Difference between revisions of "How to Develop an IFRS 9 Impairment Framework"
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Contents
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[1][2] and the Canadian Credit Union Implementation Guide [3]
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