Paragraph 5.5.20 of IFRS 9 contains an exception for certain types of financial instruments to measure expected credit losses over the period that the entity is exposed to credit risk, even if that period extends beyond the contractual period. The exception applies to some financial instruments that include both a loan and an undrawn commitment.
This seems to indicate that, in order for the exception to apply, a facility must have both drawn and undrawn components. However, in many cases, at any point in time, a facility might only have an undrawn component, such as a credit card facility.
Is it necessary for the financial instrument to have both drawn and undrawn components at the measurement date for the exception in IFRS 9 to apply?
No. The rationale for the exception, as expressed in paragraph BC5.261 of IFRS 9, is to ensure that sufficient loss allowance is established for contracts where the entity’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity’s exposure to credit losses to the contractual notice period.
A financial instrument might have a nil drawn-down balance at the reporting date. However, expected credit losses should still be recognised in the same way as they would be for an undrawn loan commitment. For example, a credit card which has been originated just before reporting date, but is yet to be used, will require recognition of expected credit losses.
Paragraph B5.5.39 of IFRS 9 also gives an example of a credit card as an instrument that can be withdrawn by the lender with little notice but that, in practice, exposes the lender to credit risk for a longer period. At any point in time, a portfolio of credit cards is likely to include instruments that have drawn-down amounts and those that do not.