Temporary Allowance Adjustments
Definition
Temporary Allowance Adjustments, in the context of IFRS 9 [1] denotes adjustments to an allowance used to account for circumstances when it becomes evident that existing or expected risk factors have not been considered in the credit risk rating and modelling process as of the reporting date.
Use of temporary adjustments
Regulatory guidance[2] states that credit institutions should use temporary adjustments to an allowance only as an interim solution, in particular in transient circumstances or when there is insufficient time to appropriately incorporate relevant new information into the existing credit risk rating and modelling process, or to re-segment existing groups of lending exposures, or when lending exposures within a group of lending exposures react to factors or events differently than initially expected. For example, when a forward-looking factor that has been identified as relevant is not incorporated into the individual or collective assessment, temporary adjustments may be necessary
Such adjustments should not be continuously used over the long term for a non-transient risk factor. If the reason for the adjustment is not expected to be temporary, such as the emergence of a new risk driver that has not previously been incorporated into the institution’s allowance methodology, the methodology should be updated in the near term to incorporate the factor that is expected to have an ongoing impact on the measurement of ECL.
The use of temporary adjustments requires the application of significant judgement and creates the potential for bias. In order to avoid the creation of potential for bias, temporary adjustments should be directionally consistent with forward-looking forecasts, supported by appropriate documentation, and subject to appropriate governance processes.
