The general approach: three stages

Learning objectives

• Determine the stage of an instrument (stage 1: 12-month expected credit losses; stage 2: lifetime after a significant increase in credit risk; stage 3: credit-impaired asset) and the corresponding loss allowance.L2, L3
• Calculate, from the data of a case, the amounts relating to the general approach: three stages, 12-month and lifetime expected credit losses.L2, L3
• Record the journal entries for the general approach (three stages, 12-month and lifetime expected credit losses) and measure their effect on the financial position, profit or loss and other comprehensive income.L2, L3

Normative references

• IFRS 9 §5.5.3Subject to paras. 5.5.13 to 5.5.16, at each reporting date, if the credit risk on a financial instrument has increased significantly since initial recognition, the loss allowance is measured at an amount equal to the lifetime expected credit losses.
• IFRS 9 §5.5.5Subject to the exceptions in paras. 5.5.13 to 5.5.16, if the credit risk has not increased significantly since initial recognition, the loss allowance is measured at an amount equal to 12-month expected credit losses, that is, the portion of lifetime expected credit losses resulting from default events possible within the 12 months after the reporting date.
• IFRS 9Appendix A (credit risk terms): a financial asset is credit-impaired when one or more events that have a detrimental impact on its estimated future cash flows have occurred, the definition citing observable data (significant financial difficulty, a breach of contract such as a default or past due event, a concession, probable bankruptcy, disappearance of an active market, purchase at a deep discount); a credit loss is the difference, discounted at the original effective interest rate, between the contractual cash flows due and the cash flows that the entity expects to receive; expected credit losses are the weighted average of credit losses with the respective risks of a default occurring as the weights; 12-month expected credit losses are the portion of lifetime expected credit losses resulting from default events possible within the 12 months after the reporting date. Appendix A does not define default: para. B5.5.37 refers to the entity's internal definition, with a rebuttable presumption that default occurs no later than when a financial asset is 90 days past due.

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

3 questions

• Quartz SA holds a loan granted to a customer. At the reporting date, the credit risk has increased significantly since initial recognition, without the loan being credit-impaired. What loss allowance does Quartz recognise?L2
• Zircon SA holds a loan whose credit risk has increased significantly since initial recognition; its loss allowance is therefore equal to the lifetime expected credit losses. Case convention: expected loss = exposure × probability of default × loss given default, without discounting. Exposure at default: {exposure}; lifetime probability of default: {lifetime_pd}; loss given default: {lgd}. Calculate the lifetime expected credit loss.L3
• Béryl SA held a loan at 31 December N-1 with a loss allowance of {opening_allowance} (12-month expected losses). At 31 December N, the credit risk has increased significantly; the lifetime expected losses are estimated at {lifetime_ecl}. Record the entry adjusting the loss allowance at 31 December N.L3