Expand the sections below to access the latest standards, drafts, PwC interpretations, tools and practice aids for this topic.
In July 2014, the IASB published IFRS 9, 'Financial instruments', the complete version of IFRS 9, 'Financial Instruments', which replaces the guidance in IAS 39. This final version includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the incurred loss impairment model used today. This version includes the hedge accounting amendments released in November 2013.The new standard is effective 1 January 2018, and was endorsed by the EU in November 2016, with early application permitted.
The impairment rules of IFRS 9 introduce a new, forward looking, expected credit loss (‘ECL’) impairment model which will generally result in earlier recognition of losses compared to IAS 39. These changes are likely to have a significant impact on entities that have significant financial assets, in particular financial institutions.
The new impairment model introduces a three stage approach. Stage 1 includes financial instruments that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month expected credit losses (that is, expected losses arising from the risk of default in the next 12 months) are recognised and interest revenue is calculated on the gross carrying amount of the asset (that is, without deduction for credit allowance). Stage 2 includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they have low credit risk at the reporting date) but are not credit-impaired. For these assets, lifetime ECL (that is, expected losses arising from the risk of default over the life of the financial instrument) are recognised, and interest revenue is still calculated on the gross carrying amount of the asset. Stage 3 consists of financial assets that are credit-impaired, which is when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. For these assets, lifetime ECL are also recognised, but interest revenue is calculated on the net carrying amount (that is, net of the ECL allowance).
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 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 many cases, application of the new requirements will require significant judgement - in particular when assessing whether there has been a significant increase in credit risk (triggering a move from stage 1 to stage 2 and a consequential increase from 12-month ECL to lifetime ECL) and in estimating ECL including the effect of forward looking information. IFRS 9 also introduces significant new disclosure requirements.