How to Develop an IFRS 9 Impairment Framework

How to Develop an IFRS 9 Impairment Framework

A high level overview of the steps required for establishing an IFRS 9 impairment framework. More detailed discussions available through the links. The list is compiled from the published regulatory guidance and the Canadian Credit Union Implementation Guide

A glossary of terms is available here

Decision Points

• Determine the level of assessment (individual vs. collective assessment)
• Whether there are prior developed credit risk models
• Determine whether the “low credit risk assumption” will be applied to certain loans

Development Steps

• Establish the definition of default
• Determine indicators/measures of significant increase in credit risk including associated thresholds
• Identify relevant forward-looking information and macro-economic factors
• Incorporate Forward-Looking Information and multiple scenarios in staging assessments of loans
• Stage loans based on the forward-looking assessment of significant increase in credit risk
• Determine the method to be used for measuring Expected Credit Loss
• Determine the estimation period – the Expected Lifetime of the financial instrument
• Establish the respective Probability of Default for loans in Stage 1 and Stage 2
• Estimate the Exposure at Default
• Identify relevant Collateral and Credit Enhancement
• Develop estimates of Loss Given Default (incorporating collateral and credit enhancements)
• Incorporate forward-looking information and multiple scenarios in the measurement of Expected Credit Losses
• Consider the Time Value of Money and calculate Expected Credit Losses
• Identify modifications that occurred during the period and determine if each modification results in derecognition or no derecognition
• Calculate the modification gain or loss and include the modified loan (or new loans)

Organizational Actions

• Establish and document the appropriate processes, internal controls and governance for estimating Expected Credit Losses

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