1. Why IFRS 9 commitments deserve more attention than they get
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In many annual reports, commitments are still treated as a technical footnote: a static list of future obligations, disclosed because the standard requires it, not because management believes it tells a meaningful story. That treatment is increasingly misaligned with reality.
Under IFRS 9, commitments—especially loan commitments, undrawn facilities, financial guarantees and credit enhancements—sit at the intersection of risk management, capital allocation, liquidity planning and governance accountability. They are not recognised as liabilities on day one, but they can crystallise into material losses precisely when conditions deteriorate. That makes them governance-sensitive by definition.
The financial crisis, the COVID period and more recent stress in highly leveraged sectors have demonstrated the same pattern repeatedly: losses do not originate in recognised loans alone, but in commitments that were economically binding long before they became accounting liabilities. IFRS 9 was designed to surface this risk earlier through expected credit loss (ECL) modelling—but only if entities apply judgement rigorously and consistently.
This article explains how IFRS 9 commitments really work, where practice still diverges, and why boards and audit committees should treat this topic as more than a disclosure exercise.
2. What IFRS 9 means by “commitments” – and what it does not
At a high level, IFRS 9 commitments are obligations that exist at the reporting date but are not recognised as liabilities because neither party has yet performed. Typical examples include:
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non-cancellable purchase or supply contracts,
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capital expenditure commitments for PPE or intangibles,
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unused letters of credit,
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undrawn loan facilities and credit lines,
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financial guarantee contracts.
As the original Annual Reporting article explains, these commitments are distinct from contingencies: there is no uncertainty about the existence of the obligation, only about its future execution.
That makes IFRS 9 different from older standards is that certain commitments are pulled into the impairment model, even though they are not recognised on the balance sheet. This applies primarily to:
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loan commitments, and
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financial guarantee contracts (FGCs).
For these instruments, IFRS 9 requires entities to recognise expected credit losses, effectively acknowledging that credit risk arises before cash is advanced.
3. Loan commitments: firm promises to provide credit
Although IFRS 9 does not define the term explicitly, its Basis for Conclusions describes loan commitments as firm commitments to provide credit under pre-specified terms and conditions. This description, originating from the IASB’s transition work, remains the anchor point for interpretation. Three elements are essential:
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Firm commitment – the entity cannot walk away at will.
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Provision of credit – not merely delivery of goods or services.
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Pre-specified terms – amount, pricing, maturity or mechanics are sufficiently defined.
Classic examples include undrawn revolving credit facilities, overdrafts, credit card limits and term loan commitments awaiting drawdown.
The difficulty arises at the margins:
Is a commitment to enter into a finance lease a loan commitment?
Is a store card issued by a retailer a credit commitment?
Is a commitment to issue a convertible bond a loan commitment or a derivative?
These questions have been debated for over a decade, most notably in the IFRS Transition Resource Group.
4. Scope boundaries: when a commitment falls inside IFRS 9 impairment
The ITG paper makes clear that two tests must be met simultaneously
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Is there a loan commitment?
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Does the commitment meet the definition of a financial instrument under IAS 32?
Only if both answers are yes does IFRS 9 impairment apply.
This explains why many executory contracts—such as supply agreements or customer orders—remain outside IFRS 9, even if they involve deferred payment. The credit element only becomes subject to ECL once a receivable or contract asset is recognised under IFRS 15.
By contrast, undrawn loan facilities are financial instruments from inception. The lender has extended credit risk exposure even before cash flows.
5. Expected credit losses on loan commitments
Once a loan commitment is in scope, the entity must measure ECL as if the loan were drawn, but limited to the expected exposure at default (EAD). This requires estimating:
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the probability of drawdown,
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the amount expected to be drawn at default, and
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the expected loss given default.
This is not a mechanical exercise. It requires forward-looking judgement about borrower behaviour, credit management actions and economic conditions.
The complexity increases further for revolving facilities, where contractual maturity often bears little resemblance to economic exposure.
6. The revolving credit exception (IFRS 9.5.5.20)
One of the most misunderstood provisions in IFRS 9 is paragraph 5.5.20, which addresses instruments that combine a drawn loan and an undrawn commitment—such as overdrafts and credit cards.
In principle, ECL should be measured over the period during which the entity is exposed to credit risk and cannot mitigate it through credit management actions. For revolving facilities, this period may extend well beyond the contractual notice period.
The 2024 EFRAG PIR confirms that this exception remains narrow by design and should not be applied automatically.
The key question is not how the instrument is labelled, but whether the lender can realistically limit its exposure by cancelling or reducing the facility.
This assessment is inherently judgemental—and therefore governance-critical.
Here is the link to IFRS 9 Financial Instruments on IFRS.org and our blog on Revolving credit facilities IFRS 9.
7. “Managed on a collective basis”: misunderstood but central
Much confusion has arisen from IFRS 9.B5.5.39, which refers to instruments “generally managed on a collective basis”. Some practitioners mistakenly treat this as a formal criterion.
The IASB clarified in the PIR that collective management is not determinative
What matters is substance:
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Can the entity enforce cancellation or repayment quickly enough to avoid further losses?
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Does historical behaviour show that limits are actually reduced when credit risk increases?
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Is management information granular enough to support such actions?
A facility managed individually can still fall within the exception if, in practice, exposure continues beyond contractual notice.
8. Financial guarantee contracts: integral or separate?
Financial guarantee contracts present a second layer of complexity. IFRS 9 requires ECL to include cash flows from credit enhancements that are integral to the contractual terms of a financial instrument.
The problem is that IFRS 9 does not define “integral”.
The EFRAG PIR documents significant diversity in practice, particularly where guarantees are acquired after loan origination or are not explicitly referenced in the loan contract.
Some entities include such guarantees in ECL; others account for them separately under IAS 37. Both approaches can materially affect profit volatility and timing.
Read more on this subject on IFRS.org for Financial guarantee contracts and IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
9. Non-integral guarantees and the IAS 37 tension
Where a financial guarantee is deemed non-integral, many entities apply IAS 37 to recognise a reimbursement asset only when recovery is virtually certain. This creates a timing mismatch: ECL is recognised early under IFRS 9, while the guarantee benefit is recognised later.
EFRAG has highlighted this mismatch as conceptually problematic, but the IASB has so far classified the issue as low priority, citing lack of evidence of pervasive misstatement.
For preparers, this reinforces one message: policy choices must be explicit, documented and consistently applied.
10. Practical example: a corporate revolving facility
Consider a €100 million revolving credit facility with a one-year contractual maturity, renewed annually for over a decade.
Contractually, the bank can cancel with 30 days’ notice. Economically, however:
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the borrower relies on the facility for working capital,
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cancellation would likely trigger default,
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historical practice shows renewal even in downturns.
Under IFRS 9, measuring ECL over 30 days would understate exposure. The facility likely falls within the 5.5.20 exception, requiring ECL over a longer behavioural life.
This is not an accounting nuance—it materially affects provisions, capital ratios and dividend capacity.
Read more on our blog: Commitments in Financial Statements – From IAS 1 to IFRS 18: The Overlooked Promise in Corporate Reporting.
11. Disclosure: more than ticking the IFRS 7 box
IFRS 7 requires disclosure of credit risk exposure arising from loan commitments, split between 12-month and lifetime ECL categories. Too often, these disclosures are boilerplate.
Good practice goes further:
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explaining key judgements in determining exposure periods,
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describing credit risk management actions,
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reconciling commitments to liquidity risk disclosures.
From a governance perspective, these disclosures signal whether management truly understands its off-balance-sheet risk.
12. Why this matters for boards and audit committees
Loan commitments and guarantees are promise-based risks. They test governance precisely because they sit outside the comfort zone of recognised balances.
Boards should ask:
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Which commitments could crystallise fastest under stress?
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Are ECL models aligned with actual credit behaviour?
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Where does judgement materially affect outcomes—and is it challenged?
IFRS 9 does not remove discretion; it relocates it into models and assumptions. Oversight must follow.
13. From compliance to insight
The IASB’s repeated conclusion—most recently in 2024—not to amend IFRS 9 is telling. The standard is not considered broken. The real risk lies in how it is applied.
Entities that treat commitments as a footnote miss an opportunity to connect accounting, risk management and strategy. Those that treat them as part of the organisation’s financial nervous system gain earlier insight into stress, resilience and capital discipline.
That is where IFRS 9 commitments stop being technical—and start becoming governance-relevant.