IFRS 9 Measurement & Impairment

IFRS 9 requires a financial asset and liabilities to be initially measured at fair value and subsequently at amortized cost or fair value depending on the classification. It also introduces a new forward-looking expected credit losses impairment requirements.

Initial measurement

At initial recognition, an entity measures a financial asset or financial liability at its fair value, plus/minus (in case of assets/liabilities measured at other than FVTPL) directly attributable transaction costs.

If a company uses settlement date accounting, an asset or liability must be initially measured at trade date fair value. Subsequent to initial recognition, financial assets are measured either at (a) amortized cost, (b) FVOCI or (c) FVTPL. Those measured at amortized cost and FVOCI are subject to the impairment requirements and those which are designated as hedged instruments are subject to hedging requirements.

Subsequent measurement

Subsequent to initial recognition, financial liabilities are measured at amortized cost except for the exceptions allowed under the classification requirements.

Under the amortized cost method, interest revenue is recognized using the effective interest method which involves applying the effective interest rate to the gross carrying amount of the asset except for credit-impaired financial assets which are measured differently under IFRS9.5.4.1.

If contractual cash flows of an asset are modified, it is remeasured by discounting the revised cash flows using the original effective interest rate. Any difference is recognized in profit or loss.

Impairment: expected credit losses

An entity recognizes loss allowance for expected credit losses on a financial asset measured at amortized cost or FVOCI, a lease receivable, a contract asset, a loan commitment, or a financial guarantee contract to which the impairment requirements apply. However, in case of asset carried at FVOCI, the loss allowance shall not reduce the carrying amount but will be reflected in other comprehensive income.

If at a reporting date, there is not a significant increase in credit risk on a financial asset since inception, an entity shall measure the loss allowance at 12-month expected credit losses. However, if there is a significant increase in credit risk, an entity shall measure the loss allowance at lifetime expected credit losses. Subsequently, if there is an improvement in credit risk, the loss allowance may be measured again at 12-month expected credit losses. For credit-impaired assets, loss allowance shall be measured at the cumulative lifetime ECLs.

Significant increase in credit risk is assessed by comparing risk of default at each reporting date to the risk of default at initial recognition (even if the asset has been modified). If an asset has a low credit risk, an entity may assume that there has not been a significant increase in credit risk. However, there shall be a rebuttable presumption that the credit risk has increased significantly if payment is 30 days past due.

Changes in loss allowance during a period shall be recognized in profit or loss.

An entity shall measure loss allowance at lifetime expected credit losses in case of trade receivable not containing significant financing component. Further, it can choose to recognize loss allowance at lifetime expected credit losses in case of trade receivables containing significant financing component and lease receivables.

An entity shall measure the expected credit losses using (a) an unbiased and probability-weighted amount based on range of outcomes; (b) the time value of money; and (c) reasonable and supportable information obtained without undue cost of effort about past and future events and economic conditions.

The maximum time period considered in measuring expected credit losses is limited to the term of the asset. However, in case of a financial instrument containing undrawn commitment, it may exceed the contractual period.

by Obaidullah Jan, ACA, CFA and last modified on

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