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Notes On Calculating ECL Per PFRS 9 Webinar

This document outlines the steps to calculate expected credit losses (ECL) under PFRS 9 using either the general or simplified approach. It discusses the scope of financial assets subject to ECL, accounting policy choices for measuring ECL, and key considerations and calculations under the general and simplified approaches. The simplified approach involves 5 steps: 1) group receivables, 2) determine historical loss period, 3) calculate historical loss rates, 4) consider forward-looking factors, and 5) calculate ECL. The general approach uses an equation with exposure at default, probability of default, and loss given default to calculate the allowance for impairment.

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299 views3 pages

Notes On Calculating ECL Per PFRS 9 Webinar

This document outlines the steps to calculate expected credit losses (ECL) under PFRS 9 using either the general or simplified approach. It discusses the scope of financial assets subject to ECL, accounting policy choices for measuring ECL, and key considerations and calculations under the general and simplified approaches. The simplified approach involves 5 steps: 1) group receivables, 2) determine historical loss period, 3) calculate historical loss rates, 4) consider forward-looking factors, and 5) calculate ECL. The general approach uses an equation with exposure at default, probability of default, and loss given default to calculate the allowance for impairment.

Uploaded by

Felicity Anne
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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March 4, 2022

Webinar Title: Calculating PFRS 9 ECL step-by-step using Excel

FINANCIAL INSTRUMENT ACCOUNTING UNIVERSE


PFRS 9 - RECOGNITION AND MEASUREMENT Webinar Topic
PAS 32 - PRESENTATION
PFRS 7 - DISCLOSURES

Trade receivables and scope of the impairment loss model


- Forward looking expected credit loss (ECL) model -- PFRS 9, Chapter 9
- Mostly applicable to trade receivables and other debt instruments (notes or loans receivable)
- Receivables within scope of ECL: Lease receivables (PFRS 16), Contract Assets (PFRS 15) and Loan
Commitments and Financial Guarantees.
- Financial Instruments measured at FVPL/ FVTOCI are outside the scope of ECL. (including shares)
Note: Equity instruments, 99% of the time is measured at fair value

Accounting Policy choices:


1. 12 Month OR Lifetime ECL
Lease Receivables, Trade Receivables/Contract Assets with significant financing component
2. Lifetime ECL
Trade receivables and contract assets without significant financing component.

Significant Financing Component: (simplified definition under PFRS 9)


- Long term receivables.

GENERAL vs SIMPLIFIED APPROACH

GENERAL APPROACH

EAD x PD X LGD = Allowance for Impairment

Exposure at default (EAD) -- Presented at Php


Think of it as amount lost when customer failed to pay its debt. This is normally the carrying amount, at
gross, of the asset.
Probability of default (PD) -- Presented as %
Think of it as the chance of the customer will not pay. Consider entity's historical loss rates when
applying judgement
Loss given default (LGD) -- Presented as %
Think of it as the portionn of the EAD lost given default. Consider value of collateral in the computation
of the factor

Illustration:
EAD: P80 Million
PD: 10%
LGD: 75%

ECL = 80M x 10% x 75%


Provision for doubtful accounts: 6,000,000.00

Note: For general approach, particularly long term receivables, should use discounted amounts.

Allowance for Doubtful Accounts, Beginning bal. xxx -- Computed from formula
Provision for Impairment (SQUEEZE) xxx
Allowance for Doubtful Accounts, Ending bal. xxx -- Computed from formula
SIMPLIFIED APPROACH

5 STEP APPROACH (USING PROVISION MATRIX):

Step 1: Determine the appropriate groupings


No guidance in PFRS 9 how to group trade receivables.
Consider:
- Type of customer (wholesale or retail) - Customer rating
- Credit term - Collateral or trade credit insurance
- Geographical region - Product type

Forward-looking expected credit loss (ECL) model


Transfer between stages:
Stage 1: Financial instruments whose credit risk has not increased significantly since initial recognition
or that have low credit crisk at the reporting date. (99% collectible)
Sometimes Called: Performing (initial recognition)
Recogintion of ECL: 12-month expected credit losses
Interest revenue: Gross carrying amount

Stage 2: Is there a significant increase in credit risk (SICR)? -- Matter of judgement


No: No transfer to stage 2, no need to recognize provision
Yes: Transfer to stage 2, OPTIONAL to provide provision

Rebuttable presumption of SICR for more than 30 days past due.


If receivable is past due 30 days, can transfer to stage 2.

Sometimes Called: Underpoerforming (Assets with SICR since initial recognition)


Recogintion of ECL: Lifetime expected credit losses
Interest revenue: Gross Carrying amount

Stage 3: Is there an objective evidence of impairment?


No: No transfer to stage 3, no need to recognize provision
Yes: Transfer to stage 3, MUST recognize provision for impairment

Consider definition of default:


- breach of covenant
- 90 day rebuttable presumption

Sometimes Called: Non-Performing (Credit-impaired assets)


Recogintion of ECL: Lifetime expected credit losses
Interest revenue: Net carrying amount

Step 2: Determine the period over which observed historical loss rates are appropriate

- No guidance in PFRS 9 how far back the historical data should be collected
- Judgement is needed. Period over which reliable historical data can be obtained that is relavant to
future period over which the trade receivables will be collected.
- Can vary per grouping of receivables.
- Should not be unrealistically short or long period of time.
In practice, can span 2 to 5 years

Note: 'Lifetime' pertains to when the receivable is recognized, until it is derecognized (either by
collection or write off)
Step 3: Determine the historical loss rates

- Determine expected loss rates for each sub-group (in Step 1) divided into past due categories
over the period determined in Step 2
- No guidance how to calculate loss rates.

Step 3.1 Determine the total credit sales and total credit loss over the selected historical period.
Step 3.2 When was cash received?

Step 3.3 Determine historical loss rate

Step 4: Consider forward looking macro-economic factors and conclude appropriate loss rates.
(Example: unemployment rate)

Credible sources of macroeconomics rates:


https://www.ceicdata.com/en https://www.economy.com/
https://data.worldbank.org/ https://tradingeconomics.com/

Step 5: Calculate expected credit losses.

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