IFRS 9 requires an entity to recognise a loss allowance for expected credit losses on financial assets within the scope of the impairment requirements, and the amount of that allowance depends on whether the credit risk on the financial instrument has increased significantly since initial recognition.

Scope of the Loss Allowance

An entity recognises a loss allowance for expected credit losses on a financial asset measured at amortised cost or at fair value through other comprehensive income, as well as on lease receivables, contract assets, loan commitments, and financial guarantee contracts to which the impairment requirements apply.

Measurement at Lifetime Expected Credit Losses

At each reporting date, an entity measures the loss allowance for a financial instrument at an amount equal to lifetime expected credit losses if the credit risk on that instrument has increased significantly since initial recognition.

Measurement at 12-Month Expected Credit Losses

If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the entity instead measures the loss allowance for that instrument at an amount equal to 12-month expected credit losses only, rather than lifetime expected credit losses.

The 30-Day Past-Due Presumption

Regardless of how an entity assesses significant increases in credit risk, there is a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due; an entity may rebut this presumption if it has reasonable and supportable information demonstrating that credit risk has not increased significantly even though payments are more than 30 days past due.

The Simplified Approach for Trade Receivables

The Standard always requires an entity to measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables or contract assets arising from transactions within the scope of IFRS 15 that do not contain a significant financing component under that Standard, without needing to track whether their credit risk has increased.

Why This Model Represents a Fundamental Shift in Impairment Accounting

This model is built on the principle of anticipating losses in advance rather than waiting for an actual loss event to occur, unlike models that recognise a loss only once tangible evidence of impairment materialises. An entity is required to update its estimate of the loss allowance at every reporting date in light of reasonable and supportable information that includes past events, current conditions and reasonable forecasts of future conditions, which makes measuring the allowance an ongoing process rather than a one-off exercise performed only when the financial instrument first arises.

Legal References

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