impairment ifrs 9 - pwc.co.za
TRANSCRIPT
IFRS 9 : Impairment
Expected Credit Loss model (ECL)
August 2021
Overview of the model
PwC 3
Meet today’s team
Centre of Excellence
Andrea Benkenstein
Senior Manager
CoE Family Business
Natasha StanhamSenior Manager
Email: [email protected]
Christoph HagspihlSenior Manager
Email: [email protected]
Presenter Facilitator
CPD: This session qualifies for 60 minutes of verifiable CPD. Certificates will be emailed to participants.
PwC
General expected Credit Loss model
4
Effective interest on gross carrying amount
12 month expected credit losses
Recognition of expected credit losses
Interest revenue
Change in credit quality since initial recognition
Stage 1 Stage 2 Stage 3Performing
Initial recognition*Underperforming
Assets with significant increase in credit risk since
initial recognition*
Non-performingCredit impaired assets
Effective interest on gross carrying amount
Lifetime expected credit losses
Effective interest on amortised cost carrying
amount (i.e. net of credit allowance)
Lifetime expected credit losses
*Except for purchased or originated credit impaired assets
For trade and lease receivables, a simplified option: lifetime ECLs
Overview of model
PwC 5
Is asset being tested a trade receivable, lease receivable (IFRS
16/IAS 17) or contract asset (IFRS 15)?
Policy choice
No
Does the asset have a significant financing component?
Yes
NoYes
Lifetime expected credit losses3 stage IFRS 9 model
Calculate the credit loss provision using the 3 stage IFRS 9 model
Calculate the credit loss provision using the simplified IFRS 9 model
Provision matrix
approach
Overview of model
Simplified approach
PwC 6
Incurred Loss Model
Expected Loss Model
IFRS9IAS39
Overview of model
Conceptual change
Questions?
Modelling considerations
PwC
Repeat above process for:● Each separate grouping of receivables; or● Large individual customers.
6. Calculate ECL using loss rate
What should corporates consider in the current economic environment?
● Historical period used previously are pre-COVID data● Not necessarily representative of losses experienced during
pandemic● Adjustments to starting point might therefore be necessary
2. Define the period
● Adjust historical ageing profile of sales to incorporate changes in expectations of delays in future payments.
3. Calculate historical payment profile
= Ultimate loss / Amounts outstanding in that time bucket4. Calculate historical loss rate
Dat
a in
tens
ive
appr
oach
Po
rtfo
lios
with
man
y de
btor
s
5. Adjust loss rate for FLI
● Assess key drivers of credit risk● Starting point: Historical information● Industry analysis forecast● Consider lag due to complexities in economic data
1. Define the portfolio
● Drivers of credit risk● Social distancing impacts different industries● Incorporate forward looking information● Requires judgement
Simplified approach : Provision matrix
PwC
What should corporates consider in the current economic environment?
● Internal write-off or credit note data, if available ● Public information on corporate bond defaults and losses
2. Identify sources of empirical loss data
● Credit ratings where available● Country ratings and country ceilings● Industry benchmarks from more developed markets, notched
to country ratings
3. Consider proxy risk metrics
● Quantitative / qualitative considerations (described in later slides)
4. Adjust loss rate for FLI
Ben
chm
arki
ng /
prox
y ap
proa
ch P
ortfo
lios
with
few
, la
rge
debt
ors
1. Define the portfolio
● Drivers of credit risk● Industry / country / market segmentation
Simplified approach : Single name, larger debtors
10
PwC 11
● ECL is based on the assumption that repayment of the loan is demanded at the reporting date.
● If the borrower has sufficient accessible highly liquid assets in order to repay the loan if demanded at the reporting date, the expected credit loss is likely to be immaterial.
● If the borrower could not repay the loan if demanded at the reporting date, the lender should consider the expected manner of recovery to measure expected credit losses.
● This might be a ‘repay over time’ strategy (that allows the borrower time to pay), or a fire sale of less liquid assets.
Loans that are repayable on demand
● For these loans, a staging assessment should be performed which looks at whether significant deterioration has taken place since origination.
● For Stage 1 loans, credit risk over next 12 months should be assessed, whereas for Stage 2 loans, credit risk over the remaining life until contractual maturity should be considered.
Loans with contractual maturities and other terms
● Credit risk - If there are guarantees in place between the entities, using an overall group measure of risk (such as Probability of Default) for the subsidiaries could be appropriate.
● If not, looking at the relative strength of entities within the group, incorporating implicit support, is important.
● Considering entity net asset values, adjusting for intangible assets and intercompany investments, can help inform Loss Given Default metrics.
Measurement approaches
What should corporates consider in the current economic environment?
General approach : Intercompany loans
12
FLI estimation - Quantitative considerations
● Compare historical loss rates to macro-economic factors● Internal or external data required, comprising
● Loss data● Macro-economic data
● Use forecasted macro-economic factors to estimate forward looking loss rates● Forecasts can be sourced externally, or also
internally if management has a house view● Deterioration already in the book should be
factored in. Avoid double-counting
● Monitoring portfolio metrics● Debtors performance to date is an important
input into the forward looking view● Some industries/segments might have been
affected but largely recovered, some might only be picking up risk in the last few months
● Aging deterioration over previous lockdowns can inform portfolio sensitivity to potential upcoming lockdowns
Example analysis
Different debtors books have responded differently to the Covid stress
IFRS 9 ECL - Considerations for corporates
PwC
FLI estimation - Qualitative considerations
● Specific debtors● Specific overlays should be raised for debtors
where management is aware of particular concerns or difficulties
● This should not be restricted only to debtors in the worse aging buckets
● Specific types of debtors / industries● For those debtors where individual characteristics
are not known, segmenting into risk groups, such as industry, can be useful
● Overlays can then be assessed per segment, e.g. Retail, Hospitality etc
● Use of existing management processes and governance forums● As far as possible, Covid overlays should be
aligned to management’s credit risk management processes and committees
● Regular monitoring should be incorporated into these specific overlays where possible
IFRS 9 ECL - Considerations for corporates
13
Questions?
Organisational culture as the foundation of transformational journeys
8 September 2021
PwC 15
Upcoming topics
Thank you
“The information contained in this publication by PwC is provided for discussion purposes only and is intended to provide the reader or his/her entity with general information of interest. The information is supplied on an “as is” basis and has not been compiled to meet the reader’s or his/her entity’s individual requirements. It is the reader’s responsibility to satisfy him or her that the content meets the individual or his/ her entity’s requirements. The information should not be regarded as professional or legal advice or the official opinion of PwC. No action should be taken on the strength of the information without obtaining professional advice. Although PwC take all reasonable steps to ensure the quality and accuracy of the information, accuracy is not guaranteed. PwC, shall not be liable for any damage, loss or liability of any nature incurred directly or indirectly by whomever and resulting from any cause in connection with the information contained herein.”
© 2021 PwC Inc. [Registration number 1998/012055/21] (“PwC”). All rights reserved.PwC refers to the South African member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.co.za for further details.