IFRS 9 Financial Instruments - Impairment Presentation, ifrs 09 impairment, impairment, Investment impairment, permanent impairment

1. IFRS 9 – Day 2 Session 7
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
IMPAIRMENT- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

2. Contents - Impairment
1. Overview
2. Scope
3. Expected Credit Loss model
4. Measurement of ECL
5. Simplified approach
6. Basel models
7. Recognition of impairment losses (at FV_OCI)
8. Using a loss allowance
9. Where US GAAP diverges

3. 1. Overview
Welcome to the Dark Side

4. Impairment Project Timeline
4
November
2009:
IASB issues ED
on impairment
May 2010:
FASB issues ED
covering all
aspects of
financial
instrument
accounting
January 2011:
FASB and IASB
issue
supplementary
document on
impairment
Q4 2012:
FASB exposes
the CECL
model
August 2012:
FASB decides not
to move forward
with ‘3 bucket’
model and
instead explore
new model
Q1-Q2 2012:
Re-deliberations
continue with a
‘three bucket’
impairment model
Q1 2013:
IASB exposes the ‘credit
deterioration’ model
(amended version of the
‘3 bucket’ model)/FASB
publishes FAQ explaining
its CECL model
11/09 5/10 Q1/12 8/12 Q4/12 Q1/13 7/14
July 2014:
FASB issues
IFRS 9
1/11
Implement
1/2018

5. IASB General Approach
Expected Credit Losses are required to be measured
through a Loss Allowance at an amount for each
Financial Instrument
Objectives of the IASB – to be:
• Consistent
• Universally applicable
• Clear
ECL_Lifetime = PV cash shortfalls over Life of Instrument

6. New ECL model
An entity shall recognize a loss allowance for expected
credit losses on a financial asset that is measured as
FAAC or FAFV_OCI, A lease receivable, a contract asset
or a loan commitment and a financial guarantee.
The new impairment model establishes a 3-stage
approach, based on changes in expected credit losses
of a financial instrument.
This determines the recognition of impairment (as well
as the recognition of interest revenue).

7. General Comments
Impairment requirements may seem to be
over-engineered
Many industries >> it is a fairly simple
procedure
Provide for bad and doubtful debts
Different and ‘hard to reconcile’ views have
emerged
It has taken >10 years of research and discussion
This is the result

8. Two controversies
Have individual assets been reviewed.?
A question remains
How to deal with fluctuations/losses on
equity instruments
Can non-defaulting assets be included in a
portfolio that has been assessed for
impairment?

9. Review of Assets
Each and every period:
Is there objective evidence of impairment?
What type of evidence are we considering?

10. Review of Assets
Each and every period:
Is there objective evidence of impairment?
What type of evidence are we considering?
The difference between the IFRS approach
and the US GAAP approach is that IFRS wants
to reconsider when there is a change in the
surrounding circumstances while the US
GAAP model says a deal is a deal.

11. Review of Assets
Each and every period:
Is there objective evidence of impairment?
What type of evidence are we considering?
Cliff comment:
Perhaps it should depend on the type of agreement
EG: Credit line = times have changed model
Loan = Deal has been made and it is up to the bank to
assess the results and provide for changed circumstances

12. Possible Loss Events include:
1. Financial difficulty of the issuer or obligor
What type of evidence are we considering?
2. Breach of contract – default on payments
3. A concession to the borrower
4. Probability of borrower BK
5. Disappearance of active market
6. Decrease in cash flow from a group of assets –
EG: increase in ‘Minimum Pmts’ or Credit limits
7. National or local conditions that correlate with
defaults – EG: regional property prices

13. Time-value of money
This is the Risk-free rate
And is usually tied to a published rate
This rate may fluctuate out-of-sync with the instrument

14. Unintended consequences
There are new risks to be dealt with
- Mistakes (Staff need training)
Judgment:
- Fraud Opportunities (is this why the US us
concerned?)
Under-funding of External Auditors
Inadequate supervision (Internal Control)

15. Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost or FV_OCI

16. Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost or FV_OCI
The change in this allowance is reported in PoL

17. Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost or FV_OCI
The change in this allowance is reported in PoL
For most such assets, when the asset is acquired the
impairment allowance is measured as PV of credit losses from
defaults - projected over the next 12 months

18. Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost or FV_OCI
The change in this allowance is reported in PoL
For most such assets, when the asset is acquired the
impairment allowance is measured as PV of credit losses from
defaults - projected over the next 12 months
If there is a significant increase in credit risk, the allowance is
measured as the PV of all credit losses projected for the
instrument over its full lifetime

19. Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial instruments) was identified as a weakness in existing
accounting standards
As part of IFRS 9 the IASB has introduced a new, expected loss
impairment model that will require more timely recognition
of expected credit losses (ECL)
IFRS 9 requires entities to account for ECL
- from when financial instruments are first recognised and
- it lowers the threshold for recognition of full lifetime
expected losses

20. Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized cost
or FV_OCI
During the financial crisis there was criticism that
companies had been allowed to delay recognition of
impairment
Both the IASB and the FASB have developed an ECL model
(they differ)

21. Impairment (3)
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected over the next 12 months.

22. Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected over the next 12 months.

23. Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected over the next 12 months.
This allowance =
- the expected losses from defaults over the next 12 months
- unless there is a significant increase in credit risk.

24. Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected for the instrument
over its full lifetime

25. Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected for the instrument
over its full lifetime
If the credit risk recovers, the allowance can once again be
limited to the ECL over the next 12 months

26. Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to the extent of the ECL
allowance

27. Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to the extent of the ECL
allowance
Both = an accelerating recognition of impairment losses

28. Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to the extent of the ECL
allowance
Both = an accelerating recognition of impairment losses
FASB requires full lifetime recognition from the time the asset
is acquired, referred to as the "current expected credit losses"
or CECL model

29. Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to the extent of the ECL
allowance
Both = an accelerating recognition of impairment losses
FASB requires full lifetime recognition from the time the asset
is acquired, referred to as the "current expected credit losses"
or CECL model
The ‘allowance’ loss will be smaller under the IFRS 9 model,
due to the 12 month limit

30. PwC
Impairment
Estimating expected losses under
FASB and IASB models
30
• Both the credit deterioration model and the CECL model focus on an expected
value measurement for credit losses
• Both models require credit loss estimates to be based on internally and externally
available information considered relevant in making the estimate, including
information about past events, current conditions, and reasonable and
supportable forecasts
• Both models require the estimate of credit losses to consider a scenario where a
credit loss results and a scenario where no credit loss results. Entities are
prohibited from estimating expected credit losses based solely on the most likely
outcome
• Estimates under both models should include consideration of the time value of
money

31. PwC
Impairment
The FASB’s current expected credit loss (CECL)
model
31
• After deciding not to move forward with the ‘three bucket’ model, the FASB
staff has developed a revised model referred to as the ‘CECL’ model
• Removes the ‘dual measurement’ approach of the IASB model and creates
a single measurement of current expected credit losses, which reflects
management’s best estimate of the future contractual cash flows that the
entity does not expect to collect
• Interest income generally recognized on the basis of contractual terms
(with the exception of purchased credit impaired (PCI) assets), where the
non-credit portion of the purchase discount/premium is recognized in
income over the life of the asset
• The CECL model requires interest income recognition to cease when it is
no longer probable that the full amount of principal and interest payments
will be collected

32. 2. Scope
Welcome to the Dark Side

33. Scope - included
• investments in debt instruments measured at amortized cost
B4.1.10
• investments in debt instruments measured at fair value through
other comprehensive income (FV_OCI)
• all loan commitments not measured at FV_PoL
• financial guarantee contracts to which IFRS 9 is applied and
that are not accounted for at FV_PoL
• lease receivables within the scope of IAS 17, Leases, and
• trade receivables or contract assets within the scope of IFRS 15
that give rise to an unconditional right to consideration

34. Scope
During the financial crisis, the delayed recognition of credit losses
on loans (and other financial instruments) was identifed as a
weakness in existing accounting standards.
B4.1.10
As part of IFRS 9 the IASB has introduced a new, ECL model that
will require more timely recognition of expected credit losses.
The new Standard requires entities to account for expected
credit losses from when financial instruments are first
recognised and it lowers the threshold for recognition of full
lifetime expected losses.

35. 3. Expected Credit Loss Model (ECL)
Welcome to the Dark Side
Let me tell you a story – once upon a
time there was a standard called IAS39
You lend your neighbor $1,000
He pays on time and is an excellent
person

36. ECL – example (1)
Along comes IFRS 9
Your neighbor offers service to Oil Companies
Oil prices slump
Under IFRS 9 we have to recognize a risk
= a credit quality event.
We provide for an ECL even if your neighbor
has not missed a payment

37. ECL - 3 stage model

38. Definition of buckets
1. 12mth ECL
The triggering Default event will happen in next 12 mths

39. Definition of buckets
2. Lifetime ECL
The default event will happen sometime within the life
of the loan
1. 12mth ECL
The triggering Default event will happen in next 12 mths

40. Definition of buckets
2. Lifetime ECL
The default event will happen sometime within the life
of the loan
1. 12mth ECL
The triggering Default event will happen in next 12 mths
Default events :
1st - What is a default?
2nd - Are there degrees of default?
3rd - What is the expected loss on this loan?

41. 4. Measurement of ECL (1) - Initial
Because future macroeconomic outlooks are important
to assess the creditworthiness of borrowers a "day 1"
loss allowance needs to be recognized
The amount of this allowance is based upon the
probability of default during the coming 12 months, as
well as the loss amount that would result
This loss allowance is referred to as the 12-month
expected credit loss (ECL)

42. 4. Measurement of ECL (2) – stage 2
If, at any time, the credit quality of the exposure has
significantly deteriorated:
the lifetime ECL (LT ECL) should be calculated
instead of 12-month ECL.

43. 4. Measurement of ECL (3) – stage 3
If, at any time, the credit quality of the exposure
becomes Non-performing
Lifetime ECL is calculated as the PV of the loss due to a
default that occurs over the entire remaining contractual
maturity of the loan
The ECL is increased to the Lifetime ECL level amount
ECLs are probability-weighted
(by the probability of default, or PDs).

44. Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost or FV_OCI
The change in this allowance is reported in PoL
For most such assets, when the asset is acquired the
impairment allowance is measured as PV of credit losses from
defaults - projected over the next 12 months
If there is a significant increase in credit risk, the allowance is
measured as the PV of all credit losses projected for the
instrument over its full lifetime

45. Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial instruments) was identified as a weakness in existing
accounting standards

46. Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial instruments) was identified as a weakness in existing
accounting standards
As part of IFRS 9 the IASB has introduced a new, expected loss
impairment model that will require more timely recognition
of expected credit losses (ECL)

47. Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial instruments) was identified as a weakness in existing
accounting standards
As part of IFRS 9 the IASB has introduced a new, expected loss
impairment model that will require more timely recognition
of expected credit losses (ECL)
IFRS 9 requires entities to account for ECL
- from when financial instruments are first recognised and
- it lowers the threshold for recognition of full lifetime
expected losses

48. Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized cost
or FV_OCI

49. Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized cost
or FV_OCI
During the financial crisis there was criticism that
companies had been allowed to delay recognition of
impairment

50. Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized cost
or FV_OCI
During the financial crisis there was criticism that
companies had been allowed to delay recognition of
impairment
Both the IASB and the FASB have developed an ECL model
(they differ)

51. Impairment (3)
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected over the next 12 months.

52. Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected over the next 12 months.

53. Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected over the next 12 months.
This allowance =
- the expected losses from defaults over the next 12 months
- unless there is a significant increase in credit risk.

54. Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected for the instrument
over its full lifetime

55. Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected for the instrument
over its full lifetime
If the credit risk recovers, the allowance can once again be
limited to the ECL over the next 12 months

56. 5. Simplified Approach
1. Trade Receivables and Contract assets
2. That do not have a significant financing component
3. entity’s that do not have sophisticated credit risk systems

57. 5. Simplified Approach
1. Trade Receivables and Contract assets
2. That do not have a significant financing component
3. entity’s that do not have sophisticated credit risk systems
These simplifications eliminate the need to calculate
12-month ECL and to assess when a significant increase
in credit risk has occurred.

58. 5. Simplified Approach
1. Trade Receivables and Contract assets
2. That do not have a significant financing component
3. entity’s that do not have sophisticated credit risk systems
These simplifications eliminate the need to calculate
12-month ECL and to assess when a significant increase
in credit risk has occurred.
Use only Lifetime ECL Model as a policy election

59. Purchase of Credit Impaired
A financial asset is considered credit-impaired on purchase if there is
evidence of impairment at initial recognition
(EG: if it is acquired at a deep discount).

60. Purchase of Credit Impaired
A financial asset is considered credit-impaired on purchase if there is
evidence of impairment at initial recognition
(EG: if it is acquired at a deep discount).
Impairment is based on full lifetime ECL on initial recognition.
However, lifetime ECL are included in the estimated cash flows when
calculating the effective interest rate on initial recognition.
Note: The effective interest rate for interest recognition throughout
the life of the asset is a credit-adjusted effective interest rate.
As a result, no loss allowance is recognized on initial recognition

61. Purchase of Credit Impaired
A financial asset is considered credit-impaired on purchase if there is
evidence of impairment at initial recognition
(EG: if it is acquired at a deep discount).
Impairment is based on full lifetime ECL on initial recognition.
Any subsequent changes in lifetime ECL, + or –
will be recognized immediately in PoL
However, lifetime ECL are included in the estimated cash flows when
calculating the effective interest rate on initial recognition.
Note: The effective interest rate for interest recognition throughout
the life of the asset is a credit-adjusted effective interest rate.
As a result, no loss allowance is recognized on initial recognition

62. Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred, IF:
Operational scope exception

63. Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred, IF:
1. has a low risk of default
3. the lender expects, in the longer term, that adverse changes in
economic and business conditions might, but will not necessarily;
reduce the ability of the borrower to fulfil its obligations
Operational scope exception
2. the borrower is considered, in the short term, to have a strong
capacity to meet its obligations

64. Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred, IF:
1. has a low risk of default
Collateral is omitted when considering 1 - 3
3. the lender expects, in the longer term, that adverse changes in
economic and business conditions might, but will not necessarily;
reduce the ability of the borrower to fulfil its obligations
Operational scope exception
2. the borrower is considered, in the short term, to have a strong
capacity to meet its obligations

65. Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred, IF:
1. The borrower has a low risk of default
Collateral is omitted when considering 1 - 3
3. the lender expects, in the longer term, that adverse changes in
economic and business conditions might, but will not necessarily;
reduce the ability of the borrower to fulfil its obligations
Operational scope exception
2. the borrower is considered, in the short term, to have a strong
capacity to meet its obligations
This operational simplification will provide relief to entities
especially financial institutions, such as insurers, who hold large
portfolios of securities with high credit ratings

66. Impairment
Flowchart

67. 6. Basel
Basel is a comprehensive set of reform measures, developed
by the Basel Committee on Banking Supervision, to
strengthen the regulation, supervision and risk of the
banking sector. ... Improve risk management and governance.
Strengthen banks' transparency and disclosures

68. 6. Basel
Basel is a comprehensive set of reform measures, developed
by the Basel Committee on Banking Supervision, to
strengthen the regulation, supervision and risk of the
banking sector. ... Improve risk management and governance.
Strengthen banks' transparency and disclosures
Basel has been through a number of developments – we are
now considering BASEL IV

69. IFRS & BASEL
IFRS – IAS 39
Incurred Loss Model
ILM
Disclose losses incurred
at BS date
BASEL III
Expected Loss Model
ELM
Adequate provision for
losses
IFRS – IFRS 9
Expected Loss Model
ELM
Adequate provision for
losses

70. BASEL - Expected Loss
What is the
probability
of debtor
default?
ECL=PD EAD x LGDx
What is our
exposure?
How much
loss?
1.3% $1m 15% $1,950
Customer
type related
Product &
Amount
Impact %
Expected
Monetary
Value

71. 7. Recognition Impairment (FV_PoL)
Best by an example discussion

72. Information to consider
when measuring ECL
The standard establishes that management should measure ECL’s
over the remaining life of a financial instrument in a way that
reflects:
1. an unbiased and probability-weighted amount that is
determined by evaluating a range of possible outcomes
2. the time value of money
3. reasonable and supportable information about:
• past events,
• current conditions and
• reasonable and supportable forecasts of future events
• economic conditions at the reporting date

73. Information to consider
when measuring ECL
The standard establishes that management should measure ECL’s
over the remaining life of a financial instrument in a way that
reflects:
1. an unbiased and probability-weighted amount that is
determined by evaluating a range of possible outcomes
2. the time value of money
3. reasonable and supportable information about:
• past events,
• current conditions and
• reasonable and supportable forecasts of future events
• economic conditions at the reporting date
The degree of judgment that is required for the estimates
depends on the availability of detailed information

74. Credit Risk Characteristics
Examples of shared credit risk characteristics might include,
(but are not limited to):
a. the instrument type
b. the credit risk ratings
c. the collateral type
d. the date of origination
e. the remaining term to maturity
f. the industry
g. the geographical location of the borrower, and
h. the value of collateral relative to the commitment if it has an
impact on the probability of a default occurring
(EG, non-recourse loans in some jurisdictions or loan-to-value ratios).
Top down vs bottom up approach
IFRS 9.B5.5.5

75. Recognising FV_OCI
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected for the instrument
over its full lifetime

76. Recognising FV_OCI
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected for the instrument
over its full lifetime
If the credit risk recovers, the allowance can once again be
limited to the ECL over the next 12 months

77. Example: FV_OCI
Entity buys 5% 10yr bond at FV = $1,000 on Dec 12,2015 and
wishes to use FV_OCI
Asset
Dr 1,000,000
Cash
1,000 Cr
2.01

78. Example: FV_OCI (2)
On Dec 31, 2015 FV = $950.
Entity determines increase in Credit Risk and 12mth ECL = $30
Asset
PoL
2.01
OCI
Total FV change = $50 offset by 12mthECL = $30
Dr 1,000

79. Example: FV_OCI (2)
On Dec 31, 2015 FV = $950.
Entity determines increase in Credit Risk and 12mth ECL = $30
Asset
Dr 30
PoL50 Cr
2.01
OCI
Dr 20
Total FV change = $50 offset by 12mthECL = $30
Dr 1,000

80. Example: FV_OCI (3)
On Jan 1, 2016, sell for $950 cash
Dr Cash 950
Cr Asset 950
Dr PoL 20
Cr OCI 20
Asset
Dr 30
PoL50 Cr
2.01
OCI
Dr 20
Total FV change = $50 offset by 12mthECL = $30
Dr 1,000
950 Cr

81. Example: FV_OCI (3)
On Jan 1, 2016, sell for $950 cash
Dr Cash 950
Cr Asset 950
Dr PoL 20
Cr OCI 20
Asset
Dr 30
PoL50 Cr
2.01
OCI
Dr 20
Dr 1,000
950 Cr
Dr 20 20 Cr
Dr 50

82. 8. Loss-rate approach

83. 9. Loss-rate approach
Top-down is there for entities who do not have the individual
information available
Less sophisticated entities may use a Loss-rate approach
[IFRS9.B5.5.12]
Loss-rate – based on a developed loss statistic – but cautions that it
will not be able to assess ECL_12Mth and ECL_Lifetime changes
Re: Top down vs bottom up approach
IFRS 9.B5.5.6

84. Presentation
Present interest revenue in the statement of OCI as a separate
line item

85. Presentation
Present interest revenue in the statement of OCI as a separate
line item
Recognize ECL in the Statement of Financial Position as:
• a loss allowance for financial assets measured at amortized
cost and lease receivables; and
• a provision (that is, a liability) for loan commitments and
financial guarantee contracts

86. Presentation
Present interest revenue in the statement of OCI as a separate
line item
Recognize ECL in the Statement of Financial Position as:
• a loss allowance for financial assets measured at amortized
cost and lease receivables; and
• a provision (that is, a liability) for loan commitments and
financial guarantee contracts
Financial assets (that are mandatorily measured at FV_OCI, the
accumulated impairment amount is not separately presented in
the statement of financial position.
However, an entity should disclose the loss allowance in the notes
to the financial statements.

87. 9. Where the US Diverges

88. FASB CECL model
Current Expected Loss Model
After deciding not to move forward with the ‘3 bucket’ model,
FASB developed - ‘CECL’ model

89. FASB CECL model
Current Expected Loss Model
After deciding not to move forward with the ‘3 bucket’ model,
FASB developed - ‘CECL’ model
Removes the ‘dual measurement’ approach of the IASB
model and creates a single measurement of CECL =
management’s best estimate of the future contractual cash
flows that the entity does not expect to collect

90. FASB CECL model
Current Expected Loss Model
After deciding not to move forward with the ‘3 bucket’ model,
FASB developed - ‘CECL’ model
Interest income generally recognized on the basis of
contractual terms (with the exception of purchased credit
impaired (PCI) assets), where the non-credit portion of the
purchase discount/premium is recognized in income over the
life of the asset
Removes the ‘dual measurement’ approach of the IASB
model and creates a single measurement of CECL =
management’s best estimate of the future contractual cash
flows that the entity does not expect to collect

91. Estimating ECL - FASB and IASB models
• Both the credit deterioration model and the CECL model focus
on an expected value measurement for credit losses
• Both models require credit loss estimates to be based on
internally and externally available information considered
relevant in making the estimate, including information about
past events, current conditions, and reasonable and
supportable forecasts
• Both models require the estimate of credit losses to
consider a scenario where a credit loss results and a
scenario where no credit loss results. Entities are
prohibited from estimating expected credit losses based
solely on the most likely outcome
• Estimates under both models should include the time
value of money

92. US GAAP not converging
In the beginning – Joint project
3 stage approach lacked support in US
FASB developed a single measurement model
Also US decided not to use a C & M model as IASB
So IFRS 9 is NOT a converged standard

93. 10. Transition
This standard will be very challenging to apply, in particular for
financial institutions

94. 10. Transition
This standard will be very challenging to apply, in particular for
financial institutions
Currently, most entities do not collect the amount of credit information
required by the standard.
Entities will need to significantly modify their current credit and
information systems in order to gather the required information.

95. 10. Transition
This standard will be very challenging to apply, in particular for
financial institutions
Currently, most entities do not collect the amount of credit information
required by the standard.
Entities will need to significantly modify their current credit and
information systems in order to gather the required information.
Management will need to build new models to determine both 12-
month and lifetime ECL.
This will require complex judgments (for example, definition of default,
definition of low credit risk and behavioral life of revolving credit
facilities).
It is expected that the implementation process will require a significant
amount of time before an entity will be in a position to comply with
the requirements of the standard.

96. 10. IFRS Transition
For Annual periods beginning after 2018 Jan 1
Can use the simplified approach initially (Lifetime ECL only)
Approximations are tolerated

97. IS YOUR LIFE
NOW CHANGED?
The End

98. Questions?

99. 99
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