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IFRS 9Workpapers (Step 4 of 5)

Workpaper template

Step 4 of 5
WorkpaperIFRS 9 — Financial InstrumentsL2 · L3 · L4

Impairment: stage of each instrument, significant increase in credit risk, expected loss by scenarios or by probability of default, provision matrix and reconciliation of the loss allowance

10 missions10 sections to document90 min
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Status
Published

Objective of the workpaper

Describe the instrument, establish its stage (12-month, lifetime, credit-impaired) or the simplified approach, document the judgments on the significant increase in credit risk, the scenarios and the definition of default, measure the expected loss (scenarios, probability of default × loss given default × exposure, or provision matrix), compute the charge, reconcile the loss allowance and prepare the entries and the note. Rates, probabilities and forward-looking information are case data, never rules of the standard.

10 sections · 69 blocks · 17 calculations · 4 entries

  • IFRS 9 §5.5.3
  • IFRS 9 §5.5.5
  • IFRS 9 §5.5.8
  • IFRS 9 §5.5.9
  • IFRS 9 §5.5.11
  • IFRS 9 §5.5.15
  • IFRS 9 §5.5.17
  • IFRS 9 §5.4.1
  • IFRS 9
  • IFRS 9 §B5.5.35

Work this workpaper as a mission

Each case that uses this template opens in the mission workspace: data, analysis, calculation, entries, conclusion and review, with your progress saved.

10 instances from the cases: the calculations and entries below are run by the calculation engine.

File and entity
Impairment of a group: provision matrix for trade receivables, stages 1 to 3 of loans and scenario-weighted loss
Case tasks documented here
  • Which approach applies to the trade receivables and is a provision matrix acceptable?
  • Compute the historical loss rate of each bucket.
  • Compute the loss allowance of each bucket with the rates retained.
  • Compute the total loss allowance of the matrix.
  • Has loan X suffered a significant increase in credit risk? Retain the stage and justify.
  • Compute the scenario-weighted expected credit loss of loan X.
  • Compute the impairment charge of the year for the trade receivables and for loan X.
  • Reconcile the loss allowance on the trade receivables (opening, charge, write-offs, closing).
  • Is loan Y credit-impaired? What is the basis of its interest?
  • Compute the net amortised cost of loan Y.
  • Compute the 20X6 interest of loan Y.
  • Should loan W return to a 12-month measurement?
  • Compute the 12-month expected loss of loan W (exposure × probability of default × loss given default).
  • Compute the amount of the reversal of the loss allowance of loan W.
  • Can the Helvana bond be measured at 12 months solely because it is investment grade?
  • Record the charge of the year for the trade receivables.
  • Record the write-off of the Davane receivable.
  • Record the charge for loan X.
  • Record the interest of loan Y.
  • Record the reversal of the loss allowance of loan W.
1

Facts and data

Inputs

  • Instrument: nature, balance, maturity, rating or days past due, collateral

    Text

  • Credit risk information at origination and at the reporting date (reasonable and supportable, without undue cost or effort)

    Text

  • Loss history by bucket and forward-looking information retained

    Text

  • Balance of ageing bucket 1

    Number

    1,000,000

  • Historical losses of bucket 1

    Number

    5,000

  • Historical receivables of bucket 1

    Number

    1,000,000

  • Loss rate retained for bucket 1 (historical rate adjusted for forward-looking information)

    Number

    0.5 %

  • Balance of ageing bucket 2

    Number

    400,000

  • Historical losses of bucket 2

    Number

    8,000

  • Historical receivables of bucket 2

    Number

    400,000

  • Loss rate retained for bucket 2 (historical rate adjusted for forward-looking information)

    Number

    2 %

  • Balance of ageing bucket 3

    Number

    150,000

  • Historical losses of bucket 3

    Number

    12,000

  • Historical receivables of bucket 3

    Number

    200,000

  • Loss rate retained for bucket 3 (historical rate adjusted for forward-looking information)

    Number

    7 %

  • Balance of ageing bucket 4

    Number

    50,000

  • Historical losses of bucket 4

    Number

    20,000

  • Historical receivables of bucket 4

    Number

    50,000

  • Loss rate retained for bucket 4 (historical rate adjusted for forward-looking information)

    Number

    40 %

  • Conversion factor to a percentage (100)

    Number

    100 %

  • Opening loss allowance

    Number

    36,000

  • Closing loss allowance measured

    Number

    43,500

  • Write-offs of the year charged to the loss allowance

    Number

    6,000

  • Closing loss allowance per the reference reconciliation (check)

    Number

    43,500

  • Scenarios: credit loss (discounted) and probability (%)

    Table

  • Exposure at default

    Number

  • Probability of default over the period retained (%)

    Number

  • Loss given default (%)

    Number

  • Gross carrying amount of the credit-impaired asset

    Number

  • Loss allowance of the credit-impaired asset

    Number

  • Effective interest rate of the credit-impaired asset (%)

    Number

  • Charge to the loss allowance recognised in profit or loss

    Number

    13,500

  • Reversal of the loss allowance recognised in profit or loss

    Number

  • Amount written off against the loss allowance

    Number

    6,000

2

Supporting documents

Evidence

  • Documents obtained and referenced (ageing report, loss history, ratings, management scenarios)

    EvidenceRequired

3

Analysis of the stage and of the approach

Analysis

IFRS 9 §5.5.3IFRS 9 §5.5.5IFRS 9 §5.5.9IFRS 9 §5.5.11IFRS 9 §5.5.15IFRS 9 §5.4.1IFRS 9

  • Points reviewed: stage, approach and measurement of the expected loss

    ChecklistRequired

    • Approach chosen: general by stages, or simplified (lifetime loss, no stages) for trade receivables
    • Significant increase assessed by comparing the risk of default at the reporting date with that at origination (not the change in the amount of expected loss), with no threshold imposed
    • Rebuttable presumption of more than 30 days past due examined, with the evidence rebutting it where relevant
    • Events with an adverse effect on estimated future cash flows (credit-impaired), a high risk at origination alone not being enough
    • Definition of default set by the entity (consistent with its internal credit risk management, rebuttable 90-days-past-due presumption) and applied consistently
    • Stage 1: 12-month expected loss (portion of the lifetime loss from default events possible within 12 months)
    • Stages 2 and 3: lifetime expected loss, an unbiased probability-weighted amount
    • Provision matrix: rates by ageing bucket from the history, adjusted for forward-looking information (method not mandatory)
    • Credit-impaired asset: interest at the effective rate on the amortised cost, net of the loss allowance
4

Expected loss and loss allowance calculations

Calculations

IFRS 9 §5.5.3IFRS 9 §5.5.5IFRS 9 §5.5.15IFRS 9 §5.4.1

  • Historical loss rate of bucket 1 (losses / receivables, in %)

    Calculation

    0.5 %

    Historical losses of bucket 1 ; Conversion factor to a percentage (100) ; Historical receivables of bucket 1

  • Historical loss rate of bucket 2 (losses / receivables, in %)

    Calculation

    2 %

    Historical losses of bucket 2 ; Conversion factor to a percentage (100) ; Historical receivables of bucket 2

  • Historical loss rate of bucket 3 (losses / receivables, in %)

    Calculation

    6 %

    Historical losses of bucket 3 ; Conversion factor to a percentage (100) ; Historical receivables of bucket 3

  • Historical loss rate of bucket 4 (losses / receivables, in %)

    Calculation

    40 %

    Historical losses of bucket 4 ; Conversion factor to a percentage (100) ; Historical receivables of bucket 4

  • Loss allowance of bucket 1 (balance × rate)

    Calculation

    5,000

    Balance of ageing bucket 1 ; Loss rate retained for bucket 1 (historical rate adjusted for forward-looking information)

  • Loss allowance of bucket 2 (balance × rate)

    Calculation

    8,000

    Balance of ageing bucket 2 ; Loss rate retained for bucket 2 (historical rate adjusted for forward-looking information)

  • Loss allowance of bucket 3 (balance × rate)

    Calculation

    10,500

    Balance of ageing bucket 3 ; Loss rate retained for bucket 3 (historical rate adjusted for forward-looking information)

  • Loss allowance of bucket 4 (balance × rate)

    Calculation

    20,000

    Balance of ageing bucket 4 ; Loss rate retained for bucket 4 (historical rate adjusted for forward-looking information)

  • Total loss allowance of the provision matrix

    Calculation

    43,500

    Loss allowance of bucket 1 (balance × rate) ; Loss allowance of bucket 2 (balance × rate) ; Loss allowance of bucket 3 (balance × rate) ; Loss allowance of bucket 4 (balance × rate)

  • Scenario-weighted expected credit loss

    Calculation

    Scenarios: credit loss (discounted) and probability (%)

  • Step 1: exposure × probability of default

    Calculation

    Exposure at default ; Probability of default over the period retained (%)

  • Step 2: result of step 1 × loss given default (expected loss)

    Calculation

    Step 1: exposure × probability of default ; Loss given default (%)

  • Net amortised cost (gross carrying amount less loss allowance)

    Calculation

    0

    Gross carrying amount of the credit-impaired asset ; − Loss allowance of the credit-impaired asset

  • Interest of the credit-impaired asset (net amortised cost × effective rate)

    Calculation

    Net amortised cost (gross carrying amount less loss allowance) ; Effective interest rate of the credit-impaired asset (%)

  • Impairment charge of the period (closing less opening plus write-offs)

    Calculation

    13,500

    Closing loss allowance measured ; − Opening loss allowance ; Write-offs of the year charged to the loss allowance

  • Closing loss allowance (opening plus charge less write-offs)

    Calculation

    43,500

    Opening loss allowance ; Impairment charge of the period (closing less opening plus write-offs) ; − Write-offs of the year charged to the loss allowance ; Closing loss allowance per the reference reconciliation (check)

  • Check difference of the loss allowance reconciliation

    Calculation

    0

    Opening loss allowance ; Impairment charge of the period (closing less opening plus write-offs) ; − Write-offs of the year charged to the loss allowance ; Closing loss allowance per the reference reconciliation (check)

5

Illustrative entries

Entries

  • Entry: charge to the loss allowance

    Entry

    AccountDebitCredit
    Impairment loss13,500
    Loss allowance13,500

  • Entry: reversal of the loss allowance

    Entry

    Debit Loss allowance ← Reversal of the loss allowance recognised in profit or loss ; Credit Impairment reversal in profit or loss ← Reversal of the loss allowance recognised in profit or loss

  • Entry: write-off of a receivable against the loss allowance

    Entry

    AccountDebitCredit
    Loss allowance6,000
    Trade receivable written off6,000

  • Entry: interest on a credit-impaired asset

    Entry

    Debit Financial asset at amortised cost ← Interest of the credit-impaired asset (net amortised cost × effective rate) ; Credit Interest income ← Interest of the credit-impaired asset (net amortised cost × effective rate)

6

Judgments: significant increase in risk, scenarios, default

Judgment

IFRS 9 §5.5.3IFRS 9 §5.5.9IFRS 9 §5.5.11IFRS 9

  • Stage or approach retained

    ChoiceRequired

    Simplified approach: lifetime loss, no stages

    Stage 1: 12-month expected loss / Stage 2: lifetime expected loss / Stage 3: credit-impaired / Simplified approach: lifetime loss, no stages

  • Significant increase in credit risk since initial recognition

    JudgmentRequired

    Not applicable (simplified approach or credit-impaired)

    Significant increase identified / No significant increase / Not applicable (simplified approach or credit-impaired)

    Professional judgment: "significant" is not defined by the standard; the assessment is relative, based on the risk of default and on reasonable and supportable information; more than 30 days past due raises a presumption of a significant increase, which is rebuttable.

  • Rationale: indicators retained, comparison of default risks, 30-day presumption

    Text

    SIMPLIFIED_APPROACH_NO_STAGES

  • Scenarios and forward-looking information

    JudgmentRequired

    Historical rates adjusted for forward-looking information

    Several scenarios weighted by their probability / Historical rates adjusted for forward-looking information / No adjustment justified

    Professional judgment: the expected loss is an unbiased, probability-weighted amount reflecting the time value of money and reasonable and supportable information on past events, current conditions and forecasts; the scenarios and their probabilities are case data.

  • Rationale: scenarios, probabilities, forward-looking information and time value

    Text

    BUCKET_3_RATE_RAISED_FOR_CONDITIONS

  • Definition of default retained

    JudgmentRequired

    Not applicable

    Entity's definition applied / Not applicable

    Professional judgment: the entity adopts a definition of default and applies it consistently with its internal credit risk management.

  • Rationale: definition of default and consistency with risk management

    Text

    NO_DEFAULT_DEFINITION_NEEDED

7

Effect on the financial statements

FS impact

  • Effect derived from the entries

    Table

8

Points to document for the impairment note

Disclosure

IFRS 9 §5.5.9

  • Points to complete in the note (the disclosures belong to IFRS 7)

    ChecklistRequired

    • Reconciliation of the loss allowance (opening, charge, reversal, write-offs, closing) presented
    • Measurement basis by stage and criteria for a significant increase set out
    • Assumptions, scenarios and forward-looking information summarised, without presenting them as rules

  • Draft note: loss allowance for expected credit losses

    Text

9

Conclusion

Conclusion

  • Stage or approach, expected loss, loss allowance, charge, judgments and entries submitted to the reviewer

    ConclusionRequired

10

Normative references

References

  • Normative references cited in this workpaper

    References

11

Checks and financial statement impact

  • Stage or approach retainedPass
  • Charge entry balancedPass
  • Reversal entry balancedNot evaluated
  • Write-off entry balancedPass
  • Interest entry balancedNot evaluated
Assets
-13,500
Liabilities
0
Profit or loss
-13,500
OCI
0
Equity
-13,500