Non-performance risk

Learning objectives

• Calculate the effect of non-performance risk, including own credit risk, on the fair value of a liability.L3
• Justify the assumption made about own credit risk before and after the transfer.L3

Normative references

• IFRS 13 §42The fair value of a liability reflects the effect of non-performance risk, which includes, but may not be limited to, the entity's own credit risk and is assumed to be the same before and after the transfer of the liability.
• IFRS 13 §43Non-performance risk includes the entity's own credit risk; the entity takes into account the effect of its credit risk and any other factors that might influence the likelihood that the obligation will be fulfilled.
• IFRS 13 §44Non-performance risk is reflected in accordance with the unit of account of the liability: the issuer of a liability with an inseparable third-party credit enhancement that is accounted for separately does not include the effect of the enhancement and takes into account its own credit standing.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

5 questions

• Marvenne must pay {outflow} in {years} years under a liability with no quoted price. The discount rate reflecting its own credit risk is {rate_with}%; without that risk it would be {rate_without}% (case data). Compute the fair value of the liability taking non-performance risk into account, then the effect of that risk compared with a measurement excluding own credit risk.L3
• Quillane must pay {outflow} in {years} year under a liability with no quoted price. Its credit rating having deteriorated, the discount rate reflecting its own credit risk rises from {rate_before}% to {rate_after}% (case data). Compute the fair value of the liability after the deterioration, then its change compared with the previous situation.L3
• What does the non-performance risk of a liability cover and how is it assumed to behave on transfer of the liability?L3
• Norvenne, with an average rating, measures its liability assuming the taker-over would be a top-tier bank, with a credit risk far better than its own, which would reduce the effect of non-performance risk. Which assumption about credit risk must Norvenne use?L3
• An auditor asks Sallane why the fair value of its loan with no quoted price takes Sallane's own credit risk into account, and why the same risk is used before and after the assumed transfer of the loan. Write a reasoned answer for the audit file.L3