Applying the 3-stage Impairment Model

IFRS 9 Financial Instruments introduced the application of the “expected credit loss” (ECL) model.

The ECL model is applicable to all financial assets subsequently measured at amortised cost and debt instruments at fair value through other comprehensive income. This includes intercompany loans included in the separate financial statements.

As intercompany loans with subsidiaries are eliminated on consolidation, no related financial assets or liabilities are recorded in the consolidated financial statements. However, the implications of impairment on intercompany loans should be considered when separate financial statements are prepared.

The terms of the loans will determine the approach to be followed in assessing the expected credit loss.

Repayable on demand

These loans are effectively repayable within a day or less. Therefore, the entity should assess the borrower’s ability to repay the loan if it were to be demanded at the reporting date. To the extent that adequate accessible liquid assets are available to settle the amount outstanding, no further work is required. If not, additional factors should be considered to determine whether recovery is possible through other means.

Term of 12 months or less and no significant increase in credit risk

For loans with a term of 12 months or less, the effect of 12-month and lifetime credit losses will be the same. Therefore, 12-month credit losses may be utilised. Similarly, for loans where there has not been a significant increase in credit risk, these loans would be in stage 1, and 12-month credit losses should be calculated. In these circumstances, similar considerations to those discussed above should be applied, i.e. consideration should be given to whether the borrower will have adequate accessible liquid assets to repay the amount outstanding throughout the 12-month period.

Low credit risk

A short-cut method may be applied to these loans. One may assume a probability of default (PD) of the lowest level investment grade instrument is applied to a loss given default (LGD) of 100%. If this results in an immaterial ECL, no further work is required. However, if the short-cut above results in a material amount, additional work is required. Entity-specific factors should be used in the calculation.

Significant increase in credit risk

These loans would be in either stage 2 or stage 3 of the impairment model and lifetime expected credit losses should be calculated. As the impairment is considered over the entire lifetime of the loan, the PDs are likely to be higher than for loans within stage 1 of the impairment model. Reasonable information should be utilised in making this assessment. This includes internal, external, historical as well as forward-looking information.


For more information on IFRS 9, please contact:

Loh Ji Kin
Assurance Leader

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