Last update 12/01/2020
IFRS 7 Credit risk disclosures – Credit risk is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures.
Management should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period [IFRS 7 31]. The disclosures require focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk [IFRS 7 32].
Qualitative and quantitative disclosures are required. Management should therefore disclose, for each type of risk arising from financial instruments:
- The exposures to risk and how they arise, and its objectives, policies and processes for managing the risk and the methods used to measure the risk (qualitative disclosure) [IFRS 7 33]; and
- Summary quantitative data about its exposure to that risk at the end of the reporting period (quantitative disclosures) [IFRS 7 34].
If the quantitative data disclosed at the end of the reporting period is unrepresentative of an entity’s exposure to risk during the period, management should provide further information that is representative [IFRS 7 35].
IFRS 7 36 requires an entity to disclose information about its exposure to credit risk by class of financial instrument. Such disclosures include information on the credit quality of financial assets with credit risk.
IFRS 7 37(a) requires investment entities to disclose an analysis of the age of financial assets that are past due at the reporting date but not impaired.
Financial asset is past due when a counterparty has failed to make a payment when contractually due. Past due therefore includes all financial assets that are one or more days overdue. Although IFRS 7 34(a) requires risk disclosures that are based on the information provided to key management personnel, there are also some minimum disclosure requirements defined by IFRS 7 (IFRS 7 36-42) that should always be disclosed, irrespective of how management monitors the risk.
However, the entity may take the way management monitors financial assets into account when defining the appropriate time bands used in the credit risk table. In the above scenario, it may disclose the amounts past due less than a month and amounts past due more than a month.
What amount should be disclosed to satisfy this requirement? Should this be:
- Only the amount past due (that is, the instalment not paid when contractually due);
- The whole balance that relates to the amount past due; or
- The whole balance that relates to the amount past due, including any other balances with the same debtor?
The investment entity should disclose the whole balance that relates to the amount past due.
IFRS 7 BC55(a) explains that the purpose of the disclosure required in IFRS 7 37(a) is to provide users of the financial statements with information about those financial assets that are more likely to become impaired and to help users to estimate the level of future impairment losses. The whole balance that relates to the amount past due should therefore be disclosed, as this is the amount that would be disclosed as the amount of the impaired financial assets if impairment crystallises.
Other associated balances to the same debtor should not be disclosed as past due but not impaired, as the debtor has not failed to make a payment on these when contractually due.
Do the credit risk disclosures required by IFRS 7 36-38 apply to an entity’s holdings of equity investments?
Only the disclosures required by IFRS 7 37(b) apply. The definition of equity in IAS 32 requires that the issuer has no obligation to pay cash or transfer other assets. It follows that such equity investments are subject to price risk, not credit risk. Most of the IFRS 7 credit risk disclosures are therefore not relevant to investments in equity instruments.
However, IFRS 7 37(b) requires entities to disclose an analysis of financial assets that are impaired. This disclosure is relevant and should be given for impaired equity investments classified as available for sale.
Disclosure includes an analysis of financial assets that are individually determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired [IFRS 7 37(b)].
A real estate investment fund has C3 million of receivables (that is, outstanding lease payments), which have been treated as follows:
- C1 million of the receivables have been assessed individually for impairment; based on the conditions stated in IFRS 9 5.5.4 (or IAS 39 58-61), management concludes that they are impaired;
- C1 million of a collection of insignificant receivables are individually concluded to be impaired on the basis of the IAS 39, but the impairment calculation is carried out on the C1m amount for efficiency purposes; and
- C1 million of a portfolio of assets has observable data indicating that there is a measurable decrease in the estimated future cash flows from that group of financial assets, although the decrease cannot be identified with individual financial assets [IAS 39 59(f)].
Which of these require disclosure under IFRS 7 37(b)?
Treatments (a) and (b) require disclosure under IFRS 7 37(b), as these receivables are individually assessed for impairment.
The disclosure is not required for (c), as the receivables are assessed on a portfolio basis rather than an individual basis. However, actual impairment loss on the portfolio of assets should also be disclosed for income statement purposes under IFRS 7 20(e).
Quantitative disclosures credit risk
Disclosures as per IFRS 7 6 …. an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.
|
Class A |
Class B |
Class C |
Total |
|
|
1 Neither past due not impaired |
X |
X |
X |
XXX |
|
2 Renegotiated |
X |
X |
X |
XXX |
|
3 Past due |
X |
X |
X |
XXX |
|
Age analysis – < 30 days – 31 – 60 days – over 60 days |
X X X |
X X X |
X X X |
XXX XXX XXX |
|
4 Impaired1 |
X |
X |
X |
XXX |
|
– Gross balance – Loss allowance |
X (X) |
X (X) |
X (X) |
XXX (XXX) |
|
Collateral held |
? |
? |
? |
XXX = reconcile to the Statement of Financial position
Disclosures for collateral and other credit enhancements obtained
- Nature and carrying amount of collateral obtained
- When assets are not readily convertible to cash the policies for:
- disposing of such assets; or
- for using them in its operations
Disclosure of collateral and other credit enhancements held as security
- Policies and procedures for valuing, managing collateral
- Description
- Main types of counterparties to collateral and their creditworthiness
- Risk concentrations within collateral
Remember collateral is also a class based disclosure.
Extensive example credit risk disclosures
12(c) Credit risk
Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost, at fair value through other comprehensive income (FVOCI) and at fair value through profit or loss (FVPL), favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables. [IFRS 7 33(a),(b)]
(i) Risk management
Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. [IFRS 7 35B]
If wholesale customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the board. The compliance with credit limits by wholesale customers is regularly monitored by line management. [IFRS 7 34 (c)]
Sales to retail customers are required to be settled in cash or using major credit cards, mitigating credit risk. There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions.
For derivative financial instruments, management has established limits so that, at any time, less than 10% of the fair value of favourable contracts outstanding are with any individual counterparty.
The group’s investments in debt instruments are considered to be low risk investments. The credit ratings of the investments are monitored for credit deterioration.
(ii) Security
For some trade receivables the group may obtain security in the form of guarantees, deeds of undertaking or letters of credit which can be called upon if the counterparty is in default under the terms of the agreement.
(iii) Impairment of financial assets
The group has four types of financial assets that are subject to the expected credit loss model:
- trade receivables for sales of inventory and from the provision of consulting services
- contract assets relating to IT consulting contracts
- debt investments carried at amortised cost, and
- debt investments carried at FVOCI.
While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.
Trade receivables and contract assets
The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. [IAS 1 117 ,IFRS 7 21 IFRS 9 5.5.15]
To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. [IFRS 7 35F(c)]
The expected loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2019 or 1 January 2019 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The group has identified the GDP and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. [IFRS 7 35G)]
See also: The IFRS Foundation