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Expected Credit Loss Model: IFRS 9 at a Glance

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The basic challenge to the Nepalese market for the Adoptation of IFRS is the hurdle which comes up with the new impairment models under IFRS 9, mainly to the financial institutions due to huge amount of data and lack of in-built models for the reliable projection and forecast of financial covenants. whatever may be the difficulties, It could not be used as an excuse for the reasonable and consistent application of impairment model as outlined by IFRS 9, Hence the initiation from market leaders is vital for the the timely adoptation of global standard. Here is the basic introductory coverage for the impairment model outlined under IFRS 9:





The standard outlines a ‘three-stage’ model (‘general model’) for impairment based on changes in credit quality since initial recognition:

Stage 1 It includes financial instruments that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month expected credit losses (‘ECL’) are recognised and interest revenue is calculated on the gross carrying amount of the asset (that is, without deduction for credit allowance). 12-month ECL are the expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months.. 

Stage 2 It includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they have low credit risk at the reporting date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest revenue is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Expected credit losses are the weighted average credit losses with the probability of default (‘PD’) as the weight. 

Stage 3 It includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised and interest revenue is calculated on the net carrying amount (that is, net of credit allowance). The standard requires management, when determining whether the credit risk on a financial instrument has increased significantly, to consider reasonable and supportable information available, in order to compare the risk of a default occurring at the reporting date with the risk of a default occurring at initial recognition of the financial instrument. 


And, the definition of default should be identified, that is consistent with the definition used for internal risk management purposes for the relevant financial instrument, and it should consider qualitative factors such as financial covenants and forecasts, wherever appropriate. 



Source: IFRS/NFRS 9,PWC Resources etc.

2 comments:

  1. Good beginning boy. It would be more concrete to support your analysis through numerical example. Hope the numerical example will be incorporated soon.

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    1. Sure sir, your feedback is appreciated.

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