Effective in January 2018, IFRS 9, Financial Instruments, replaced IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 includes requirements on recognition and measurement, impairment, general hedge accounting and derecognition; however, the derecognition guidance model in IFRS 9 remains relatively unchanged from IAS 39. The other three areas have significant differences and today’s post is going to provide a high-level overview on the new IFRS 9 impairment guidance.
IFRS 9 introduces a new impairment model based on expected credit losses, rather than incurred losses under IAS 39, which will require companies to recognize impairments earlier than the IAS 39 model through a loss allowance method. Click on the video below to learn more about the new impairment guidance:
Expected credit losses are measured based on a probability-weighted outcome, which considers the time value of money as well as the best available information. This includes past events, current conditions and forecasts of future events. If credit risk significantly increases after initial recognition, then the measurement of credit losses shifts from 12-month expected credit losses to lifetime expected credit losses. When a default has actually occurred, lifetime credit losses are still recognized, but now on an individual basis. How interest income is recognized also changes. This method of recognition is also referred to as the three-bucket approach:
- Bucket 1: 12-month expected credit losses
- Bucket 2: lifetime expected credit losses
- Bucket 3: individually assessed lifetime expected losses
Remember that an instrument can go back and forth between buckets throughout the lifetime of the instrument! Other impairment approaches specific to certain instruments include:
- Simplified approach for trade receivables, contract assets and lease receivables: must use lifetime expected losses to measure the loss allowance for trade receivables or contract assets that do not contain a significant financing component
- Purchased or Originated Credit-Impaired Assets (POCI) approach: No allowance is recorded at initial recognition and cumulative changes in lifetime expected credit losses are recognized
If you want to learn more about impairment under IFRS 9, or about any of the other major requirements of IFRS 9, you’re in luck – we have a 4-part webinar series on IFRS 9! Visit our Revolution page, where you will find links for each webinar. As always, please contact us for any questions!
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