IFRS 9 Stage 1 ECL Estimation

This model estimates the probability of defaults on financial instruments, for financing reporting purpose.

by Roger Loh Kit Seng
Business Valuation Expert | Advising Merger & Acquisitions | Working with Start-ups & Established BusinessesFollow 18

16 reviews1,902 views|Start the discussion!|Bookmark download for free

Description
Under IFRS 9, expected credit losses would be recognised from the point at which financial instruments are originated or purchased. With limited exceptions, a 12-month expected credit loss must be recognised initially for all assets subject to impairment.

Under the requirement of IFRS 9, financial assets are subject to the 12-month expected credit losses on initial recognition. This means that a 12-month expected credit loss must be considered on initial recognition for a financial asset carried at amortised cost, even if the instrument is of high quality, for example, AAA-rated bonds. Please do note that trade receivables, contract assets and lease receivables are recognised under the simplified approach; therefore this model may not be applied.

This model estimates the probability of defaults when the financial instruments are recognised (initial recognition). The initial recognition, or commonly known as "Stage 1", forms the basis of initial recognition of financial instruments for financial reporting purpose.

This model estimates a synthetics rating based on Z-Score method, originated by Dr Edward I. Altman. Dr Altman estimated a series of title rating based on his methodology to differentiate the riskiness of creditworthiness of each entity.

Once the entity is being "rated", the probability of defaults can be estimated. With the help of StarMine's SmartRatios Credit Risk, we can estimate the counterparty's probability of defaults.

This Best Practice includes
Excel Spreadsheet