A quick overview of credit impairment under IFRS 9 for banks. Those with limited or no understanding of new requirements for loan loss accounting, will get a quick high level understanding of an accounting standard that is the most significant change in accounting for loan losses in more than a decade.
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
Modern credit risk modeling (e.g., Merton, 1974) increasingly relies on advanced mathematical, statistical and numerical echniques to measure and manage risk in redit portfolios
This gives rise to model risk (OCC 2011-16) and the possibility of nderstating nherent dangers stemming from very rare yet plausible occurrencs perhaps not in our eference data-sets International supervisors have recognized the importance of stress testing credit risk in the Basel framework (BCBS, 2009)
It can and has been argued that the art and science of stress testing has lagged in the domain of credit, vs. other types of risk (e.g., market), and our objective is to help fill this vacuum
We aim to present classifications & established techniques that will help practitioners formulate robust credit risk stress tests
Fundamental Review of the Trading Book - What is FRTB and why start now?Morten Weis
Presentation on new minimum standard for market risk capital, known as Fundamental Review of the Trading Book "FRTB", issued by the Basel Committee January 2016. Given by Dr. Morten Weis, independent risk management expert, at a workshop arranged by KPMG Denmark 9 June 2016 in Copenhagen, Denmark. Focus is on general introduction to the new capital standard, with emphasis on the standard method as it is used by most banks in Denmark. Advice is shared on why to start FRTB preparations now, despite rules expected in force first from 2019.
The presentation is in pdf format, but might not display correctly unless downloaded.
Summary and Overview of new IFRS 9 on Financial instruments - covering valuation models, the impairment approach for trade receivables, and hedge accounting examples
Liquidity Risk is normally a crucial issue in a banking crisis, however, during the 2007-2010 period, Liquidity has not been as difficult for us as we may have thought. There are many reasons for this, but number one is the fact that today’s community bankers simply have a better understanding of the various techniques for raising both retail deposits and wholesale funds. What does make this crisis a bit different is the relative pricing efficiencies in the wholesale or non-core funding arena these days and our session will focus on how bankers can avoid those difficult examiner discussions about the use of FHLB Advances and Brokered Deposits. It’s all about process and we will provide guidance on what needs to be in your ALCO Policy as it relates to wholesale funding. We will also explore the April 2010 Liquidity and Funds Management Guidance to ensure your bank is up to speed on those requirements. Finally, we will provide specific guidance on both Ratio Analysis and creating your Contingency Funding Plan and will review a sample CFP.
This presentation provides complete study ofcredit risk management,how it was performed in yester years ,how it is taken care nowadays and what is the road ahead in future
Safeguarding Bank Assets with an Early Warning SystemCognizant
The recent global financial crisis underscored the impact of non-performing assets and caused banks' overhead to soar. An automated early warning system (EWS) can help these institutions avoid the risk of problem loans, better protect their assets and reduce the effects of delinquent payments.
Banks are scrambling to meet with IFRS 9 guidelines and are setting down on the path to implement various ECL estimation methodologies and models. But a topic that hasn’t been given enough attention is the need for governance of these models and the attendant model risk management framework that needs to be set up to lend credibility to the model estimates. This blog touches upon the need for validation of models and how model risk governance has become paramount in view of the new guidelines.
Counterparty Credit Risk and CVA under Basel IIIHäner Consulting
Financial institutions which apply for an IMM waiver under Basel III need to fullfill a broad set of requirements. We present the quantitative, organizational and operational implications and provide some hand-on guidance how to fulfill the regulatory requirements.
Modern credit risk modeling (e.g., Merton, 1974) increasingly relies on advanced mathematical, statistical and numerical echniques to measure and manage risk in redit portfolios
This gives rise to model risk (OCC 2011-16) and the possibility of nderstating nherent dangers stemming from very rare yet plausible occurrencs perhaps not in our eference data-sets International supervisors have recognized the importance of stress testing credit risk in the Basel framework (BCBS, 2009)
It can and has been argued that the art and science of stress testing has lagged in the domain of credit, vs. other types of risk (e.g., market), and our objective is to help fill this vacuum
We aim to present classifications & established techniques that will help practitioners formulate robust credit risk stress tests
Fundamental Review of the Trading Book - What is FRTB and why start now?Morten Weis
Presentation on new minimum standard for market risk capital, known as Fundamental Review of the Trading Book "FRTB", issued by the Basel Committee January 2016. Given by Dr. Morten Weis, independent risk management expert, at a workshop arranged by KPMG Denmark 9 June 2016 in Copenhagen, Denmark. Focus is on general introduction to the new capital standard, with emphasis on the standard method as it is used by most banks in Denmark. Advice is shared on why to start FRTB preparations now, despite rules expected in force first from 2019.
The presentation is in pdf format, but might not display correctly unless downloaded.
Summary and Overview of new IFRS 9 on Financial instruments - covering valuation models, the impairment approach for trade receivables, and hedge accounting examples
Liquidity Risk is normally a crucial issue in a banking crisis, however, during the 2007-2010 period, Liquidity has not been as difficult for us as we may have thought. There are many reasons for this, but number one is the fact that today’s community bankers simply have a better understanding of the various techniques for raising both retail deposits and wholesale funds. What does make this crisis a bit different is the relative pricing efficiencies in the wholesale or non-core funding arena these days and our session will focus on how bankers can avoid those difficult examiner discussions about the use of FHLB Advances and Brokered Deposits. It’s all about process and we will provide guidance on what needs to be in your ALCO Policy as it relates to wholesale funding. We will also explore the April 2010 Liquidity and Funds Management Guidance to ensure your bank is up to speed on those requirements. Finally, we will provide specific guidance on both Ratio Analysis and creating your Contingency Funding Plan and will review a sample CFP.
This presentation provides complete study ofcredit risk management,how it was performed in yester years ,how it is taken care nowadays and what is the road ahead in future
Safeguarding Bank Assets with an Early Warning SystemCognizant
The recent global financial crisis underscored the impact of non-performing assets and caused banks' overhead to soar. An automated early warning system (EWS) can help these institutions avoid the risk of problem loans, better protect their assets and reduce the effects of delinquent payments.
Banks are scrambling to meet with IFRS 9 guidelines and are setting down on the path to implement various ECL estimation methodologies and models. But a topic that hasn’t been given enough attention is the need for governance of these models and the attendant model risk management framework that needs to be set up to lend credibility to the model estimates. This blog touches upon the need for validation of models and how model risk governance has become paramount in view of the new guidelines.
Counterparty Credit Risk and CVA under Basel IIIHäner Consulting
Financial institutions which apply for an IMM waiver under Basel III need to fullfill a broad set of requirements. We present the quantitative, organizational and operational implications and provide some hand-on guidance how to fulfill the regulatory requirements.
IFRS (International Financial Reporting Standards) 9 is not just an accounting standard, but a game-changer. In today’s capital constrained environment, the increased volatility of P&L and that of associated regulatory capital are likely to have a profound impact across the stakeholder community. This presentation provides an overview of our assistance themes. If you are project sponsor or a stakeholder, please feel free to organize a call with us to discuss how Nexx can assist you.
Philip Lewis, Head of Accounting Product at Aptitude Software, presents his thoughts on the complexities and challenges involved in the implementation of IFRS 9 regulation for banks globally.
Transition matrices and PD’s term structure - Anna CornagliaLászló Árvai
A transition matrix is a square matrix describing the probabilities of moving from one state to another in a dynamic system. In each row there are the probabilities of moving, from the state represented by that row, to the other states. Thus each row of a transition matrix adds to one.
In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the IFRS 9 framework. In this blog, we have discussed the methodologies for adjusting PDs for the ‘forward-looking’ macroeconomic scenarios and development of PD Term Structure.
G20 (2009): Strengthen loan loss accounting using broader
range of information aiming at greater stability
IFRS 9: 3S-approach replaces Incurred Loss (IL)-approach
Basel Committee Guidelines: Are claims justified?
higher model quality and backtesting
Macroeconomic projections
Denouncing shortcuts (e.g. 30d past due)
For lack of empirical evidence: Let’s use simulations
Revolving 10Y-loan portfolio, infinitely granular follows Moody’s
US-Corp. migration statistics, transfer S1/2: 3notch downgrade
(papers.ssrn.com/sol3/papers.cfm?abstract_id=2187515
Assurance and advisory firm Nkonki will be hosting a roundtable session exclusively for CFOs with Darrel Scott, Board Member of the IFRS Foundation. Scott, who is in Johannesburg for the occasion, will provide global and industry insights on the newly-released IFRS 16, issued on 13 January 2016, to CFOs from many of South Africa’s leading companies.
“The session is designed to share insights and deliberate on how this new accounting standard will impact processes and financial reporting, and how industries across the globe will deal with this change,” says Sindi Zilwa, CEO of Nkonki. It will also provide an update on accounting developments in the medium term.
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, namely, the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.
On 18th December 2015, the Basel Committee for Banking Supervision (BCBS) published its final insights on sound credit risk and accounting practices associated with the implementation of IFRS 9 Expected Credit Losses (ECL) accounting frameworks.
In this post, we will be highlighting and deliberating upon some of the key issues which have been discussed in the BCBS guidance note, and their impact on various banks.
Enriching Content with Semantic Tagging
K. Krishna (Molecular Connections (India))
Jignesh Bhate (Molecular Connections, India)
In spite of rapid transformation of publishing landscape brought about by digital technologies, content remains the focal point for publishers as well as consumers. Content deluge has increasingly made it challenging for consumers to discover and analyze relevant content. Approaches like semantic tagging provide an effective solution to this burgeoning problem.
Semantic tagging facilitates enhanced knowledge discovery and management, automated categorization of content, improved web navigation, easier integration of new knowledge in existing content and better exchange of information across diverse services.
In this talk, we will discuss about various content enrichment methodologies and share some insights from application of our in-house semantic tagging platform for enriching content of publishers.
IFRS 9 : Accounting Meets Risk Management by En Shah ZainAlbakry Azis
"IFRS 9 : Accounting Meets Risk Management - Challenged and Solutions for Fixed Income Instruments" was presented by En Shah Zain, Chief Business Officer from Bond Pricing Agency Malaysia during the BPAM Annual Client Update 2016.
Steiner AG ("Steiner" together with its subsidiaries the "Steiner Group") is a real estate
developer (RED) and total and general construction service contractor (TC/GC)
headquartered in Zurich, Switzerland
In our second post ‘building blocks of Impairment Modeling’, we had highlighted that IFRS 9 uses a ‘three stage model’ for measurement of ECL, and one of the major challenges of implementing this model was tracking and determining whether there has been a significant increase in risk of a credit exposure since origination. This blog post delves into the intricacies related to the three stage model, and some nuances that need to be considered for a bank looking to implement IFRS 9.
IFRS 9 defines “Credit Loss” in terms of “Cash Shortfall” or credit loss estimation through projected cash flow discounting. However, there is little explicit information available as to how “Cash Shortfall” should be computed; should it be computed separately or along with “Expected” default path of the borrower, leading to ambiguity around the subject. IFRS 9 has specifically given inputs on PD estimation however, on LGD there is no such specific directives available. The ambiguity around the subject raises a few questions. The blog explores the limits of current knowledge (theoretical and empirical), and offers some preliminary guidance on such questions.
In depth: New financial instruments impairment modelPwC
On June 16, 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) (the “ASU”). The ASU introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets.
Continuing with our updates on the key aspects of IFRS 9 Implementation, our current post (attached) talks about “Impairment Modelling in Retail ” where, key challenges are highlighted through questions and different solutions are proposed to address the same. The post attempts to address some key implementation challenges such as; Which approach to follow for analysis of retail portfolios?, What timeframe to consider for estimating lifetime of retail products?, How to link forward looking information with PDs? How to carry out Stage Allocation? And, what are the methods for calculation of ECL for Retail Portfolios?
Strategic implications of IFRS9 oliver wymanGeoff Holmes
IFRS9 will fundamentally change the level and dynamics of credit provisions, and will result in significantly diminished returns for some segments. To date, most banks have focussed on ensuring compliance, but with the 2018 implementation deadline approaching attention is turning to understanding and mitigating the impacts.
IFRS9 materially impacts lending economics, particularly for consumer credit and SME products where some segments will be significantly less attractive than today. Given all lenders are affected, this represents a challenge and an opportunity. Those who develop their responses early and optimise their actions stand a good chance of getting ahead of the competition.
The paper attached examines how IFRS9 impacts profitability, where the effects are most material, and how lenders can respond.
IFRS Report - Important upcoming accounting changes Graeme Cross
The new IFRS 9 rules effective January 2018, and equivalent US GAAP standards (ASU 2016-13) effective in 2019, are aimed at
increasing the accuracy and transparency of how credit risk is represented on a company’s Balance Sheet and P&L. Both new
standards include requirements around the use of both historic as well as forward looking credit information in order to calculate
the provisions for credit losses (Expected Credit Losses).
Current Write-off Rates and Q-factors in Roll-rate MethodGraceCooper18
Under the current CECL standard introduced by Accounting Standards Updates (ASU) 2016-13, there are several measurement approaches that financial institutions can use to estimate expected credit losses. Among these, the Roll-rate method, which uses historical trends in credit write-offs and delinquency, is the most popular. Historical roll rates are used to predict ultimate losses.
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Bank Case Assignment
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CaseRequirements.pdf
Home>Business & Finance homework help>Bank Case Assignment
What is this Project’s Objective?
This project is designed to improve your ability to analyze a particular bank's performance. The
emphasis should be to explore your bank from a regulator’s point of view. In that respect you
should address the six CAMELS components and try to identify any "red flags" that could indicate
potential problems in your bank. The Excel file under the name of “Bank Financial Analysis”
should be used to capture the financial data for your bank and to show the associated financial
ratios. You should be able to find all your data in your bank’s Uniform Bank Performance Report
(UBPR) which is available at www.ffiec.gov. Your written report should be no less than 5 pages
long (typed, double-spaced) not including the Excel worksheet. The six CAMELS components
are: Capital adequacy; Asset quality; Management quality; Earnings record; Liquidity position;
and Sensitivity to market risk. Following is a more detailed listing of the items that you need to
address:
A. Liquidity
Consider your bank’s Uniform Bank Performance Report (UBPR) and provide an overview of your
bank’s liquidity by reviewing the following areas:
1. Liquidity and Funding Ratios especially the Net Non-Core Funding Dependence
and Loan to Assets Ratios – The first ratio measures the degree to which the bank is
funding longer-term assets (loans, securities that mature in more than one year, etc.) with
non-core funding. Non-core funding includes funding that can be very sensitive to
changes in interest rates such as brokered deposits, CDs greater than $100,000, and
borrowed money. Higher ratios reflect a reliance on funding sources that may not be
available in times of financial stress or adverse changes in market conditions. What are
the trends in these ratios? How do they compare to the peer?
2. The availability of liquid assets readily convertible to cash without undue loss-
Consider Federal funds sold, available for sale securities, loans for sale, etc.
3. Core deposit/asset growth - Are core deposits capable of funding anticipated asset
growth?
4. Diversification of funding sources - A bank with strong liquidity has a strong core
deposit base, established borrowings lines, and procedures in place for acquiring
internet-based or other forms of emergency borrowing.
5. External Forces - Economic conditions, competition, marketing efforts, etc. ...
The blog provide some key insights on the subject – as to how to compute EIR for fixed or floating rate instruments, how to compute EIR for products which involves both interest income and fee income, what are the challenges which banks might face while computing EIR, what are the operational simplifications which banks might consider while computing EIR.
Stress Testing Commercial Real Estate Loans – No Time Like the PresentCBIZ, Inc.
A well-planned stress testing process should help management ensure that it has a defensible, forward-looking, capital planning process. It can also help banks get a jump start on the new credit loss impairment accounting model, which takes effect in 2020 for public companies.
Accounting Principle 6th Edition Weygandt Test BankGaybestsarae
Full download : https://alibabadownload.com/product/accounting-principle-6th-edition-weygandt-test-bank/ Accounting Principle 6th Edition Weygandt Test Bank , Accounting Principle,Weygandt,6th Edition,Test Bank
Market Practice Series (Credit Losses Modeling)Yahya Kamel
The Central Bank of Egypt “CBE” has adopted IFRS in year 2008. In specific IAS 39 has a discussion about implementing a model that can derive the incurred credit losses for a pool of receivables/ loans, which was quite open for market development & practical initiatives.
From the part of the CBE, it has adopted same approach, which led to some wide different market practices, logic, and interpretations, which sometimes have been questionable on a wide scale basis!
So, I've thought to develop some sort of materials that can serve as a practical guidance for quantifying the credit risk, using different simple models, based on Basel II definitions of the risk components.
The intended users of this material are the credit risk professionals who conduct risk analysis, implement risk management policies, or/and are in charge of quantifying the credit risk for a loan portfolio (corporate & retail).
Also, other professionals or officers complying with IFRS, or CBE GAAP.
Personal Brand Statement:
As an Army veteran dedicated to lifelong learning, I bring a disciplined, strategic mindset to my pursuits. I am constantly expanding my knowledge to innovate and lead effectively. My journey is driven by a commitment to excellence, and to make a meaningful impact in the world.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
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VAT Registration Outlined In UAE: Benefits and Requirementsuae taxgpt
Vat Registration is a legal obligation for businesses meeting the threshold requirement, helping companies avoid fines and ramifications. Contact now!
https://viralsocialtrends.com/vat-registration-outlined-in-uae/
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Improving profitability for small businessBen Wann
In this comprehensive presentation, we will explore strategies and practical tips for enhancing profitability in small businesses. Tailored to meet the unique challenges faced by small enterprises, this session covers various aspects that directly impact the bottom line. Attendees will learn how to optimize operational efficiency, manage expenses, and increase revenue through innovative marketing and customer engagement techniques.
Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
2. Classification and
Measurement
Impairment
Hedge Accounting
IFRS 9, IASBs new accounting standard
on financial instruments, will replace
IAS 39, effective January 1, 2018.
It contains three areas of accounting
for financial instruments as shown in
the diagram.
This presentation addresses
‘Impairment’, from the point of view of
banks.
Introduction
3. By the end of this
presentation, you will be able
to:
• Describe what is the new expected
credit loss model under IFRS 9
• What are the 3 stages of accounting
for credit losses and interest income
• What are the practical expedients
allowed
What will you learn?
4. I. Credit loss
model
III.
Practical
expedients
II. Stages
IFRS 9, replaces IAS 39 for recognizing
credit losses in banks accounting
books.
Under IFRS 9, the approach for
measuring credit risk and accounting
for it has changed fundamentally from
incurred loss model to expected credit
loss model and carries the following 3
key components
Key Components
5. Previous to IFRS 9, an allowance for
credit losses used to be estimated
based on historical data, such as,
delinquencies in repayments,
impairment in collateral or other
adverse conditions of the borrower.
This is called the incurred loss model.
Meaning, the loss or conditions had
already occurred before the allowance
was booked.
Incurred Loss Model
I. Credit loss
model
III.
Practical
Expedients
II. Stages
6. Credit
loss
model
A criticism from 2008 financial crisis,
was that the banks recognized credit
loss allowance too late, i.e., based on
historical information.
IFRS 9 introduces expected credit loss
model, a forward looking model, to
recognize credit losses expected over
the life of the loan.
As a result, credit risk of a bank is more
timely reflected in its financial
statements.
Expected Loss Model (Contd.)
7. Credit
loss
model
In a forward looking model, the banks
will now have to estimate the expected
credit losses before credit events have
taken place.
In next slide you will see the 2 factors
used in estimating expected credit
losses under IFRS 9.
Expected Loss Model (Contd.)
8. Probability
of Default
Expected
Loss
Reasonable
and
Supportable
Information
The expected credit losses (ECL) are
estimated from the product of 2
factors:
PD: This is the weighted average of
probability of losses from various
scenarios
EL: Present value of expected losses
(or PV of shortfall in cash over lifetime
of asset)
IFRS 9 requires above to be calculated
using reasonable and supportable
information from past, present and
future (e.g. economic outlook)
Factors in Calculating ECL
9. Credit
loss
model
Banks already usually follow some
estimation model, for capital planning,
pricing or regulatory requirements,
e.g. capital adequacy, stress testing,
scenario analysis etc.
IFRS 9 aligns the above with
accounting so that more useful
information is presented to the users
of bank’s financial statements.
Expected Loss Model (Contd.)
10. Credit
loss
model
There are also financial statements
disclosures requirements that have to
do with explaining:
- How the expected credit losses were
estimated, and
- How was credit risk (or changes
thereto) were assessed
Expected Loss Model
11. I. Credit loss
model
III.
Practical
Expedients
II. Stages
Second component is the Stages.
IFRS 9 establishes 3 stages for
accounting for expected credit losses:
Stage 1- Initial recognition
Stage 2- Significant increase in credit
risk
Stage 3- Credit losses incurred
Stages (Contd.)
12. Stage 1 Stage 2 Stage 3
Stages (Contd.)
Recognize 12 months
expected credit losses
Recognize
lifetime
expected credit
losses
Recognize
lifetime
expected credit
losses
Recognize interest revenue as
effective interest on gross
carrying amount
Recognize interest
revenue as effective
interest on gross
carrying amount
Recognize interest
revenue as effective
interest on
amortized cost
carrying amount
13. Stage 1
Stages (Contd.)
Recognize 12 months
expected credit losses
Recognize interest revenue
as effective interest on gross
carrying amount
In Stage 1, at the initial recording of the
loan, the credit losses expected as a
probability in the next 12 months (at
reporting date) are recognized in P&L.
Interest income during this time is
recognized at effective interest rate
applied to the gross carrying amount of
the loan.
14. Stage 2
Stages (Contd.)
Recognize lifetime
expected credit losses
Recognize interest revenue
as effective interest on gross
carrying amount
In Stage 2, the credit losses expected over
the lifetime of the loan, are recognized in
P&L, if there is a significant increase in
credit risk.
There is no change in how interest income
is recorded.
15. Stage 3
Stages (Contd.)
Recognize lifetime
expected credit losses
Recognize interest revenue
as effective interest on
amortized cost carrying
amount
If the credit quality of the loan
deteriorates further to the point that
credit losses are actually incurred or that
there is an actual credit impairment the
loan moves to stage 3.
In Stage 3, there is no change in
accounting for credit losses.
Interest income, however, now is
recognized based on gross carrying
amount minus the loss allowance
(amortized cost).
16. Time
Horizon
You must have noted, that for
recognizing expected credit losses,
there are 2 time horizons.
The 12 month horizon for recognizing
expected credit losses is for the
probability of default within the next
12 months (Stage 1).
However, when there is significant
increase in credit risk for a loan or a
group of loans, the bank will have to
recognize the expected credit losses
for the lifetime of the loan(s) at the
reporting date (Stages 2 & 3).
Stages (Contd.)
20. Credit loss
model
Practical
Expedients
Stages
Some relief has been provided in
implementing IFRS 9, so to make it
easier for a wide range of companies
(banking and non-banking).
Three practical expedients are
highlighted next.
Practical Expedients (Contd.)
21. 3 practical expedients allowed under IFRS 9
Practical Expedients (Contd.)
Information Set Low Credit Risk > 30 Days Past Due
Information
Set
Low Credit
Risk
Past Due
Rebuttable
Presumption
22. Information
Set
IFRS 9 allows for using information that is
easily available to the organization without
incurring high costs.
This is particularly true for small organization
which does not have resources for more
sophisticated data analysis.
However, for large internationally active banks,
Basel guidance (see link below) on expected
credit losses, indicates that such banks should
not have to use this practical expedient as they
already utilize sophisticated data.
www.bis.org/bcbs/publ/d350.pdf
Practical Expedients (Contd.)
23. Low
Credit
Risk
If the credit risk was low at the time of
loan origination as an example, there
no need to assess credit risk at
reporting date and it can be assumed
that the risk was still low. E.g. US
treasuries
Basel guidance expects the large
international banks to not use this
practical expedient and assess all loans
for significant increase in credit risk.
Practical Expedients (Contd.)
24. Past Due
Rebuttable
Presumption
If a loan is more than 30 days past due,
there is a rebuttable presumption that
the credit risk has increased
significantly and the banks will have to
recognize life time credit losses.
For large international banks, Basel
guidance points out that 30 days past
due is a lagging indicator, so it should
not be the primary factor for
estimating expected credit losses.
Practical Expedients
25. Credit loss
model
Practical
expedients
Stages
To recap all what we learnt:
IFRS 9 replaces IAS 39, effective Jan 1,
2018.
It introduces a new forward looking credit
loss model.
It prescribes 3 stages of accounting for
credit losses depending on credit risk and
losses incurred.
It provides some relief in implementation,
however, Basel expects internationally
sophisticated banks to not use these
practical expedients.
In Summary
26. Can you answer these
questions?
• Describe what is the new expected
credit loss model under IFRS 9
• What are the 3 stages of
accounting for credit losses and
interest income
• What are the practical expedients
allowed
What did you learn?
27. Answers
1. New credit loss model is forward looking
in that now expected credit losses are
estimated and recognized before a default
or loss
2. In stage 1, losses expected in 12 months
are recognized, stage 2 and 3, losses
expected lifetime of loan are recognized
3. Practical expedients allowed are
information set, low credit risk and past
due rebuttable presumption
What did you learn?
28. Faraz Zuberi 2016
Los Angeles, California
USA
For questions and
comments, please write
to:
Faraz Zuberi
farazzuberi@yahoo.com