Ind AS 107 Credit Risk Disclosures: ECL, Exposure, Collateral and Loss Allowance Reconciliation

Understand Nature and Extent of Risks: Credit Risk Disclosures

Key rules to remember

Loss allowance closing balance

Opening allowance + Charge to P&L (net of releases) − Write-offs ± Other movements (FX, etc.) = Closing allowance

Prepare this separately for each category, such as 12-month ECL, lifetime ECL not credit-impaired, lifetime ECL credit-impaired and simplified approach.

ECL per exposure

ECL = PD × LGD × EAD (discounted at the effective interest rate)

PD is probability of default, LGD is loss given default, EAD is exposure at default. Collateral reduces LGD.

Net carrying amount

Net carrying amount = Gross carrying amount − Loss allowance

Credit quality tables show gross carrying amount by rating grade. The allowance is shown separately.

Maximum exposure to credit risk

For recognised financial assets: gross carrying amount before deducting the loss allowance (net of any amounts offset under Ind AS 32); for guarantees, the maximum amount the entity could be required to pay

Disclose it without taking collateral into account, then disclose collateral separately. The exposure is the gross carrying amount, not the net carrying amount. Show the loss allowance separately, so users can see both the gross exposure and the net carrying amount.

Collateral coverage (practical presentation measure)

Collateral coverage = Fair value of collateral held ÷ Exposure (gross carrying amount, on the same basis as maximum exposure; often capped at 100% of the exposure)

Ind AS 107 does not prescribe a coverage ratio or a cap. It requires a description of the collateral and its financial effect, and, for credit-impaired assets, the extent to which collateral mitigates credit risk. Capping at the exposure is a sensible way to present the effect, because excess collateral does not reduce the exposure further. Use the gross exposure so the comparison is on the same basis as the maximum exposure.

How to solve Nature and Extent of Risks: Credit Risk Disclosures questions

1. 1Identify the instruments in the case and confirm they are subject to ECL impairment, for example loans, trade receivables, debt investments and loan commitments.
2. 2Mark the approach: general three-stage model or simplified approach. Note any purchased or originated credit-impaired assets.
3. 3Write the qualitative disclosures: credit risk management, how significant increase in credit risk is assessed, definition of default, write-off policy and ECL inputs.
4. 4Build the loss allowance reconciliation by category. Start from opening, add or deduct each movement, and prove the closing figure.
5. 5Present exposure: gross carrying amount by credit rating grade, maximum exposure, and collateral and credit enhancements with their financial effect.
6. 6Add concentrations of credit risk and any modification or write-off disclosures, including amounts still subject to enforcement.
7. 7Check totals: allowance closing must match the balance sheet or notes, and net carrying amount must equal gross less allowance.
8. 8State the conclusion in one line, for example the total allowance and the stage with the largest movement.

Quickest way: Four-block disclosure skeleton

Common mistakes in Nature and Extent of Risks: Credit Risk Disclosures

• Showing maximum exposure after deducting collateral.

  Students think collateral reduces the risk, so they net it off.

  Fix: Disclose maximum exposure without considering collateral. Then disclose collateral and its financial effect separately.

• Preparing one combined reconciliation for all assets.

  It looks simpler and saves time.

  Fix: Reconcile separately by category: 12-month ECL, lifetime ECL not credit-impaired, lifetime ECL credit-impaired, and simplified approach, where relevant.

• Deducting write-offs from the P&L charge instead of from the allowance.

  Students confuse the statement of profit and loss effect with the allowance movement.

  Fix: A write-off reduces both gross carrying amount and the allowance. Only the charge or release for the year goes through profit or loss.

• Leaving out qualitative disclosures and writing only numbers.

  Numerical parts feel safer and score visibly.

  Fix: Always include management practices, significant increase test, default definition and write-off policy. These carry marks.

• Treating trade receivables as needing a stage analysis.

  Students apply the general model to every asset.

  Fix: If the simplified approach is used, show lifetime ECL, for example through a provision matrix, and do not allocate to stages.

• Presenting collateral value above the exposure as extra protection.

  Collateral value is used directly without comparing it to the exposure.

  Fix: Describe the collateral and its financial effect. As a practical presentation approach, limit the quantified benefit to the exposure amount, because excess collateral does not reduce the loss further. Ind AS 107 does not prescribe a cap or coverage ratio.

Worked examples