The basic challenge
to the Nepalese market for the Adoptation of IFRS is the hurdle which comes up
with the new impairment models under IFRS 9, mainly to the financial
institutions due to huge amount of data and lack of in-built models for the
reliable projection and forecast of financial covenants. whatever may be the
difficulties, It could not be used as an excuse for the reasonable and
consistent application of impairment model as outlined by IFRS 9, Hence the
initiation from market leaders is vital for the the timely adoptation of global
standard. Here is the basic introductory coverage for the impairment model
outlined under IFRS 9:
The standard outlines a ‘three-stage’ model (‘general model’)
for impairment based on changes in credit quality since initial recognition:
Stage 1 It includes financial instruments that have not had a
significant increase in credit risk since initial recognition or that have low
credit risk at the reporting date. For these assets, 12-month expected credit
losses (‘ECL’) are recognised and interest revenue is calculated on the gross
carrying amount of the asset (that is, without deduction for credit allowance).
12-month ECL are the expected credit losses that result from default events
that are possible within 12 months after the reporting date. It is not the
expected cash shortfalls over the 12-month period but the entire credit loss on
an asset weighted by the probability that the loss will occur in the next 12
months..
Stage 2 It includes
financial instruments that have had a significant increase in credit risk since
initial recognition (unless they have low credit risk at the reporting date)
but that do not have objective evidence of impairment. For these assets,
lifetime ECL are recognised, but interest revenue is still calculated on the
gross carrying amount of the asset. Lifetime ECL are the expected credit losses
that result from all possible default events over the expected life of the
financial instrument. Expected credit losses are the weighted average credit
losses with the probability of default (‘PD’) as the weight.
Stage 3 It includes
financial assets that have objective evidence of impairment at the reporting
date. For these assets, lifetime ECL are recognised and interest revenue is
calculated on the net carrying amount (that is, net of credit allowance). The
standard requires management, when determining whether the credit risk on a
financial instrument has increased significantly, to consider reasonable and
supportable information available, in order to compare the risk of a default occurring
at the reporting date with the risk of a default occurring at initial
recognition of the financial instrument.
And, the definition of default should be identified, that is consistent with
the definition used for internal risk management purposes for the relevant
financial instrument, and it should consider qualitative factors such as
financial covenants and forecasts, wherever appropriate
- CA Rohit Dhital
Stage 2 It includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they have low credit risk at the reporting date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest revenue is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Expected credit losses are the weighted average credit losses with the probability of default (‘PD’) as the weight.
Stage 3 It includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised and interest revenue is calculated on the net carrying amount (that is, net of credit allowance). The standard requires management, when determining whether the credit risk on a financial instrument has increased significantly, to consider reasonable and supportable information available, in order to compare the risk of a default occurring at the reporting date with the risk of a default occurring at initial recognition of the financial instrument.
And, the definition of default should be identified, that is consistent with the definition used for internal risk management purposes for the relevant financial instrument, and it should consider qualitative factors such as financial covenants and forecasts, wherever appropriate
- CA Rohit Dhital
