Page 7 - Bramasol_eBook-Overview of IFRS 9

Three stages of impairment

Impairment of loans is recognized – on an individual or collective basis – in three stages under IFRS 9:

Stage 1 Stage 2 Stage 3

Credit risk Credit risk Credit risk

Initial recognition, or no Signi cant increase in Objective evidence of impairment
signi cant increase in credit risk credit risk

Recognition of provision Recognition of provision Recognition of provision
for expected losses for expected losses for expected losses

Impairment amounting to Impairment amounting to lifetime Impairment amounting to lifetime
12-month expected credit losses expected credit losses expected credit losses

Interest revenue Interest revenue Interest revenue
On basis of gross carrying value On basis of gross carrying value On basis of net carrying value

Stage 1 – When a loan is originated Stage 2 – If a loan’s credit risk has Stage 3 – If the loan’s credit risk
or purchased, ECLs resulting from increased significantly since initial increases to the point where it is
default events that are possible within recognition and is not considered considered credit-impaired, interest
the next 12 months are recognized low, lifetime ECLs are recognized. revenue is calculated based on
(12-month ECL) and a loss allowance The calculation of interest revenue is the loan’s amortized cost (that is,
is established. the same as for Stage 1. the gross carrying amount less the
loss allowance). Lifetime ECLs are
On subsequent reporting dates, recognized, as in Stage 2.
12-month ECL also applies to
existing loans with no significant
increase in credit risk since their
initial recognition. Interest revenue is
calculated on the loan’s gross carrying
amount (that is, without deduction for
ECLs).

In determining whether a significant
increase in credit risk has occurred
since initial recognition, a bank is to
assess the change, if any, in the risk
of default over the expected life of
the loan (that is, the change in the
probability of default, as opposed to
the amount of ECLs).

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