Expected Credit Loss Model

Last Updated on 25/02/2021 by 75385885

IFRS 9 establishes a three-stage impairment model, based on whether there has been a significant increase in the credit risk of a financial asset since its initial recognition. These three-stages then determine the amount of impairment to be recognised as expected credit losses (ECL) at each reporting date as well as the amount of interest revenue to be recorded in future periods:

1. Stage 1: Credit risk has not increased significantly since initial recognition – Recognise 12-months ECL, and recognise interest on a gross basis;
2. Stage 2: Credit risk has increased significantly since initial recognition – Recognise lifetime ECL, and recognise interest on a gross basis;
3. Stage 3: Financial asset is credit impaired (using the criteria currently included in IAS 39) – Recognise lifetime ECL, and present interest on a net basis (i.e. on the gross carrying amount less credit allowance).

The Stage 1 12-months ECL is recorded at initial recognition of the financial instrument. In estimating ECLs, entities must consider a range of possible outcomes and not the ‘most likely’ outcome. The standard requires that at a minimum, entities must consider the probability that:

• A credit loss occurs; and
• No credit loss occurs.