Financial assets can lose value, and accounting rules help track these losses. This section covers how to spot and measure impairment using the model. It's a key part of managing financial instruments and their risks.
The rules differ based on how assets are classified and measured. For some, you'll use a three-stage model, while others need simpler approaches. Understanding these methods is crucial for accurate financial reporting and risk assessment.
Impairment Models for Financial Assets
Expected Credit Loss (ECL) Model Overview
introduced ECL model replaced incurred loss model from IAS 39
ECL model requires entities to recognize expected credit losses at all times
Entities must update expected credit loss amounts at each reporting date
Three main approaches for measuring expected credit losses
General approach
Simplified approach
Credit-adjusted effective interest rate approach
General Approach: Three-Stage Model
Based on changes in credit quality since initial recognition
Stage 1: 12-month ECL for financial instruments without significant increase in credit risk
Stage 2: Lifetime ECL for financial instruments with significant increase in credit risk
Stage 3: Lifetime ECL for credit-impaired financial assets
Movement between stages based on relative credit risk changes
Simplified and Credit-Adjusted Approaches
Simplified approach used for trade , contract assets, and lease receivables
Always recognize lifetime ECL
Typically utilizes provision matrix based on historical loss rates
Credit-adjusted effective interest rate approach applied to purchased or originated credit-impaired assets
Incorporates lifetime ECL into effective interest rate calculation
Used for assets already credit-impaired at initial recognition (distressed debt)
Indicators of Impairment
Financial Distress and Market Indicators
Significant financial difficulty of issuer or borrower indicates potential impairment