The low credit risk simplification

Learning objectives

• Assess whether an instrument can be considered to have low credit risk and keep 12-month expected credit losses, recognising that collateral or comparison with other instruments is not sufficient on its own.L3

Normative references

• IFRS 9 §5.5.10An entity may assume that credit risk has not increased significantly if the instrument has low credit risk at the reporting date; this is an option, not an obligation. Further guidance is in paras. B5.5.22 to B5.5.24: an external 'investment grade' rating may illustrate low credit risk, the value of collateral alone is not sufficient, and moving out of the low credit risk category does not on its own trigger lifetime measurement.
• IFRS 9 §B5.5.22Credit risk is low, for para. 5.5.10, if the instrument has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term, and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce that ability; an instrument is not considered to have low credit risk simply because of the value of collateral, nor because it has a lower risk of default than the entity's other instruments or than the credit risk of the jurisdiction in which the entity operates.
• IFRS 9 §B5.5.24Lifetime expected credit losses are not recognised simply because an instrument considered to have low credit risk at the previous reporting date is no longer so: the entity then assesses whether there has been a significant increase in credit risk since initial recognition, as described in para. 5.5.3.

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

2 questions

• The entity is required to apply the low credit risk exemption as soon as an instrument has low credit risk at the reporting date.L3
• A file presents four statements about the low credit risk exemption. Which one is wrong?L3