The illustration below shows the overall ECL model; each decision box will be considered
over the following pages:
Scope exception from the general model: simplified approach for trade and
The model includes some operational simplifications for trade receivables, contract assets
and lease receivables, because they are often held by entities that do not have sophisticated
credit risk management systems. These simplifications eliminate the need to calculate 12-
month ECL and to assess when a significant increase in credit risk has occurred.
For trade receivables or contract assets that do not contain a significant financing
component, the loss allowance should be measured at initial recognition and throughout
the life of the receivable at an amount equal to lifetime ECL. As a practical expedient, a
provision matrix may be used to estimate ECL for these financial instruments. See
example 1 in the Appendix for reference.
For trade receivables or contract assets which contain a significant financing component
in accordance with IFRS 15 and lease receivables, an entity has an accounting policy
choice: either it can apply the simplified approach (that is, to measure the loss allowance
at an amount equal to lifetime ECL at initial recognition and throughout its life), or it can
apply the general model.
The policy choice should be applied consistently, but an entity can apply the policy election
for trade receivables, contract assets and lease receivables independently of each other.
Scope exception from the general model: purchased or originated credit impaired
The general impairment model does not apply to purchased or originated creditimpaired
assets. A financial asset is considered credit-impaired on purchase or
origination if there is evidence of impairment (as defined in IFRS 9 Appendix A) at the
point of initial recognition (for instance, if it is acquired at a deep discount).
For such assets, impairment is determined based on full lifetime ECL on initial
recognition. However, lifetime ECL are included in the estimated cash flows when
calculating the effective interest rate on initial recognition. The effective interest rate for
interest recognition throughout the life of the asset is a credit-adjusted effective interest
rate. As a result, no loss allowance is recognised on initial recognition.
Any subsequent changes in lifetime ECL, both positive and negative, will be recognised
immediately in profit or loss.
The accounting for purchased or originated credit-impaired assets is largely consistent
with how entities currently apply paragraph AG5 of IAS 39.
Practical expedient for financial assets with low credit risk
As an exception to the general model, if the credit risk of a financial instrument is low at
the reporting date, management can measure impairment using 12-month ECL, and so it
does not have to assess whether a significant increase in credit risk has occurred. In order
for this operational simplification to apply, the financial instrument has to meet the
- it has a low risk of default;
- the borrower is considered, in the short term, to have a strong capacity to meet its
- the lender expects, in the longer term, that adverse changes in economic and
business conditions might, but will not necessarily, reduce the ability of the
borrower to fulfil its obligations.
The credit risk of the instrument needs to be evaluated without consideration of
collateral. This means that financial instruments are not considered to have low credit
risk simply because that risk is mitigated by collateral. Financial instruments are also not
considered to have low credit risk simply because they have a lower risk of default than
the entity’s other financial instruments or relative to the credit risk of the jurisdiction
within which the entity operates.
The use of the practical expedient is optional. That is, management can choose to apply
the general model for those assets that would meet the low credit risk requirements.
It is expected that this operational simplification will provide relief to entities especially
financial institutions, such as insurers, who hold large portfolios of securities with high
credit ratings. This expedient will avoid having to assess whether there are significant
increases in credit risk for financial assets with low credit risk.
Financial instruments are not required to be externally rated. An entity can use internal
credit ratings that are consistent with a global credit rating definition of ‘investment
The low credit risk simplification is not meant to be a bright-line trigger for the
recognition of lifetime ECL. Instead, when credit risk is no longer low, management
should assess whether there has been a significant increase in credit risk to determine
whether lifetime ECL should be recognised. This means that just because an instrument’s
credit risk has increased such that it no longer qualifies as low credit risk, it does not
automatically mean that it has to be included in Stage 2 Management needs to assess if a
significant increase in credit risk has occurred before calculating lifetime ECL for the
Exploring the general model: assessing a significant increase in credit risk
When assessing whether the credit risk on a financial instrument has increased
significantly since initial recognition, management looks at the change in the risk of a
default occurring over the expected life of the financial instrument rather than the
change in the ECL. An entity should compare the risk of a default as at the reporting date
with the risk of a default occurring on the financial instrument as at the date of initial
recognition. If management chooses to make the assessment by using PD, generally a
lifetime PD (over the remaining life of the instrument) should be used. However, as a
practical expedient, a 12-month PD can be used if it is not expected to give a different
result to using lifetime PDs.
(3) Does the financial
instrument have a low credit risk at reporting date?
(4) Has there been a
significant increase in credit
risk since initial recognition?
IFRS 9: Expected credit losses PwC 8
There are cases where using a 12-month PD is not a reasonable approximation to using
lifetime PD. These include, for example, bullet repayment loans where the payment
obligations of the debtor are not significant during the first 12 months of the loan
facility; or loans where changes in credit-related factors only have an impact on the
credit risk of the financial instrument beyond 12 months. Example 2 in the Appendix
illustrates a case where looking at 12-month PD would not be appropriate.
In order to perform the assessment all information available should be taken into
account. When the financial instrument is collateralised, entities should assess
significant increases in credit risk without taking into account the collateral.
Nevertheless, when calculating ECL, the expected recovery from collateral should be
taken into account. Example 3 in the Appendix reflects how the assessment should be
The standard allows entities to make the assessment of changes in credit risk by using a
12-month PD where it would not be expected to give a different result to using lifetime
PDs. This does not mean that the 12-month PD used for regulatory purposes can be
used without adjustment.
Twelve-month expected credit losses used for regulatory purposes are normally based
on ‘through the cycle’ (‘TTC’) probabilities of a default (that is, probability of default in
cycle-neutral economic conditions) and can include an adjustment for prudence. PD
used for IFRS 9 should be ‘point in time’ (’PiT’) probabilities (that is, probability of
default in current economic conditions) and do not contain adjustment for prudence.
However, regulatory PDs might be a good starting point, provided they can be
reconciled to IFRS 9 PDs.
Under IFRS 9, estimates of PD will change as an entity moves through the economic
cycle. Under many regulatory models, as PD is calculated through the cycle, estimates
are less sensitive to changes in economic conditions. Therefore, regulatory PDs reflect
longer-term trends in PD behaviour as opposed to PiT PDs.
As a consequence, during a benign credit environment, IFRS 9 PD (PiT) will be lower than
regulatory PD (TTC), while the adjustment will be the opposite during a financial crisis:
The standard does not provide any guidance on how to adjust TTC PD to PiT PD. The
process is complex and will require the use of judgement.
IFRS 9: Expected credit losses PwC
Management should be aware that a simple or absolute comparison of PDs at initial
recognition and at the reporting date is not appropriate. All other things staying
constant, the PD of a financial instrument should reduce with the passage of time. So,
management needs to consider the relative maturities of a financial instrument at
inception and at the reporting date when comparing PDs. This means that the PD for
the remaining life of a financial asset at the reporting date (for example, two years if
three years have already passed on a five-year instrument) should be compared to the
PD expected at initial recognition for the last two years of its maturity (that is, for
years 4 and 5). Management might find this requirement operationally challenging.
When determining whether the credit risk on an instrument has increased significantly,
management should consider reasonable and supportable best information available
without undue cost or effort. This information should include actual and expected
changes in external market indicators, internal factors and borrower-specific
Examples of ways in which the assessment of significant increases in credit risk could be
implemented more simply include:
✓ Establishing the initial maximum credit risk for a particular portfolio by product type
and/or region (the ‘origination credit risk’) and comparing that to the credit risk at
the reporting date. This would only be possible for portfolios of financial instruments
with similar credit risk on initial recognition;
✓ Assessing increases in credit risk through a counterparty assessment, as long as such
assessment achieves the objectives of the proposed model; and
✓ An actual or expected significant change in the financial instrument’s external
The examples above are not exhaustive, so other ways of assessing a significant increase
in credit risk might be used. Refer to Example 3 in the Appendix for an example on
assessing increases in credit risk based on PD.
Generally a financial instrument would have a significant increase in credit risk before
there is objective evidence of impairment or before a default occurs. The standard
requires both forward-looking and historical information to be used in order to
determine whether a significant increase in credit risk has occurred.
Lifetime ECL are expected to be recognised before a financial asset becomes delinquent.
If forward-looking information is reasonably available, an entity cannot rely solely on
delinquency information when determining whether credit risk has increased
significantly since initial recognition; it also needs to consider the forward-looking
information. However, if information that is more forward-looking than past due status
is not available, there is a rebuttable presumption that credit risk has increased
significantly since initial recognition no later than when contractual payments are more
than 30 days past due.
This presumption can be rebutted if there is reasonable and supportable evidence that,
regardless of the past-due status, there has been no significant increase in the credit risk:
For example, where non-payment is an administrative oversight, instead of resulting
from financial difficulty of the borrower. Another example is where management has
access to historical evidence that demonstrates that there is no correlation between
significant increases in the risk of a default occurring and financial assets on which
payments are more than 30 days past due, but that evidence does identify such a
correlation when payments are more than 60 days past due.
Generally, a significant increase in credit risk happens gradually over time and before the
financial asset becomes credit-impaired or is in default. As a result, the lifetime ECL
should not be delayed and is recognised before a financial asset is regarded as creditimpaired
or in default.
Level at which the increase in credit risk assessment should be performed
The model can be applied at an individual or portfolio level. However, some factors or
indicators may not be identifiable at an instrument level. In such cases, the factors or
indicators should be assessed at a portfolio level. Management cannot avoid calculating
lifetime ECL by considering the assessment at an individual asset level only, if
information available at portfolio level indicates that there has been an increase in credit
risk for the instruments included in the portfolio.
Depending on the nature of the financial instrument and the credit risk information
available for particular groups of financial instruments, management might not be able
to identify significant changes in credit risk for individual financial instruments before
the financial instrument becomes past due. This might be the case for financial
instruments such as retail loans for which there is little or no updated credit risk
information that is routinely obtained and monitored on an individual instrument basis
until a customer breaches the contractual terms.
If changes in the credit risk for individual financial instruments are not captured before
they become past due, a loss allowance based only on credit information at an individual
financial instrument level would not faithfully represent the changes in credit risk since
In some circumstances management does not have reasonable and supportable
information that is available without undue cost or effort to measure lifetime ECL on an
individual instrument basis. In that case, lifetime ECL should be recognised on a
collective basis that considers comprehensive credit risk information. This
comprehensive credit risk information must incorporate not only past-due information
but also all relevant credit information, including forward-looking macro-economic
information, in order to approximate the result of recognising lifetime ECL when there
has been a significant increase in credit risk since initial recognition on an individual
Management can group financial instruments on the basis of shared credit risk
characteristics with the objective of facilitating an analysis that is designed to enable
significant increases in credit risk to be identified on a timely basis. The entity should not
(4) Has there been a
significant increase in credit
risk since initial recognition?
IFRS 9: Expected credit losses
obscure this information by grouping financial instruments with different risk characteristics.
Examples of shared credit risk characteristics might include, but are not limited to:
- the instrument type;
- the credit risk ratings;
- the collateral type;
- the date of origination;
- the remaining term to maturity;
- the industry;
- the geographical location of the borrower; and
- the value of collateral relative to the commitment if it has an impact on the
probability of a default occurring (for example, non-recourse loans in some
jurisdictions or loan-to-value ratios).
IFRS 9 provides some examples of how to perform the portfolio analysis. It establishes
that individual exposures could be grouped into sub-portfolios on the basis of common
borrower-specific characteristics, such as geographical location or postcodes,
headroom/access affordability at origination or behavioural scoring (that is, ‘bottom
up’ approach). Alternatively management could estimate the proportion of the portfolio
that has experienced a significant increase in credit risk using general information and
calculate expected credit losses on that basis (that is, ‘top down’ approach). Example 4
in the Appendix illustrates these approaches.
If management does not have forward-looking information available at an individual
level, and therefore assesses significant increases in credit risk using past-due
information only (‘bottom up’ approach), the standard requires management to also
consider forward-looking information at a portfolio level in order to determine whether
there has been a significant increase in credit risk (‘top down’ approach).
ECL are a probability-weighted estimate of credit losses. A credit loss is the difference
between the cash flows that are due to an entity in accordance with the contract and the
cash flows that the entity expects to receive discounted at the original effective interest
rate. Because ECL consider the amount and timing of payments, a credit loss arises even
if the entity expects to be paid in full but later than when contractually due.
The illustration below shows the ECL for a financial asset and a loan commitment:
ECL represent a probability-weighted estimate of the difference over the remaining life of
the financial instrument, between:
Undrawn loan commitments
ECL represent a probability-weighted estimate of the difference over the remaining life of
the financial instrument, between:
The time value of money must be taken into account when calculating the ECL
(regardless of whether it is the 12-month or the lifetime ECL). Management should
discount the cash flows that it expects to receive at the effective interest rate determined
at initial recognition, or an approximation thereof in order to calculate ECL. If a financial
instrument has a variable interest rate, ECL should be discounted using the current
effective interest rate.
When calculating ECL on financial assets classified in the FVOCI category, movements in
the ECL provision will impact profit or loss (‘P&L’). Under the model, impairment
charges in P&L will always occur earlier as compared to current IAS 39 guidance, and
this is no different for financial assets classified in the FVOCI category. Example 5 in the
Appendix illustrates the estimation of credit losses for FVOCI financial assets.
An estimate of ECL on loan commitments should be consistent with expectations of
draw-downs on that loan commitment. That is, management should consider the
expected portion of the loan commitment that will be drawn down within 12 months of
the reporting date when estimating 12-month ECL and the expected portion of the loan
commitment that will be drawn down over the expected life of the loan commitment
when estimating lifetime ECL.
For a financial guarantee contract, management is required to make payments only in
the event of a default by the debtor in accordance with the terms of the instrument that is
guaranteed. Accordingly, cash shortfalls are the expected payments to reimburse the
holder for a credit loss that it incurs, less any amounts that management expects to
receive from the holder, the debtor or any other party. If the asset is fully guaranteed, the
estimation of cash shortfalls for a financial guarantee contract would be consistent with
the estimations of cash shortfalls for the asset subject to the guarantee.
For a financial asset that is credit-impaired at the reporting date, but that is not a
purchased or originated credit-impaired financial asset, an entity should measure the
ECL as the difference between the asset’s gross carrying amount and the present value of
estimated future cash flows discounted at the financial asset’s original effective interest
rate. Any adjustment is recognised in profit or loss as an impairment gain or loss.
The standard establishes that management needs to take into account credit risk
management actions that are taken once an exposure has deteriorated (such as the
reduction or removal of undrawn limits) when estimating the period over which to
calculate ECL on loan commitments.
This could affect loan commitments where the agreement establishes an adjustment to
interest rates at draw-down which compensates for credit risk. Entities might need to
take this feature into account when estimating ECL on the loan commitments.
Period over which to estimate ECL
For loan commitments, the maximum period over which ECL should be measured is the
maximum contractual period over which the entity is exposed to credit risk.
Some financial instruments include both a loan and an undrawn commitment
component, such as revolving credit facilities. In such cases, the contractual ability to
demand repayment and cancel the undrawn commitment does not necessarily limit the
exposure to credit losses beyond the contractual period. For those financial instruments,
management should measure ECL over the period that the entity is exposed to credit risk
and ECL would not be mitigated by credit risk management actions, even if that period
extends beyond the maximum contractual period. Example 6 in the Appendix illustrates
For those types of instrument, the factors to be considered when determining the period
over which to estimate ECL are:
the period over which the entity was exposed to credit risk on similar instruments;
the length of time for related defaults to occur on similar financial instruments following an increase in credit risk; and
the credit risk management actions that an entity expects to take once the credit risk
on the financial instrument has increased, such as the reduction or removal of undrawn limits.
The standard is clear that this exception to the recognition of ECL only applies to
instruments that include both a loan and an undrawn commitment component where
the ability to demand repayment and cancel the undrawn commitment does not limit
the exposure to credit losses. It should not be applied to other types of instruments.
Management will need to apply significant judgement in order to determine the
behavioural life of these types of instrument such as credit cards.
Measurement of ECL: what information to consider
The standard establishes that management should measure expected credit losses over
the remaining life of a financial instrument in a way that reflects:
- an unbiased and probability-weighted amount that is determined by evaluating a
range of possible outcomes;
- the time value of money; and
- reasonable and supportable information about past events, current conditions and
reasonable and supportable forecasts of future events and economic conditions at the
When estimating ECL, management should consider information that is reasonably
available, including information about past events, current conditions and reasonable
and supportable forecasts of future events and economic conditions. The degree of
judgement that is required for the estimates depends on the availability of detailed
information. See example 7 in the Appendix for some examples.
For periods beyond ’reasonable and supportable forecasts’, management should consider
how best to reflect its expectations by considering information at the reporting date about the
current conditions, as well as forecasts of future events and economic conditions.
As the forecast horizon increases, the availability of detailed information decreases, and
the degree of judgement to estimate ECL increases. The estimate of ECL does not require
a detailed estimate for periods that are far in the future – for such periods, management
may extrapolate projections from available, detailed information.
The standard is not specific on how to extrapolate projections from available
Different ways of extrapolation can be used. For example, management could apply the
average ECL over the remaining period or use a steady rate of expected credit losses
based on the last available forecast. These are only examples, and other methods might
apply. Management should choose an approach and apply it consistently.
This is a highly judgemental area which could have a large impact on the allowance for
The standard requires the estimate of ECL to reflect an unbiased and probabilityweighted
amount that is determined by evaluating a range of possible outcomes. It is specific
that at least two outcomes should be considered. In particular, management should consider the possibility of a credit loss occuring and the possibility that no credit loss occurs.
In practice, this may not need to be a complex analysis. In some cases relatively simple
modelling may be sufficient, without the need for a large number of detailed simulations
of scenarios. For example, the average credit losses of a large group of financial
instruments with shared risk characteristics may be a reasonable estimate of the
probability-weighted amount. In other situations, multiple scenarios that specify the
amount and timing of the cash flows for particular outcomes and the estimated
probability of those outcomes may be needed.
Where an entity modifies the contractual cash flows of a financial asset, and the
modification does not result in derecognition, the gross carrying amount of the asset
should be adjusted to reflect the revised contractual cash flows. The new gross carrying
amount should be determined as the present value of the estimated future modified
contractual cash flows discounted at the asset’s original effective interest rate. The
resulting adjustment should be charged to profit or loss as a gain or loss on modification.
Modified assets should be assessed to determine whether a significant increase in credit
risk has occurred in the same way as any other financial instrument. Management should
consider the credit risk at the reporting date under the modified contractual terms of the
asset. This is compared to the credit risk at initial recognition under the original
unmodified contractual terms of the financial asset. If this comparison does not show a
significant increase in credit risk, the loss allowance should be measured at 12-month
ECL. Example 8 in the Appendix illustrates this approach.
The guidance included above is applicable only to those cases where the modification
does not result in derecognition of the asset.
If the modification results in derecognition, the date of the modification would be
treated as the date of initial recognition of the new financial asset, and significant
increases in credit risk should be monitored against the credit risk at that date.
For measuring ECL, the estimate of expected cash shortfalls should reflect the cash flows
expected from collateral and other credit enhancements that are part of the contractual
terms and are not recognised separately by the entity.
The estimate of expected cash shortfalls on a collateralised financial instrument reflects
the amount and timing of cash flows that are expected from foreclosure on the collateral
less the costs of obtaining and selling the collateral. This is irrespective of whether
foreclosure is probable (that is, the estimate of expected cash flows considers the
probability of a foreclosure and the cash flows that would result from it). Consequently,
any cash flows that are expected from the realisation of the collateral beyond the
contractual maturity should be included in this analysis. Any collateral obtained as a
result of foreclosure is not recognised as an asset that is separate from the collateralised
financial instrument unless it meets the relevant recognition criteria for an asset.
Management should present interest revenue in the statement of comprehensive income
as a separate line item. Impairment losses (including reversals of impairment losses or
impairment gains) should also be presented as a separate line item.
An entity should recognise ECL in the statement of financial position as a provision (that is, a liability) for loan commitments and financial guarantee
For financial assets that are mandatorily measured at fair value through other
comprehensive income, the accumulated impairment amount is not separately presented
in the statement of financial position. However, an entity should disclose the loss
allowance in the notes to the financial statements.
For financial assets measured at amortised cost and lease receivables, there is no specific requirement in the Standard to separately disclose the accumulated impairment allowance on the face of the financial statements.
Extensive disclosures are required to identify and explain the amounts in the financial
statements that arise from ECL and the effect of deterioration and improvement in
credit risk. Example of key disclosure requirements are presented below:
The new disclosures will represent a significant challenge for management (specifically
for financial institutions) as the detailed level of information is likely to require significant
changes to systems and processes.
The standard and the implementation guidance set out the detail of the disclosures that
are required to be provided.