Disclaimer

“This material has been prepared for general informational purposes

only and is not intended to be relied upon as accounting or other
professional advice. Please refer to your advisors for specific advice.
This is not a substitute for reading the standards and interpretations
themselves. Therefore, the participants should refer to these
standards and interpretations and evaluate their applicability and the
impact of current and future adoption”.

IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Phase 2 – Expected Credit Loss

Page 3 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Scope

The impairment requirements would apply to:

 Debt instruments measured at amortised cost.

 Debt instruments measured at fair value through other
comprehensive income.
 Loan commitments and financial guarantee contracts not
measured at fair value through profit or loss.
 Trade receivables and contract assets.
 Lease receivables.

Page 4 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

 General approach

Start here

Loss Stage 1 Stage 2 Stage 3

allowance
updated 12-month Lifetime Lifetime
at each expected credit expected credit expected credit
reporting
date losses losses losses
Lifetime Credit risk has increased significantly since
expected initial recognition (individual or collective basis)
credit losses +
criterion
Credit-impaired
Interest Effective interest rate Effective interest rate Effective interest rate
revenue on gross carrying on gross carrying on amortised cost
calculated amount amount
based on

Change in credit risk since initial recognition

Improvement Deterioration

Page 5 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

IFRS 9 – Incurred to expected credit loss

Collectability Existing IAS 39/PSAK 55 New IFRS 9/PSAK 71

1 Lifetime
Performing loans 12-month
expected loss
expected loss Bucket
Incurred but not reported Under-
(IBNR) loss/collective Performing 1 &2
Increase in performing
impairment loans
2 loans
allowance
Significant increase in credit risk

Non-performing loans Non-performing loans Bucket

4
Specific impairment No changes Lifetime expected loss 3
except
forward
looking
5

Expected credit loss is also applicable to consumer finance, marketable securities, government recap bonds, treasury notes and
other FVOCI financial assets.

Page 6 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

From IAS 39 to IFRS 9
► Example:

Before After
IAS 39 IFRS 9
Rating
Non-bank Bank Expected credit loss
Good Book 12M EL Lifetime EL
Impairment Impairment
1
Incurred but allowance allowance
Good book
not reported
(No impairment) Mechanical
(IBNR) Exposures Exposures with
collective increased of without significant
provision impaired significant deterioration
exposures deterioration
Fragile ‘Emergence
period’ length Significant deterioration
exposures
8 ‘expected’ ► Key methodological analysis
Collective loss, based on ► Choice of indicators
9 triggered ► Calibration
provision
events
10

11 Impaired Impaired
Specific allowances Specific allowances
No change
12
Lifetime EL under expected Lifetime EL
(PD = 100%) loss except for (PD = 100%)
forward looking

Page 7 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

9
P
age10
Credit-adjusted effective interest rate
approach for credit-impaired assets

Financial assets that are credit-impaired

Scope on purchase or origination

 Expected credit losses on initial recognition reflected in

credit-adjusted effective interest rate
No ‘day one’ 12-month expected credit losses

 Loss allowance based on subsequent changes in lifetime

expected credit losses

Page 11 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Definition of 12-month and lifetime expected
credit losses
Lifetime expected credit losses
Expected credit losses that result from all possible default events over the
expected life of a financial instrument.
12-month expected credit losses
The portion of lifetime expected credit losses that result from
default events on a financial instrument that are possible
within the 12 months after the reporting date.
‘Default’
Definition is not defined by the standard and there is a
90 days past due rebuttable presumption.

Page 12 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Measurement of expected credit losses

Numerator: cash shortfalls

Expected credit ► The period over which to estimate ECL: maximum
losses contractual period (for revolving credit facilities, this
extends beyond contractual period)
► Probability-weighted outcomes: possibility that a
credit loss occurs, no matter how low the possibility
Present value of all ► Reasonable and supportable information:
cash shortfalls information available without undue cost or effort
over the remaining about the past, current and future forecasts
life, discounted at
the original Denominator: discount rate
effective interest ► Discounting period: from cash flows date to
rate (EIR) reporting date
► Assets: EIR or approximate (if credit-impaired on
initial recognition, then use credit-adjusted EIR)
► Commitments and guarantees: current rate
representing risk of the cash flows (for commitments,
use EIR of resulting asset if this is determinable)

Page 13 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Factors or indicators of change in the risk of
a default occurring
Operating Business,
Credit spread
results financial or
(e.g., credit
economic
default swap)
conditions

Credit rating
(internal or Regulatory,
external) Factors or indicators of economic or
change in the risk of a technological
default occurring environment
Rates or terms
(e.g., covenants,
collateral)
Collateral, guarantee
or financial support,
Credit risk if this impacts the
management Payment risk of a default
approach status and occurring
behaviour

Page 14 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Transfer Criteria

Stage 1 Stage 2 Stage 3

Low credit risk Significant Credit impaired
increase in credit
risk from initial
recognition
AND
Not in low credit
risk

Page 15 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

What is a ‘significant’ increase in credit risk?
Interpretation of ‘significant’
Original credit risk at
initial recognition
 Change in absolute
probability of a default (PD)
occurring is more significant
for financial instruments with
lower initial credit risk
Page 16 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project
Expected life or term
structure
 Risk of a default occurring
increases with the expected
life of the financial instrument
 PD will decrease less quickly
over time for instrument with
significant payments
obligations close to maturity
Simplifications and presumptions in
assessing significant credit deterioration
(1) Low credit risk –
equivalent to
‘investment grade’*

(6) Assessment on a
collective basis based
on shared credit risk
characteristics*
(5) Set transfer
threshold by
determining maximum
initial credit risk
(2) More than 30 days
past due ‘backstop’*
Assessing
significant
increases in credit (3) Use change in
risk 12-month risk as
approximation for
change in lifetime risk*

(4) Assessment at
counterparty level

* The yellow text denotes simplifications and presumptions in the standard, while the text
in white denotes those in the illustrative examples.

Page 17 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

(1) Low credit risk - equivalent to ‘investment
grade’
If a financial instrument has low credit risk, an entity may assume no
significant increases in credit risk
If a financial instrument does not have low credit risk, an entity has to
assess whether there has been a significant increase in credit risk
Low credit risk is equivalent to ‘investment grade’

 Simplification is of limited use for instruments

originated or purchased with a credit risk higher than
non-investment grade or marginally better.
 Internal ratings will be mapped to external ratings (e.g.,
In
S&Ps, Moody’s, Fitch’s).
practice
 Historical default rates by external rating agencies
should be updated for current and forward-looking
information and also adjusted to reflect an expected
change in ratings.

Page 18 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

(2) More than 30 days past due (DPD)
‘backstop’
Rebuttable presumption: The credit risk on a financial asset
has increased significantly since initial recognition when
contractual payments are more than 30 DPD.

Past-due information is a lagging indicator and should only be

used if more forward-looking information is not available without
undue cost or effort.
Significant increases in credit risk should be identified before
default occurs or the financial asset becomes credit-impaired.

Presumption does not apply if significant increases in

In credit risk occur before payments are more than
practice 30 DPD. However, presumption can be rebutted if Entities
have information to demonstrate otherwise.

Page 19 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

(3) Use change in 12-month risk as
approximation for change in lifetime risk
The use of the change in risk of a default occurring over the
next 12-months (rather than the remaining life) to assess
significant increases in credit risk is allowed, except if:
Significant payment obligation and likely default is beyond
the next 12-months
Changes in macroeconomic or credit-related factors are not
reflected within the 12 months or occur after the 12 months

It would not be appropriate to apply this simplifcation for

In many non-amortising debt instruments (e.g., most bonds
practice and interest-only mortgages).

Page 20 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

(4) Assessment at counterparty level

The outcome of assessing at counterparty level should be the same

as if the financial instruments had been individually assessed.

Illustrative Example 7 indicates that assessment of significant

deterioration in credit risk can be made at the level of the
counterparty rather than the individual financial instrument
Only if…
It is consistent with the requirements for recognising lifetime
expected credit losses

Entities are likely to assess their credit exposures at the

In counterparty level, but need to ensure that the outcome
practice meets the measurement objective of lifetime expected
credit losses.

Page 21 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

(5) Set transfer threshold by determining
maximum initial credit risk (IFRS 9 Example 6)
Reasonable and
supportable information Internal credit risk rating
 Customer credit history The risk of default occurring increases exponentially
and payment behaviour
 Interest rate (e.g.,
interest rate rise) 1 2 3 4 5 6 7 8 9 10
 Unemployment
Portfolios Entity does not issue loans
Portfolio A worse than the rating of 7
Loans to
existing Portfolio A: Bank is able to
customers set lifetime expected credit
originated losses transfer threshold at
at ratings ratings worse than 5 because
of 3 or 4 the initial credit risk is similar

Portfolio B: Bank is unable to Portfolio B

set lifetime ECL threshold Loans to new customers
because the initial credit risk is originated at ratings
too diverse between 4 and 7

Page 22 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

(6) Assessment on a collective basis based
on shared credit risk characteristics
Examples in the standard include:
Date of Instrument Credit risk
initial type ratings
recognition

Remaining
Shared credit risk Collateral
term to
characteristics type
maturity

Loan to value, if
Geographical
this impacts the
location of Industry risk of
the borrower
a default occurring

As groupings are required to be amended over time, Entities

In
need to put in place processes to reassess whether loans
practice
continue to share similar credit risk characteristics.

Page 23 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Collective assessment: ‘bottom-up’ approach
(IFRS 9 Illustrative Example 5)
Reasonable and supportable information
► Past due status
► Industry / source of income (e.g., coal mining)

Decline in coal exports

Region two
‘Bottom-up’ approach
Sub-portfolios
Lifetime ► Existing mortgages to coal miners
expected credit ► Existing mortgages more than 30 DPD
losses

12-month ► New mortgages to coal miners

expected credit ► Other remaining mortgages (e.g.,
losses mortgages to lumber jacks)

Page 24 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Collective assessment: ‘top-down’ approach
(IFRS 9 Illustrative Example 5)
Reasonable and supportable information
► Past due status
► Interest rates (e.g., interest rate rise)

2% increase in interest rates

Region three
‘Top-down’ approach
Portfolios
Lifetime ► All variable and fixed-rate mortgages more
expected credit than 30 DPD
losses ► 20% of remaining variable-rate mortgages

12-month ► 80% of remaining variable-rate mortgages

expected credit ► Remaining fixed-rate mortgages
losses

Page 25 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Loss rate approach

Loss rate approach: An entity develops loss rate

statistics on the basis of the amount written off over the
life of the financial assets rather than developing a
separate probability of default and loss given default
statistics and then adjusts these historical credit loss
trends for current conditions and expectations about the
future.

 Difficulty in assessing significant increases in

credit risk based on the change in the risk of a
In default occurring
practice  Requires an overlay of measuring and
forecasting the level of default

Page 26 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Portfolio Segmentation
► What are the segmentation requirements?
► Assets may be grouped on the following Leveraging traditional segmentation
basis:
- Shared risk characteristics
Commercial Retail
► The outcome of the evaluation shall be
consistent regardless of whether the
asset is evaluated individually or as part
of a group • Credit rating • Arrears

► Considerations when performing segmentation: • Industry • Product

Segmentation determines the level at which the

triggers will be applied. Segmentation may mix • Geography • Region
higher quality and lower quality assets, which could
result in:
► higher quality assets protecting the lower • Collateral Amount
• Collateral Type
quality assets from having a life-time (LTV)
expected loss being held against them; or
► lower quality assets tainting higher
quality assets.

Page 27 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Application to loan commitments and
financial guarantee contracts
Financial guarantee
Loan commitments
contracts
Date of initial The date that an entity becomes a party to the irrevocable
recognition commitment
The maximum contractual period over which an entity has a
Period of
present contractual obligation to extend credit (exceptions for
estimation
revolving credit facilities)

Difference between the

The expected payments to
contractual cash flows that
reimburse the holder for a
Cash shortfalls in are due to the entity if the
credit loss that it incurs less
measuring holder of the loan
any amounts that the entity
expected credit commitment draws down the
(issuer) expects to receive
losses loan and the cash flows that
from the holder, the debtor or
the entity expects to receive
any other party
if the loan is drawn down

Page 28 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Application to revolving credit facilities, such
as credit cards and overdrafts
 Includes both a loan and an undrawn commitment
 Entity’s contractual ability to demand repayment and
Scope cancel the undrawn commitment does not limit the
entity’s exposure to credit losses to the contractual
notice period
 Period over which the entity was exposed to credit risk
 The length of time for related defaults to occur following
Estimation a significant increase in credit risk
period  The credit risk management actions that an entity
expects to take once the credit risk on the financial
instrument has increased
Whether the estimate of credit exposures should be
In
expanded beyond contractual period even if that would
practice
exceed the contractual credit limit

Page 29 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

IFRS 9 – Expected credit loss on irrevocable
LCs, undrawn loan facility and credit card limit

Existing PSAK 55 New IFRS 9

IAS 39 PSAK 71

Increase in
allowance for
impairment

Allowance for impairment Allowance for impairment

 Loan and unused/undrawn

 Loan amount only
facility
 Maximum period until maturity
 Maximum period until the
date of loan
Bank’s contractual obligation

Page 30 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

P
age31
Pa
ge32
P
age33
IFRS 9 – Incurred to expected credit loss

Collectability Existing IAS 39/PSAK 55 New IFRS 9/PSAK 71

1 Lifetime
Performing loans 12-month
expected loss
expected loss Bucket
Incurred but not reported Under-
(IBNR) loss/collective Performing 1 &2
Increase in performing
impairment loans
2 loans
allowance
Significant increase in credit risk

Non-performing loans Non-performing loans Bucket

4
Specific impairment No changes Lifetime expected loss 3
except
forward
looking
5

Expected credit loss is also applicable to consumer finance, marketable securities, government recap bonds, treasury notes and
other FVOCI financial assets.

Page 34 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

IFRS 9 Impairment calculation
BCBS “Basel Guidance on Credit Risk and Accounting for ECL”
1. Senior management responsibilities and engagement
2. Clearly documented and technically sound methodologies
3. Credit rating process to appropriately group lending exposures by credit risk
characteristics
4. Adequacy of allowance
5. Validation of the models underlying the ECL calculation
6. Use of experienced credit judgment
7. Common data, systems and processes for both accounting and capital
adequacy purposes
8. Transparency in public disclosures
9. Periodic supervisory evaluation of each institution’s credit risk practices
10. Supervisory assessment of the ECL measurement methodologies
11. Supervisory consideration of each institution’s credit risk practices when
assessing capital adequacy

Page 35 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Macroeconomic scenarios
Issue: Incorporating forward-looking scenarios into the
measurement of Expected Credit Loss (ECL)
Current industry practice
► Industry practice and supervisory guidelines continue to
evolve.
► A number of approaches exist:

‒ ECL is the weighted average of the ECLs calculated

under multiple scenarios
‒ Single scenario with an additional overlay to account
for non-linearity
• Internal versus External forecast sources
• Bottom up versus portfolio/sub-portfolio level macro
economic linkages
• Regression based models for conditional
Page 36 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project
Transferring criteria
Issue: Assessing each loan to determine whether there has been a
significant increase in credit risk (SICR)

Current industry practice

► Incorporate both quantitative and qualitative assessments

► Use of 12 month PD versus Lifetime PD (complexity)

► Standard confirms that use of lifetime PD whilst there is

allowance for the 12 month PD under certain conditions
‒ Ongoing monitoring of triggers adopted for lifetime
purpose
‒ Account for macroeconomic adjustments beyond the
12 month horizon
► Many banks are performing impact analysis in the choice
of staging triggers

Page 37 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Expected Credit Loss Calculation – Process Governance
Issue: Calculation Process Flow of ECL
(Further guidelines needed from supervisors)
Current industry practice
► Calculate the lifetime PD under each of the multiple scenarios

► Combine the multiple scenarios to get a probability weighted

ECL
► Perform stage allocation based on multiple factors including
but not limited to Internal Rating movement, Days past due,
term (tenor), changes in limit etc.
► Calculate 12 month ECL if Stage 1

► Lifetime ECL for Stage 2 and 3 Management/Expert Overlay:

► Short term scenario

► Longer term quantitative assessment not possible

Page 38 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Expected Credit Loss Calculation – Model Governance
Issue: Calculating Lifetime ECL (PD, LGD, EAD)
Adjustments to existing models / deployment of new models
Current industry practice
► Convert through-the-cycle PD/rating from Basel capital
models to an IFRS 9 compliant Lifetime PD term structure.
► Support scenario-based analysis for IFRS 9 impairment
calculations and stage allocation logic.
► Need for robust data tools to challenge and benchmark ECL
estimates (Challenger models and benchmark datasets)
► Best Estimate and Point in Time Lifetime PD measures

► Estimated with data consistent with other prudential

requirements, such as capital planning and stress testing
Leveraging 12 month PD used for Basel and adjusting it for
IFRS9 PIT purposes, ensuring consistency.
► Historical default observations

Page 39 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Integrated infrastructure and disclosures
Issue: Short implementation timeframe with challenges around
performance and adoption of a new standard
Current industry practice
Procurement of Systems designed towards IFRS9 Variance
analysis
Typically align Credit risk and regulatory expertise and part of a
total IFRS9 solution
► Offering built in credit risk model management

► Incorporating flexibility for PD/EAD/LGD calculation logic

► Models can be developed externally and hosted in the system

Standard offerings to meet regulatory deadlines

► Standard data mapping and functionalities requiring some
customization
Software platforms offer services for compliance Auditability/
Tracability Performance and scalability
Page 40 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project
 IFRS 9 System Implementation – Building Blocks

Other Data Population

Policy Assumptions (systems) Data Management,/ Strategy
GL Posting Transaction & Dimension Data
Disclosures & Reporting Data Quality Checks
Parallel Run & Reconciliation GL Reconciliation
Control & Governance Data Adjustments
Operating Model
Downstream Integration

Calculations
Methodologies Pre Processing Calculation
(Retail / Non Retail Portfolio) Portfolio Creation
ECL Computation Business Model & SPPI
(12M & Life Time) Methodology Assignment
Probability Weighted Impairment Stage Determination
PIT PD, PIT LGD Model &
Integration

Page 41 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

IFRS 9 Readiness and Implementation Challenges

Data Strategy &

Methodologies & Downstream
Management
Modeling Integration

Policies,
Accounting & Cross Functional
Judgements
GL Collaboration
IFRS 9 Readiness
Consideration

Disclosures &
Processes & Reconciliation &
Reporting Data
Controls Parallel Run
Elements

Page 42 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

IFRS 9 Implementation Complexities: Firm-wide Impact

Page 43 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

System Selection: IFRS 9 Engine vs IFRS 9 System

Data Management & Model Integration Transparency & Auditability

• Information Analytics Platform • Expose business logics (lineage)

• Data Quality & GL Reconciliation • Ability to view intermediate calculation results
• Data Adjustments (controlled manner) • Track changes to data & logics generating ECL
• Model & Calculation Integration • Expose entire calculation stream to regulator &
auditors

IFRS9 Engine
Portfolio Coverage, Stage Determination,
ECL - 12 Month, Lifetime, Probability
Weighted Amount, PIT Models

Flexibility Performance Optimization

• Business Driven Rules & Report Changes
• Partial Runs based on bank data availability realities
• Upgrades with no impact to infrastructure
• Reporting with drill down
• Partial Run & Parallel Run
• Effective use of HW
• Enabling business units to execute & review
• Highly scalable to massive data volumes & scenarios
(portfolios of millions of customers)

Page 44 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

2020
 2016 Impairment Global Banking Survey

We

Page 46 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

2016 Impairment Global Banking Survey

► IFRS 9 will require

significant enhancements
to organization, data,
systems, qualitative
models and governance.

► Methodology will involve

more judgment,
complexity and volatility
in reporting, resulting in a
need for intensive
oversight and enhanced
stakeholder scrutiny.

► Significantcost related to
additional resources to
run the models and for
licenses.

Page 47 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

2016 Impairment Global Banking Survey

Page 48 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

2016 Impairment Global Banking Survey

Page 49 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

2016 Impairment Global Banking Survey

Page 50 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Focus Areas for Those Charged with
Governance

Page 51 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project

Page 52 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project
Page 53 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project
Page 54 IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project
Thank You

IFRS 9: Financial Instruments – Overview of the IAS 39 Replacement Project