Chapter CFM21890
| Published date | 16 April 2016 |
| Record Number | CFM21890 |
Financial assets classified as amortised cost or FVTOCI must be tested for impairment at the end of each period of account. Impairment losses are recognised in profit or loss for financial assets classified at both amortised cost and FVTOCI.
The impairment approach of IFRS 9 is that a company shall recognise a loss allowance for the expected credit losses of a financial asset. Credit loss is the difference between the cash flows expected per the contract and the cash flows the company expects to receive (ie all cash shortfalls).
The amount of the expected credit losses to be recognised depends on the level of credit risk attached to the financial asset:
For financial assets where the credit risk has not increased significantly since initial recognition, a company shall recognise a loss allowance equal to 12 month expected credit losses.
For financial assets where the credit risk has increased significantly since initial recognition, a company shall recognise a loss allowance equal to the lifetime expected credit losses.
For trade receivables, contract assets and lease receivables a simplified approach may be applied. This approach allows a company to always recognise a loss allowance equal to the lifetime expected credit losses.
Credit riskCredit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
A company shall assess at each reporting date whether the credit risk associated to a financial asset has increased significantly since initial recognition.
An increase in credit risk is reflected by a change in the risk of a default occurring over the expected life of the financial asset. When making the assessment the company must consider reasonable and supportable information, that is available without undue cost or effort that is indicative of significant increases in credit risk since initial recognition.
Application guidance to IFRS 9 at paragraph B5.5.17 sets out a lengthy, non-exhaustive list of information that may be relevant in assessing changes to credit risk.
A company may assume that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the...
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