International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 765
that all write-offs could only be debited against the allowance, meaning that any direct
write-offs against profit or loss without flowing through the allowance were
prohibited.38 IFRS 9 does not include any similar explicit guidance on this issue
(see Chapter 46 at 3.8.1 in relation to presentation of modification losses).
Similarly, the standard does not provide guidance on accounting for subsequent
recoveries of a financial asset. Arguably, there would be a higher threshold when
recognising an asset that has been previously written-off and this is likely to be when
cash is received rather than when the criteria for write-off are no longer met. It might
3864 Chapter 47
also be argued that such recoveries should not often be significant, as write-off should
only occur when there is no reasonable expectations of recovering the contractual cash
flows. As the nature of recoveries are similar to reversals of impairment and it makes
sense to present such recoveries in the impairment line in profit or loss as it would
provide useful and relevant information to the users of the financial statements.
[IAS 1.82(ba)].
In addition, IFRS 7 requires an entity to disclose its policies in relation to write-offs and
also, the amounts written off during the period that are still subject to enforcement
activity (see 15 below and Chapter 50 at 5.3). [IFRS 7.35F(e), 35L]. It should be noted that
there is a tension between this requirement and the criteria in IFRS 9 for write-off, since
it may be difficult to argue that there is no reasonable expectation of recovering the
contractual cash flows if the loan is still subject to enforcement activity.
14.1.2
Presentation of the gross carrying amount and expected credit loss
allowance for credit-impaired assets
For financial assets that are not purchased or originated credit-impaired financial assets
but subsequently have become credit-impaired financial assets, i.e. moved to stage 3,
the application of the EIR to the amortised cost, i.e. gross carrying amount net of the
ECL allowance, of the financial asset applies only to the calculation and presentation of
interest revenue in subsequent reporting periods. [IFRS 9.5.4.1(b)]. The Basis for
Conclusions confirms that this does not affect the measurement of the loss allowance.
[IFRS 9.BC5.75]. As long as the asset was not credit-impaired on initial recognition, the EIR
is based on the contractual cash flows, excluding ECLs and this does not change when
the asset becomes credit-impaired. [IFRS 9.B5.4.4, Appendix A]. Consequently, the calculation
of the gross carrying amount and the ECL allowance are not affected by the recognition
of interest revenue moving from a gross to a net basis.
During its meeting in December 2015, the ITG discussed the measurement of the gross
carrying amount and loss allowance for credit-impaired financial assets that are
measured at amortised cost (excluding those that are purchased or originated credit-
impaired). Interest revenue for credit-impaired financial assets is required to be
reported in profit or loss based on the original EIR multiplied by the amortised cost (i.e.
the gross carrying amount less the loss allowance). A question was raised on how the
disclosed figures for the gross carrying amount and loss allowance should each be
calculated. The example below is based on the ITG discussion but has been amended
to reflect unpaid accrued interest in the gross carrying amount.39
Example 47.25: Disclosing the gross carrying amount and loss allowance for
credit-impaired financial assets that are not purchased or
originated credit-impaired
The Bank originated a loan on 1 January 2019, with an amortised cost of $100 and an EIR of 10% per annum.
On 31 December 2019 the loan is considered to be credit-impaired and so is moved to stage 3, and an
impairment allowance is recognised of $70. Accordingly, the gross carrying amount of the loan is now $110
and the amortised cost is now $40. During 2020, no cash is received, and on 31 December 2020, there is no
change in the expected cash flows. Accordingly, the amortised cost becomes $44 (being $40 + ($40 × 10%)).
Three different ways could be used to reflect the changes in the net amortised cost in the gross carrying
amount and the loss allowance. In Approach A, interest continues to be accrued in the measurement of the
Financial instruments: Impairment 3865
gross carrying amount at 10%, in Approach B, the interest accrued to the gross carrying amount is only the
$4 recorded in profit or loss, while in Approach C, no interest is added to the gross carrying amount:
Approach A
B
C
$
$
$
Gross carrying amount
121 *
114
110
Loss allowance
(77)
(70)
(66)
Amortised cost
44
44
44
* The gross carrying amount is calculated by adding the EIR of 10% per annum on the 31 December 2019
gross carrying amount of $110, i.e. 10% × $110 = $11.
It was acknowledged by the ITG members that IAS 39 provides no specific guidance on
this matter and that there was diversity in current practice.
The ITG members appeared to agree that only Approach A is IFRS 9-compliant.
Thereby, for assets in stage 3, it is necessary to ‘gross up’ accrued interest income, to
increase both the disclosed gross carrying amount and loss allowance in the notes to the
financial statements. This is because IFRS 9, unlike IAS 39, defines the gross carrying
amount. Approach A requires the entity to calculate:
(a) the gross carrying amount by discounting the estimated contractual cash flows
(without considering ECLs) using the original EIR; and
(b) the loss allowance by discounting the expected cash shortfalls using the original EIR.
This conclusion has caused some discussion. Some have pointed out that, assuming no
further loss is expected, this results in an increase in the amount of the impairment
allowance over time that is not presented as an impairment loss, even though all
movements in the allowance are required by IAS 1 to be reported in a separate line in
the income statement. [IAS 1.82]. Presumably the IASB considers the requirements of
IFRS 9 to be more relevant, since it is specific on how the gross carrying amount is
defined and how interest should be recognised. However, it would be useful for IAS 1
to be amended so as to be consistent.
Depending on the legal form of the loan, we assume that once interest is no longer
contractually due, for instance when the bank moves to take possession of collateral,
there would be no need to continue to make these gross up entries.
Moreover, the ITG did not consider the interaction between the recognition of interest
income and the requirement to write off all or a proportion of the gross financial asset
if there is no reasonable expectations of recovering the associated contractual cash
flows. If there is no reasonable expectation that all of the contractual interest will be
paid, then the lender should presumably not follow Approach A. Instead, a portion of
the gross asset would be written off against the allowance, depending on the
> expectations of recovery. This could result in a lender reporting numbers closer to those
in Approach B. By writing off accrued interest where there is no reasonable expectation
of recovery, it may be possible to align the amounts disclosed for stage 3 loans under
IFRS 9 with the figures that banking regulators require to be disclosed for non-
performing loans.
The IASB is of the view that, conceptually, an entity should assess whether financial
assets have become credit-impaired on an ongoing basis, thus, altering the presentation
3866 Chapter 47
of interest revenue as the underlying economics change. However, the IASB noted that
such an approach would be unduly onerous for preparers to apply. Thus, the IASB
decided that an entity should be required to make the assessment of whether a financial
asset is credit-impaired at the reporting date and then change the interest calculation
from the beginning of the following reporting period. [IFRS 9.BC5.78]. Arguably, if an entity
is able to change the interest calculation earlier than the reporting date, then this would
be a timelier adjustment and reflection of the interest revenue. However, this is not
what the standard requires.
If there are subsequent improvements in the credit risk of the financial asset such that
it is moved back to stage 2, there should not be any catch-up adjustments to the interest
revenue recognised in a subsequent reporting period unless there are changes in
expected cash flows. This is illustrated in the example below.
Example 47.26: Presentation of the interest revenue, gross carrying amount, loss
allowance and amortised cost for when assets move from stage 2
to stage 3 and vice versa
Based on the fact pattern in Example 47.25 above, for the reporting period to 31 December 2019, the interest
revenue would be calculated by applying the 10% EIR to the gross carrying amount of the loan of $100, i.e.
$10. For the subsequent reporting period to 31 December 2020, the interest revenue would be calculated by
applying the 10% EIR to the amortised cost of the loan of $40, i.e. $4, instead of the gross carrying amount.
During 2021, the credit risk of the loan improves and the contractual interest for 2019, 2020 and 2021 of $33
(including interest on interest) is received at the beginning of 2022. At the end of 2021 the loan is transferred
to stage 2 and the ECL is reduced to $40. The reduction in the impairment allowance of $37 (from $77 to
$40) should be presented as an impairment gain.
For the next reporting period to 31 December 2022, the interest revenue would be calculated by applying the
10% EIR to the gross carrying amount of the financial asset once the backlog of interest has been received of
$100, i.e. $10. It is assumed that the ECL is left unchanged during 2022 except for the unwind of the discount.
Consistent with the treatment of interest income when an asset first becomes credit impaired, we have restored
the recognition of interest income to the EIR multiplied by the gross amortised cost only from the start of the
next reporting period.
31 December
31 December
31 December
31 December
2019
2020
2021
2022
$
$
$ $
Gross carrying amount
As at 1 Jan
$100
$110
$121 $133
Interest accrued (EIR) on the
$10
$11
$12 $10
gross carrying amount
Interest received
–
–
– ($33)
As at 31 Dec
$110
$121
$133 $110
ECL allowance
As at 1 Jan
–
$70
$77 $40
Impairment
$70
–
($45) $4
Adjustment to interest accrued
–
$7
$8
–
As at 31 Dec
$70
$77
$40 $44
Amortised cost
As at 1 Jan
$100
$40
$44 $93
As at 31 Dec
$40
$44
$93 $66
Financial instruments: Impairment 3867
14.2 Provisions
for
loan commitments and financial guarantee contracts
In contrast to the presentation of impairment of assets, ECLs on loan commitments and
financial guarantee contracts are presented as a provision in the statement of financial
position, i.e. as a liability. [IFRS 9 Appendix A].
For financial institutions that offer credit facilities, commitments may often be partially
drawn down, i.e. an entity may have a facility that includes both a loan (a financial asset)
and an undrawn commitment (a loan commitment). If the entity cannot separately
identify the ECLs attributable to the drawn amount and the undrawn commitment,
IFRS 7 requires an entity to present the provision for ECLs on the loan commitment
together with the allowance for the financial asset. IFRS 7 states, further, that if the
combined ECLs exceed the gross carrying amount of the financial asset, then the ECLs
should be recognised as a provision. [IFRS 7.B8E].
14.3 Accumulated impairment amount for debt instruments
measured at fair value through other comprehensive income
Rather than presenting ECLs on financial assets measured at fair value through other
comprehensive income as an allowance, this amount is presented as the ‘accumulated
impairment amount’ in other comprehensive income. This is because financial assets
measured at fair value through other comprehensive income are measured at fair value in
the statement of financial position and the accumulated impairment amount cannot reduce
the carrying amount of these assets (see 9 above for further details). [IFRS 9.4.1.2A, 5.5.2, Appendix A].
15 DISCLOSURES
The credit risk disclosure requirements are less onerous than were proposed in the 2013
Exposure Draft. Nevertheless, they have been expanded significantly when compared to
those currently in IFRS 7 and are supplemented by some detailed implementation
guidance. The disclosure requirements in relation to the IFRS 9 ECL model are dealt with
in more detail in Chapter 50 at 5.3, and this section provides only a high level summary.
The new credit risk disclosure requirements will enable users of financial statements to
understand better an entity’s credit risk management practices, its credit risk exposures, ECL
estimates and changes in credit risks. [IFRS 7.35B]. In order to meet this objective, an entity will
need to disclose both quantitative and qualitative information that includes the following:
• inputs, assumptions and estimation used (and any changes) to determine significant
increases in credit risk of financial instruments, including the application of the low
credit risk and more than 30 days past due operational simplifications (see 6
above); [IFRS 7.35F(a), 35G(a)(ii), 35G(c)]
• inputs, assumptions and techniques used (and any changes) in measuring 12-month
and lifetime ECLs, including the definition of default and the incorporation of
fo
rward-looking information (see 5 above); [IFRS 7.35F(b), 35G(a)(i), 35G(b), 35G(c), B8A]
• how the financial instruments were grouped if the measurement of ECLs was
performed on a collective basis (see 6.5 above); [IFRS 7.35F(c)]
• how collateral and other credit enhancements affect the estimate of ECLs,
including a description of the nature and quality of collateral held and quantitative
3868 Chapter 47
information about the collateral for financial assets that are credit-impaired
(see 5.8.1 and 6.1.1 above); [IFRS 7.35K, B8F, B8G]
• a reconciliation of the opening and closing balance of the loss allowance and
explanations of the changes. This disclosure is required to be shown separately for:
• financial instruments that are measured using 12-month ECLs;
• those that are measured using lifetime ECLs; financial assets that are credit-
impaired on initial recognition;
• those that are subsequently credit-impaired; and
• trade receivables, contract assets and lease receivables measured under the
simplified approach; [IFRS 7.35H]
• explanation of how significant changes in the gross carrying amount of financial
instruments during the period contributed to changes in the loss allowance;
[IFRS 7.35I]
• inputs, assumptions and techniques used (and any changes) to determine whether a
financial asset is credit-impaired (see 3.1 and 3.3 above); [IFRS 7.35F(d), 35G(a)(iii), 35G(c)]
• for modified financial assets (see 8 above):
• the credit risk management practices (how an entity determines that a
financial asset that is modified when its loss allowance was measured based
on lifetime ECLs has improved to the extent that its allowance can now be
reduced to 12-month ECLs, and how an entity monitors the extent to which
such a loss allowance should subsequently be brought back to lifetime ECLs);
• the amortised cost before the modification and the net modification gain or
loss recognised during the period for modified financial assets with a loss
allowance measured at lifetime ECLs;
• the gross carrying amount of those modified financial assets for which the loss
allowance has changed from lifetime to 12-month ECLs during the period; and