IFRS 9 - ECL Model

INDEX
1 DEFINITIONS
2 IFRS9 CLASSIFICATION SUMMARY
3 TABLE OF ADJUSTMENTS
4 ECL CALCULATION - CASH AT BANK
5 ECL CALCULATION - FIXED DEPOSIT
6 ECL CALCULATION - LOAN RECEIVABLE - 12-month ECL
7 ECL CALCULATION - LOAN RECEIVABLE - Lifetime ECL (2yrs to maturity)
8 ECL CALCULATION - LOAN RECEIVABLE - Lifetime ECL (3yrs to maturity)
9 DECISION TREE FOR RP LOANS
10 ECL CALCULATION - INTEREST-FREE TERM LOAN RECEIVABLE FROM RP
11 ECL CALCULATION - INTEREST-FREE DEMAND LOAN RECEIVABLE FROM RP
12 TECHNICAL ALERT 7/2019 [ΤA 7_2019]
13 EXHIBIT 7 - AVG CORPORATE DEBT RECOVERY RATES
14 EXHIBIT 44 - AVG CUMULATIVE ISSUER-WEIGHTED GLOBAL DEFAULT RATES
15 CREDIT RATING - CYPRUS (MOODY'S)
16 CREDIT RATING - RUSSIA (MOODY'S)
17 CREDIT RATING - UKRAINE (FITCH)
18 CREDIT RATING - HELLENIC BANK (MOODY'S)
19 CREDIT RATING - BANK OF CYPRUS (MOODY'S)
20 CREDIT RATING - RCB (MOODY'S)
21 GUIDANCE TO SIMPLIFIED LOSS RATE APPROACH (PROVISION MATRIX) FOR TRADE RECEIVABLES
22 TEMPLATE FOR PROVISION MATRIX - ROLL RATE MATHOD USING MONTHLY AGEING ANALYSIS
23 EXAMPLE FOR PROVISION MATRIX - ROLL RATE MATHOD USING MONTHLY AGEING ANALYSIS
24 TEMPLATE FOR PROVISION MATRIX - ROLL RATE MATHOD USING YEARLY AGEING ANALYSIS
25 TEMPLATE FOR PROVISION MATRIX - ROLL RATE MATHOD USING CURRENT YEAR'S SALES
26 TEMPLATE FOR PROVISION MATRIX - ROLL RATE MATHOD USING CURRENT YEAR'S SALES (1 yr's historical data)
DEFINITIONS
PD Probability of Default the risk of a default occurring (over 12 months or the expected life)
LGD Loss Given Default the percentage loss that arises if a default occurs
EAD Exposure at Default amounts owed under the loan at the point of default
Present value of the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows
CR Credit losses
that the entity expects to receive (ie. The present value of all cash shortfalls).
PV Present value Calculated using either the original EIR or an approximation as a discount rate
ECL Expected credit losses Probability - weighted estimate of credit losses over the expected life of the financial instrument.
ECL = PD X LGD X EAD X Discount factor
Under GA, at each reporting date, entities are required to determine whether there has been a significant increase in credit risk since
intitial recognition and whether the loan / receivable is credit impaired. This determines whether the loan is in Stage 1, Stage 2 or
GA General approach Stage 3
A portion of lifetime ECL that result from default events that are possible within the 12 months after the reporting date i.e. not just
12 month Stage 1 - 12-month ECL the cash shortfalls that are expected to arise within the next 12 months but a portion of the lifetime ECL arising as a result of a default
occuring within 12 months.
where credit risk has not increased significantly since initial recognition.
Interest is calculated by applying the effective interest rate (EIR) to the gross carrying amount (i.e. before the loss allowance)
LECL Lifetime ECL ECL that result from all possible defaut events over the expected life of the loan.
Stage 2 LECL significant increase in credit risk since initial recognition (not defined by IFRS9)
Rebuttable presumption that the criterion for lifetime expected credit losses is met if payments are more than 30 days past due [IFRS
Underperforming: 9 paragraph 5.5.11]
change relates to probability of default rather than changes in LGD
interest is calculated by applying the effective interest rate (EIR) to the gross carrying amount (i.e. before the loss allowance)
Stage 3 LECL Credit-impaired financial assets
Non-performing: This is effectively the point at which there has been an incurred loss event under the IAS 39 model.
Observable data about: significant financial difficulty of the issuer or borrower / breach of contract / a concession granted to the
borrower / probable bankruptcy / purchase or origination of an asset at a deep discount that reflects incurred credit losses
Default (not defined by IFRS9): Considers qualitative indicators when appropriate, is consistent with the definition used for internal
credit risk management and is applied consistently. (90 days past due rebuttable presumption). The ‘90 days past due’ rebuttable
presumption is supposed to serve as a backstop for those cases where no additional information can be obtained. The purpose of the
rebuttable presumption is not to delay the default event until the financial asset becomes 90 days past due, but to ensure that
entities will not define default later than that point without reasonable and supportable information.
ECL is calculated on the impaired amount
Interest is calculated on amortized cost (i.e. on the gross carrying amount of the financial asset less ECL)
Performing No significant deterioration in credit quality
SA Simplified approach Loss allowance always equal to lifetime expected credit losses
POCI Purchased or originated credit-impaired approach
This distinction between 12 month and lifetime ECL is important and can be particularly relevant for interest - free loans where no payment obligations are due until
maturity. 2 of 38
DEFINITIONS
Financial instruments excluded from the scope of IFRS 9

- Interest in subsididiaries, associates and JVs (IAS 27, 28)
- Employer's rights and obligations under employee benefit plans (IAS 19)
- Financial instruments under share-based payment transactions (IFRS 2)
- Rights and obligations under insurance contracts (IFRS 4)
- Lease rights and obligations with certain exceptions (IFRS 16)
- Rights and obligations within the scope of IFRS 15 with certain exceptions
Transactions within the scope of the ECL model
-Trade receivables under IFRS15 Revenue from contracts with customers are required to classified and measured in accordance with IFRS9 similar to any other financial
asset; those that are not classified at FVTPL are within the scope of the ECL model (Simplified approach is either permitter or, in some cases, required) (for trade
receivables and contract assets with significant financing component either simplified or general approach. For trade receivables and contract assets without a significant
financing component, simplified approach)
Impact of electing general approach
-need to track changes in credit risk since initial recognition
-more sophisticated credit risk management systems needed
-lower expected losses recognised
(for short-term trade receivables, both general and simplified approach would lead to the same result)
-Contract assets under IFRS15 are within the scope of the ECL model (Simplified approach is either permitted or, in some cases, required)
-Lease receivables under IFRS16 Leases are within the scope of the ECL model (simplified approach permitted - can elect either general approach or simplified)
-Issued financial guarantee contracts (FGCs) that are not classified at FVTPL (and not accounted for in accordance with IFR4 Insurance contracts or IFRS17 Insurance
contracts) are within the scope of the ECL model (General Approach required)
-Issued loan commitments that are not classified at FVTPL are within the scope of the ECL model (General Approach required)
-RP receivables, loans receivable are within the scope of the ECL model
Assessment of significant increases in credit risk: A relative concept

-Based on change in risk of default since initial recognition, not on changes in amount of ECL
-Made for a specific instrument rather than for a counterparty
-Factors used in the assessment can be quantitative (e.g. based on lifetime PD) and qualitativbe (e.g. financial difficulties)
-Cannot simply compare change in aboslute risk of default
-Risk of default tends to decrease over time as remaining maturity / exposure reduces
-If risk of default has not decreased over time, this may indicate an increase in the credit risk
Rebuttable presumption that credit risk has increased significantly since initial recognition when contractual payments are more than 30 days past due.
Data sources in measuring impairment

Internal / external ratings (limitation: historical default rates may not be an accurate predictor of future default rates)
Macroeconomic data
Factors specific to the borrower
Credit loss experience of other entities
Historical loss experience
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DEFINITIONS
Other information
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IFRS 9 Classification Summary
IFRS 9 understanding:
1) Debt Instruments:
Debt Instruments are measured at amortised cost, unless the asset is designated at FVTPL under the fair value
a) option, if the following conditions are met:
i) Business Model Test: Objective is to hold financial asset (FA) to collect contractual cash flows (rather than to
sell the instrument prior to its contractual maturity to realise its fair value changes)
ii) Cash flow characteristics test: Contractual terms of the FA give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal outstanding
b) Debt Instruments are measured at FVOCI, unless the asset is designated at FVTPL under the fair value option, if
the following conditions are met:
i) Business Model Test: FA is held with the objective of collecting contractual cash flows and selling the asset
ii) Cash flow characteristics test: Contractual terms of the FA give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal outstanding
c) Fair Value Option

Even if an instruments meet the requirements to be measured at amortised cost or FVTOCI, entities have the
option to designate at initial recognition, a FA measured at FVTPL if doing so eliminates / significantly reduces a
measurement or recognition inconcistency (accounting mismatch)
Adjustments for 31/12/2018
B/ce as at
31/12/2018 ECL @ 31/12/2018 Movement in P&L
Cash at bank 3,700.00 0.11 0

Fixed deposit 100,000.00 330.41 330
Loan receivable - Fintrast Limited 764,151.00 1,063.86 1,064

Loan receivable - Farnedell Investments Ltd (1) 153,086.00 1,680.45 1,680
Loan receivable - Farnedell Investments Ltd (2) 153,086.00 3,315.11 3,315
On interest-free term loan from subsidiary 7,561,436.67 567,290.00 567,290

On interest-free demand loan from subsidiary 5,809,930.00 74,198.60 74,199
14,441,689.67 647,548 647,548
Trade receivables Provision matrix - roll rate method 15,674
663,222
Cash at bank - Demand deposits / current accounts
Bank Balance Rating
Hellenic Bank 1000 B1

Bank of Cyprus 2000 B1
RCB Bank Ltd 700 Ba2
B1 Ba2
Cumulative PD 1.990% 0.740% Exhibit 44

Daily PD 0.005% 0.002%
LGD 66% 66% Exhibit 7 Note 1
EAD 3,000.00 700.00
ECL 0.11 0.01 0.11
Note 1
1 - 33,87% / Sr. Unsecured Bond / Volume-weighted recoveries 1983-2016
Fixed deposits
Bank of Cyprus rating B1

Short term deposit amount 100000
Remaining maturity 3 months
Interest paid annually 5%
Cumulative PD 1.9900% 1.9900% 1.9900% Exhibit 44
3 - month PD (Yr 1 PD / 12) 0.1658% 0.1658% 0.1658%

LGD 66.13% 66.13% 66.13% Exhibit 7 Note 1
EAD (principal + 3 months interest) 101,250.00 101,250.00 101,250.00
Discount factor (monthly discount rate) 0.4074% 0.9959 0.99190 0.9879
ECL 110.59 110.14 109.69 330.41 N/M
check 0.9919 0.9878
Note 1
Loan receivable - Fintrast Ltd - 12-month ECL
Assumptions
Type: Loan receivable from Fintrast Limited
Relationship with borrower: None
Country of borrower's principal activities: Russia
Moody's Rating Baa3 see credit rating Russia note 1
Maturity: 3 years
Interest rate: 14.00% p.a.
Origination: 10/26/2016
Maturity: 12/31/2020
Reporting date 12/31/2018
Time to maturity (years): 2
Amount due 31/12/2018: $764,151
Is the loan credit impaired? No

Has there been a significant increase in credit risk since the
loan was originated? No Stage 1 = 12 month ECL;
Is the loan low credit risk? Yes Interest on gross basis
Does the loan have a remaining life of 12 months or less? No
Estimating ECL using external ratings 2019
Cumulative PD 0.24% Exhibit 44
Marginal PD 0.24%
LGD 66% Exhibit 7 Note 2
EAD 764,151.00
Disounting factor 0.88
ECL 1,063.86 1,063.86
Note 1
-No external credit rating is available for the borrower
-Therefore the entity performs an assessment of estimating an appropriate LGD for the borrower, using external
ratings as a starting point
-Considerations:
* Seniority of the debt in relation to other liabilities. If the borrower has a bank loan, the bank loan is more
senior (senior vs junior)
* Security of the debt (secured vs). unsecured
-The rating of the country of the borrower is the best scenario. The rating should then be adjusted downwards
depending on the financial variables of the borrower
Note 2
Note 3
Calculated using either the original EIR / market rate if no EIR available or an approximation as a discount rate
Notes
VR does not consider that downgrading the rating from sovereign is necessary, due to following reasons:
1. Our borrowers are 100% subsidiaries
2. There is no third party financing in these entities
3. The operations of the entities as energy producers is closely linked with the performance of Ukraine itself, there is virtua
ed with the performance of Ukraine itself, there is virtually no other credit risk
Loan receivable - Farnedell - Lifetime ECL (Stage 2)
Assumptions
Type: Loan receivable from Farnedell Investments Limited
Country of borrower's principal activities: Cyprus
Moody's Rating Ba2 see credit rating of Cyprus note 1
Maturity: 2 years
Maturity: 2/12/2020
Amount due 31/12/2018: $153,086

Has there been a significant increase in credit risk since
the loan was originated? Yes Stage 2 = LECL;
Is the loan low credit risk? No Interest on gross basis
Does the loan have a reminaing life of 12 months or less? No
Estimating ECL using external ratings 2019 2020
Cumulative PD 0.74% 1.92% Exhibit 44
Marginal PD 0.74% 1.18%

LGD 66% 66% Exhibit 7 Note 2
EAD 153,086.00 153,086.00
Disounting factor 0.91 0.83 Note 3
ECL 684.15 996.29 1,680.45
Note 1
-Therefore the entity performs an assessment of estimating an appropriate LGD for the borrower, using external
ratings as a starting point
-Considerations:
* Seniority of the debt in relation to other liabilities. If the borrower has a bank loan, the bank loan is more
senior (senior vs junior)
-The rating of the country of the borrower is the best scenario. The rating should then be adjusted downwards
depending on the financial variables of the borrower
Note 2
Note 3
Loan receivable - Farnedell (2) - Lifetime ECL (Stage 2)
Assumptions
Type: Loan receivable from Farnedell Investments Limited
Country of borrower's principal activities: Cyprus
Moody's Rating Ba2 see credit rating of Cyprus note 1
Maturity: 2 years
Maturity: 2/12/2021
Amount due 31/12/2018: $153,086

Has there been a significant increase in credit risk
since the loan was originated? Yes Stage 2 = LECL;
Interest on
Is the loan low credit risk? No gross basis
Does the loan have a reminaing life of 12 months or
less? No
Estimating ECL using external ratings 2019 2020 2021
Cumulative PD 0.74% 1.92% 3.30% Exhibit 44
Marginal PD 0.74% 1.18% 2.12%

LGD 66% 66% 66% Exhibit 7 Note 2
EAD 153,086.00 153,086.00 153,086.00
Disounting factor 0.91 0.83 0.76 Note 3
ECL 684.15 996.29 1,634.66 3,315.11
Note 1
-Therefore the entity performs an assessment of estimating an appropriate LGD for the borrower, using
external ratings as a starting point
-Considerations:
* Seniority of the debt in relation to other liabilities. If the borrower has a bank loan, the bank
loan is more senior (senior vs junior)
-The rating of the country of the borrower is the best scenario. The rating should then be adjusted
downwards depending on the financial variables of the borrower
Note 2
Note 3
The following decision tree illustrates the key areas that entities will need to consider for RP loans:
Key areas of consideration:
Is the loan within the scope of IFRS 9? NO Apply IAS 27 or IAS 28 *
YES
Does the loan meet the solely payments NO Classify at fair value through
of principal and interest test? profit or loss (FVTPL)
NO
YES
Is the loan in a 'hold to collect' business NO Is the loan in a 'hold to collect
model? and sell' business model?
YES YES
Classify at amortised cost & apply General Classify at fair value through
ECL Approach. other comprehensive income
(for debt) & apply
General ECL Approach
Stage 3 = Lifetime ECL;

Is the loan credit impaired? YES Interest on net basis
NO
Stage 2 = Lifetime ECL;

YES Interest on gross basis
Has the loan sufferred a significant increase in credit risk?
(if we cannot assess this --> lifetime ECL)
Stage 1 = 12 month ECL;

NO Interest on gross basis
* Before considering how to apply the requirements of IFRS9 to related company loans, entities must first consider whether the loan is within the scope of IFRS9 or
another standard (i.e. IAS27 Separate Financial Statements or IAS28 Investments in Associates and Joint ventures).
In many cases, it will be clear that the loan is a debt instrument that falls within the scope of IFRS9 but some scenarios may require a more detailed analysis
If an entity has minimal equity and is financed almost entirely through a loan, the nature of that loan may seem more akin to a capital contribution. This is
particularly the case if settlement of the loan is not planned or likely to occur for some time.
Special consideration should be given to loans that are undocumented (i.e loans that are advanced without any contractual terms such as a specified repayment
date or interest rate). In these cases, entities must first determine whether the arrangement gives rise to a debt instrument or, in accordance with the laws and
regulations in their jurisdiction, a capital contribution.
If an entity provides funding without any contractual terms it is typically treated from a legal prerspective as a repayable on demand loan and not a capital
contribution. This means that under the applicable laws and regulations, the lender has a substantive right to demand repayment; the fact that the lender may
choose not to demand repayment for some time does not negate this right. Consequently, this type of arrangement typically gives rise to debt instrument within
the scope of IFRS9.
Int-free term loan to RP
Interest-free term loan
Parent A obtains external bank financing at competitive market rates and then lends to its subsidiaries on an interest-free
basis. On 1 January 2018, Parent A advanced a loan of €10 million to Subsidiary B with the following terms:
– €10 million repayable in three years – December 2020;
– 0% interest.
The purpose of the loan is to fund Subsidiary B’s ongoing business operations and, based on current cash flow projections,
Subsidiary B is expected to be in a position to fund the repayment of the loan by December 2020. Assume that:
– The market rate of interest for a loan with similar terms is 15%; and
– The loan not considered POCI.
Subsidiary B also has a loan of €1 million from Bank X which was taken out several years ago and is also due for repayment
in December 2020. The bank loan bears a market rate of interest and is senior to the loan from Parent A.
Question: Does the loan meet the SPPI test?
In order to meet the SPPI test, the contractual cash flow of €10 million in three years must represent payments of principal
(being the initial fair value) and interest (being interest accrued using the EIR method).
The initial fair value will be the amount recognised in accordance with IFRS 9 at initial recognition that is generally equal to
the transaction price. However, in the case of long-term interest-free loans, the standard contains guidance that is more
specific. In such scenarios, the initial fair value is measured as the present value of future cash receipts discounted at an
appropriate market rate of interest for a similar loan at the date of initial recognition.
In this example, the present value €10 million in three years discounted by the market rate of interest of 15% is €6.575m.
This amount will accrete back to €10 million over the 3-year life of the loan using the EIR method at a rate of 15%. In this
way, the contractual cash flow of €10 million due in 2020 represents payments of principal (being the initial fair value of
€6.575m) and interest (being the accretions of €3.425m). The loan therefore meets the SPPI test.
The difference between the initial fair value of €6.575m and the amount of cash advanced of €10 million (i.e. €3.425m) will
be considered a capital contribution and an addition to Parent A’s investment in the Subsidiary B. This amount will not be
within the scope of IFRS 9. Instead, it will be accounted for in accordance with IAS 27 and subject to impairment testing in
accordance with the requirements of that standard (i.e. IAS 36 Impairment of Assets).
DR CR
Initial gross carrying amount 6,575,000
Investment in Subsidiary B 3,425,000
Cash 10,000,000
Page 15 of 38
Applying the ECL model to an interest-free term loan
At initial recognition, Parent A makes an assessment as to the initial credit risk of the loan over its 3-year life. Parent A does
so by taking into account available relevant information about Subsidiary B’s past, current and expected operating
performance and cash flow position (which includes forward looking information) and notes the following:
-Key business risks include (i) the general economic environment, in particular unemployment, consumer confidence and
inflation (ii) changing consumer preferences/trends and (iii) the competitive environment. All of these factors have an effect
on Subsidiary B’s key performance indicators (KPIs) relating to operating profit, liquidity position and cash flow projections,
which in turn affect Subsidiary B’s ability to meet its payment obligations;
– Current cash flow projections which include full repayment of the bank loan, suggest that Subsidiary B is expected to be
able to fund the repayment of the loan to Parent A in December 2020.
Determining whether the loan is in Stage 1, Stage 2 or Stage 3
At the reporting period-end of 31 December 2018, which is the first reporting date following initial recognition of the loan,
Parent A notes that since initial recognition:
– Economic conditions across Europe, especially Cyprus, have become increasingly uncertain, which has led to declining
consumer confidence and a depreciation in the value of € – both of which have led to increased inflation. For Subsidiary B,
this has resulted in increasing supplier costs, decreasing sales volumes and lower operating profits;
– Due to the ecomonic crisis of 2013 in Cyprus, there is an increase in unemployment levels which will have a negative
effect on sales volumes;
– Subsidiary B has not defaulted on any of its loan payment obligations to Bank X nor has it breached any covenants;
– Subsidiary B’s KPIs have been considerably lower than initial forecasts (beyond permitted tolerance levels) for a period of
4 months and this trend is expected to continue for at least the next 6-8 months; and
– Subsidiary B is still expected to have sufficient funds to repay the loan to Bank X and to Parent A in 2020 and in addition
the key solvency ratio has not breached the SICR backstop limit set by Parent A.
While the SICR backstop indicator has not been breached, KPIs have been declining for a period of 4 months and this is
expected to continue for at least another 6-8 months. Based on Parent A’s accounting policies, it concludes that there has
been a SICR. Therefore, the loan is in Stage 2 and lifetime ECL must be recognised.
Estimation of the lifetime risk of a default occurring
Using the maximum risk of default

In this example, Parent A derives the risk of a default occurring using a considerable amount of management judgment and
methods that are not statistical in nature. As a result, it may choose to apply a worst case scenario (i.e. 100% risk of default)
in the first instance, in order to determine whether or not the resulting ECL would be material. However, should that amount
be material, one possible approach to estimating the actual lifetime risk of a default occurring is set out below.
Page 16 of 38
Parent A is not in a position to develop statistical models to calculate probabilities of default without undue cost or effort.
Instead, it considers several different sources of information in order to derive a less complex measure of the risk of a
default occurring.
Parent A first considers historical information:
– Internal information – If Parent A had information available internally about past default rates (for loans advanced on
similar terms to similar counterparties), these could be used as a starting point for calculating the lifetime risk of a default
occurring. However, Subsidiary B has never defaulted on its loans and while other subsidiaries have defaulted in the past,
these defaults occurred many years ago and Parent A does not consider Subsidiary B’s position to be comparable.
-External information – While it is possible to obtain information about the historical default rates for loans to other
entities in the retail sector, those entities typically have lower gearing levels than Subsidiary B. In addition, the loans
advanced to these entities are generally interest bearing and senior ranking, whereas Subsidiary B’s loan is interest-free and
junior in nature. Parent A concludes that it would not be appropriate to use this external data in isolation but considers
that this information could be a useful source of independent challenge for its own estimate of the lifetime risk of a default
occurring for the loan to Subsidiary B. This is because the lifetime risk of a default occurring for the loan to Subsidiary B
should be considerably higher than that suggested by the external information due to the higher gearing levels and more
junior nature of the loan. Parent A therefore decides to source this information from an external provider (for which is
pays a fee).
This data indicates a 12-month historical default rate of 7%. Assuming a constant default rate over the remaining 2 years of
the loan to Subsidiary B, this would imply an approximate historical lifetime default rate of 13.5% i.e. 7% marginal risk of
default in 2019 plus 6.5% (7% x 93%) marginal risk of default in 2020.
Parent A then considers other relevant forward looking information that could be used to measure the risk of a default
occurring over the expected life of the loan to Subsidiary B. In accordance with Parent A’s accounting policies, insufficient
liquidity of the borrower to repay the loan when due (as evidenced by key liquidity and solvency ratios) would constitute a
default. Based on Subsidiary B’s current forecasts which assume the most likely expected business and economic conditions
(base case), no such default arises. However, because Parent A is required to at least consider the possibility of a credit loss
occurring, it must consider other reasonably possible scenarios. It sources economic information about different expected
unemployment and inflation rates from an external provider (for which it pays a fee) and considers the effect these
alternative scenarios would have on Subsidiary B’s forecasts.
Having performed this analysis, Parent A considers that the risk of a default occurring over the expected life taking into
account forward looking information and other reasonably possible scenarios is 25%. Parent A notes that this is significantly
higher than the historic lifetime default risk of default of 13.5% that would have been derived using external information
which reflects both the less senior nature of the loan to Subsidiary B and the incorporation of forward looking information
which was excluded from the external information.
Economic Scenarios Likelihood Default outcome
Scenario 1 (base case) 70% No default

Scenario 2 (best case) 5% No default
Scenario 3 (worst case) 25% Default
Page 17 of 38
Measurment of ECL
In order to measure ECL, Parent A estimates the possible cash flows it expects to receive if Subsidiary B does default on the
loan repayment of €10 million due in December 2020. In this example, Parent A considers the value of the underlying
business operations and how best its recovery could be maximised. Parent A also takes into account the fact that the bank
loan is senior to its loan.
Parent A considers a number of recovery strategies are available to it in the event of default. Subsidiary B may recover
given time, in which case Parent A may choose to simply wait for recoveries. Alternatively, Parent A could force a sale of
the underlying business or assets. However, because a ‘fire sale’ of assets could result in significantly discounted sales
prices, Parent A anticipates that it would wind down its trading operations over a number of years allowing sales to take
place over a period of time (in so far as possible) in order to maximise recovery value.
Having considered this information, and taking into account other relevant reasonable and supportable information
(including forward-looking information), Parent A determines that recoveries would be maximised by giving Subsidiary B
extra time to repay. It estimates three possible expected cash flow scenarios under that recovery strategy (Scenarios 1, 2
and 3) together with the likelihood of their occurrence. Parent A includes Scenario 3 because even though the full amount
of €10 million is expected to be recovered under this scenario, a credit loss will arise because the late payments amounts
will be discounted at the EIR of 15%. Parent A also considers the possibility of forcing a sale of the underlying assets
because despite being the least likely recovery strategy, it could result in significantly less cash flows being recovered and
consequently greater credit losses (Scenario 4).
Expected cash flow scenarios 2019 2020 2021 2022 Total

(undiscounted) € € € € €
Scenario 1 (20% likelihood) - 2,800,000 1,600,000 1,200,000 5,600,000

Scenario 2 (60% likelihood) - 4,500,000 2,900,000 900,000 8,300,000
Scenario 4 (5% likelihood) - 1,000,000 900,000 500,000 2,400,000
Parent A then discounts these cash flows by the original EIR of 15% in order to derive the present value amounts:
Expected cash flow scenarios 2019 2020 2021 2022 Total

(discounted) € € € € €

Scenario 4 (5% likelihood) - 756,144 591,765 285,877 1,633,785
Page 18 of 38
Even though Scenario 2 is the most likely outcome, Parent A concludes that the other scenarios must also be considered in
order to arrive at a probability weighted ECL amount that reflects different outcomes. Parent A therefore calculates four
credit loss scenarios:
Credit loss scenarios Scenario 1 Scenario 2 Scenario 3 Scenario 4

(discounted) € € € €
Present value of contractual cashflows due * 7,561,437 7,561,437 7,561,437 7,561,437

Present value of expected cash flows 3,855,332 5,824,021 6,300,721 1,633,785
Credit loss 3,706,105 1,737,415 1,260,716 5,927,652
* This represents the gross carrying amount of the loan as at 31 December 2018 – i.e. the present value of €10m due on 31
December 2020 using a discount rate of 15%.
Using this information, Parent A calculates weighted average of lifetime credit losses:
Weighted average credit losses €
Scenario 1 (20% likelihood) (€3.706.105 x 20%) 741,221

Scenario 2 (60% likelihood) (€1.737.415 x 60%) 1,042,449
Credit loss 2,269,160
Finally, Parent A calculates lifetime ECL using the lifetime risk of a default of 25% and the weighted average of lifetime
credit losses of €2,269 million:
--Lifetime ECL = 25% X €2.269.160 567,290
If, in the example above, Parent A had concluded that there had not been a SICR and that the loan was in Stage 1, then a
12-month risk of default occurring would need to be calculated in order to measure 12-month ECL. As noted previously, an
entity may choose firstly to calculate the ECL amount using a 100% risk of default occurring in order to determine whether
the maximum ECL amount would be material. However, if that amount is material, entities would need to estimate the risk
of a default occurring over the next 12 months using similar principles to those described above for the estimation of a
lifetime risk of default.
An interest-free loan of this nature will have significant payment obligations at maturity and in these cases, we note that
IFRS 9 acknowledges that there would generally be a concentration of default risk towards maturity. This means that the
risk of a default occurring in earlier years is likely to be lower. However, it is important to note that it would not be
appropriate to assume that the risk of a default occurring over the next 12 months was zero, simply because no payments
were due during that period. Instead, entities would need to consider other more qualitative indicators of default such as
changes in key financial ratios that could imply the potential financial difficulty of the borrower.
Page 19 of 38
Applying the ECL model to an interest-free demand loan
Parent A has recently sut up a new subsidiary, Subsidiary B for the purposes of undertaking a new electricity generation
project (solar panel plants).
On 14 June 2018, Parent A advanced a loan of €5.809.930 to Subsidiary B

The loan is interest-free and repayable on demand
The purpose of the loan is to finance Subsidiary B which in turn will fund Subsidiary C's planned solar panel project
The expected repayment date of the loan depends upon the success of the project which can be assessed once the
initial exploratory work has been completed
At initial recognition, Parent A concludes that the loan is not purchased or originated credit impaired (POCI) and meets th
criteria to be classified at amortised cost. As the loan is due on demand and is interest-free it is recognised initially at €5.
and has an EIR of 0%.
ECL calculation should be made taking into account the following factors:
1) The Company’s accounting policies relevant to its interest-free demand loans:
a. Definition of default (i.e. A loan is considered to be in default when there is evidence that the borrower is
significant financial difficulty such that it will have insufficient liquid assets to repay the loan on demand. This is
assessed based on a number of factors including key liquidity and solvency ratios.)
b. Significant Increase in Credit Risk assessment – The risk that the borrower will default on a deman
loan depends on whether Subsidiary B:
i. Has sufficient cash or other liquid assets to repay the loan immediately (meaning that the risk
default is very low, possibly close to 0% and the loan is in Stage 1); or
ii. Does not have sufficient cash or other liquid assets to repay the loan immediately (meaning th
the risk of default is very high, possibly close to 100% and the loan is in Stage 3).
c. Credit impaired indicators (i.e. a loan is considered to be credit impaired if it meets the definition
defaulted loan.)
2) Determining whether the loan is in Stage 1, Stage 2 or Stage 3

a. Stage 1 (performing): 12-month expected credit losses:
i.ii. No significant deterioration in credit quality
The portion of lifetime expected credit losses that represent the ECLs that result from default even
occurring within the 12 months after the reporting date, weighted by the probability of that default
b. Stageoccurring
2 (underperforming): lifetime expected credit losses
i. Significant increase in credit risk since initial recognition (if this cannot be assessed, then assume
lifetime expected credit losses)
ii. Change relates to probability of default
iii. Rebuttable presumption that the criterion for lifetime expected credit losses is met if payments ar
more than 30 days past due
c. Stage 3 (non-performing): lifetime expected credit losses
i. Credit-impaired financial assets
ii. Observable data about:
1. Significant financial difficulty of the borrower
2. Breach of contract
3. Probable bankruptcy
Page 20 of 38
3) Measurement of ECL
In order to measure Lifetime ECL, Parent A should evaluate different recovery options and credit loss scenarios. The succ
of the project is the most important factor that will drive credit losses and this in turn is driven by the operating capabilit
the Subsidiary, the economic environment and electricity prices. Parent A should assess the likely success of the project
based on both internal and external information, including obtaining forecasted information about economic variables (s
as electricity prices) from an external provider.
Having considered this information, and taking into account other reasonable and supportable information (i.e. past eve
current conditions and forward-looking information / forecast of future economic conditions) about Subsidiary, the
economic environment and electricity prices, Subsidiary B should estimate the possible cash flow scenarios under this
strategy together with the likelihood of their occurrence. Parent A should also consider the possibility that the project m
fail because, even being unlikely, it would result in significantly less cash flows being recovered and consequently greater
credit losses.
Parent A took into account following considerations:

1. Subsidiary is operating company that generates cash inflow already
2. Subsidiary has an intention to settle the Parent A's receivable under the solar panel supply contract as a priority
3. Parent A expects that all amount will be settled within 2019, we consider the potential delays with payments and
default on this obligation by Subsidiary very unlikely
4. As the present moment we have received two payments already in total amount of 1,451,174 usd
5. Overall we do not expect the ECL on the receivable to exceed the respective ECL on the loans due to nature of th
receivable
Expected cash flow 2019 2020 2021

US$ US$ US$
Scenario 1 (90% likelihood) 5,809,930

Scenario 2 (8% likelihood) 1,451,174 4,358,756
Scenario 3 (2% likelihood) 2,100,000
The discounted expected cash flows are identical to the undiscounted expected cash flow because the loan has an EIR of
The present value of contractual cash flows using a discount rate of 0%
Credit loss scenarios Scenario 1 Scenario 2

US$ US$
Likelihood 90% 8%
Present value of contractual cash flows due 5,809,930 5,809,930
Present value of expected cashflows on default 5,809,930 5,809,930
Credit Loss 0 0
Page 21 of 38
Weighted Average of Credit Losses US$
Scenario 1 (90% likelihood) (90% x 0) 0

Scenario 2 (8% likelihood) (8% x 0) 0
Scenario 3 (2% likelihood) (2% x 3.709.930) 74,199
74,199
Finally, Parent A measures the lifetime ECL using the lifetime risk of a default occurring, which it assumes to be 100% (as
Subsidiary B does not have the ability to repay the loan on demand at the reporting date) and the weighted average of
lifetime credit losses of €74.199.
Probability of Default (PD) 100% 74,199
*assuming to be 100% (as subsidiary does not have the ability to repay the amount at the reporting date
Page 22 of 38
diary B for the purposes of undertaking a new electricity generation
y B which in turn will fund Subsidiary C's planned solar panel project
ends upon the success of the project which can be assessed once the
an is not purchased or originated credit impaired (POCI) and meets the

n is due on demand and is interest-free it is recognised initially at €5.8m
sidered to be in default when there is evidence that the borrower is in

ll have insufficient liquid assets to repay the loan on demand. This is
uding key liquidity and solvency ratios.)
ssessment – The risk that the borrower will default on a demand
uid assets to repay the loan immediately (meaning that the risk of
to 0% and the loan is in Stage 1); or
or other liquid assets to repay the loan immediately (meaning that

sibly close to 100% and the loan is in Stage 3).
an is considered to be credit impaired if it meets the definition of a
ed credit losses that represent the ECLs that result from default events
fter the reporting date, weighted by the probability of that default
sk since initial recognition (if this cannot be assessed, then assume

of default
the criterion for lifetime expected credit losses is met if payments are
Page 23 of 38
valuate different recovery options and credit loss scenarios. The success
drive credit losses and this in turn is driven by the operating capability of
ricity prices. Parent A should assess the likely success of the project
cluding obtaining forecasted information about economic variables (such
account other reasonable and supportable information (i.e. past events,

/ forecast of future economic conditions) about Subsidiary, the
iary B should estimate the possible cash flow scenarios under this
ence. Parent A should also consider the possibility that the project may
ignificantly less cash flows being recovered and consequently greater
ent A's receivable under the solar panel supply contract as a priority
led within 2019, we consider the potential delays with payments and/or
ely
wo payments already in total amount of 1,451,174 usd
eivable to exceed the respective ECL on the loans due to nature of the
Total
US$
5,809,930
5,809,930
2,100,000
the undiscounted expected cash flow because the loan has an EIR of 0%.
Scenario 3
US$
2%
5,809,930
2,100,000
3,709,930
Page 24 of 38
e lifetime risk of a default occurring, which it assumes to be 100% (as

oan on demand at the reporting date) and the weighted average of
Page 25 of 38
However, please note that the country’s rating should be adjusted downwards in notches (depending on the financial
variables of the borrower), for prudency purposes.

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INDEX

2 IFRS9 CLASSIFICATION SUMMARY

4 ECL CALCULATION - CASH AT BANK

5 ECL CALCULATION - FIXED DEPOSIT

6 ECL CALCULATION - LOAN RECEIVABLE - 12-month ECL

7 ECL CALCULATION - LOAN RECEIVABLE - Lifetime ECL (2yrs to maturity)

8 ECL CALCULATION - LOAN RECEIVABLE - Lifetime ECL (3yrs to maturity)

9 DECISION TREE FOR RP LOANS

10 ECL CALCULATION - INTEREST-FREE TERM LOAN RECEIVABLE FROM RP

11 ECL CALCULATION - INTEREST-FREE DEMAND LOAN RECEIVABLE FROM RP

12 TECHNICAL ALERT 7/2019 [ΤA 7_2019]

13 EXHIBIT 7 - AVG CORPORATE DEBT RECOVERY RATES

14 EXHIBIT 44 - AVG CUMULATIVE ISSUER-WEIGHTED GLOBAL DEFAULT RATES

15 CREDIT RATING - CYPRUS (MOODY'S)

16 CREDIT RATING - RUSSIA (MOODY'S)

17 CREDIT RATING - UKRAINE (FITCH)

18 CREDIT RATING - HELLENIC BANK (MOODY'S)

19 CREDIT RATING - BANK OF CYPRUS (MOODY'S)

20 CREDIT RATING - RCB (MOODY'S)

Financial instruments excluded from the scope of IFRS 9

Transactions within the scope of the ECL model

Assessment of significant increases in credit risk: A relative concept

Data sources in measuring impairment

c) Fair Value Option

Cash at bank 3,700.00 0.11 0

Loan receivable - Fintrast Limited 764,151.00 1,063.86 1,064

On interest-free term loan from subsidiary 7,561,436.67 567,290.00 567,290

14,441,689.67 647,548 647,548

Trade receivables Provision matrix - roll rate method 15,674

Bank Balance Rating

Hellenic Bank 1000 B1

Cumulative PD 1.990% 0.740% Exhibit 44

ECL 0.11 0.01 0.11

Bank of Cyprus rating B1

Cumulative PD 1.9900% 1.9900% 1.9900% Exhibit 44

3 - month PD (Yr 1 PD / 12) 0.1658% 0.1658% 0.1658%

ECL 110.59 110.14 109.69 330.41 N/M

check 0.9919 0.9878

Is the loan credit impaired? No

Does the loan have a remaining life of 12 months or less? No

Estimating ECL using external ratings 2019

Cumulative PD 0.24% Exhibit 44

ECL 1,063.86 1,063.86

Is the loan credit impaired? No

Does the loan have a reminaing life of 12 months or less? No

Estimating ECL using external ratings 2019 2020

Cumulative PD 0.74% 1.92% Exhibit 44

Marginal PD 0.74% 1.18%

ECL 684.15 996.29 1,680.45

Is the loan credit impaired? No

Estimating ECL using external ratings 2019 2020 2021

Cumulative PD 0.74% 1.92% 3.30% Exhibit 44

Marginal PD 0.74% 1.18% 2.12%

ECL 684.15 996.29 1,634.66 3,315.11

Key areas of consideration:

Is the loan within the scope of IFRS 9? NO Apply IAS 27 or IAS 28 *

Stage 3 = Lifetime ECL;

Stage 2 = Lifetime ECL;