For reporting under Hong Kong Financial Reporting Standards (HKFRS), which is the equivalent of Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board, HKFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018.
Impairment requirements under HKFRS 9 are based on an expected credit loss (ECL) model. The ECL model applies to debt instruments (such as bank deposits, loans, debt securities and trade receivables) recorded at amortised cost or at fair value through other comprehensive income, plus lease receivables, contract assets and loan commitments and financial guarantee contracts that are not measured at fair value through profit or loss. The guiding principle of the ECL model is to reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. The amount of ECL recognised as a loss allowance or provision depends on the extent of credit deterioration since initial recognition.
Under the general approach, there are two measurement bases:
n 12-month ECL (Stage 1), which applies to all items (from initial recognition) as long as there is no significant deterioration in credit quality;
n Lifetime ECL (Stages 2 and 3), which applies when a significant increase in credit risk has occurred on an individual or collective basis.
When assessing significant increases in credit risk, there are a number of operational simplifications available, such as the low credit risk simplification. Stages 2 and 3 differ in how interest revenue is recognised. Under Stage 2 (as under Stage 1), there is a full decoupling between interest recognition and impairment and interest revenue is calculated on the gross carrying amount. Under Stage 3 (where a credit event has occurred, defined similarly to an incurred credit loss under HKAS 39), interest revenue is calculated on the amortised cost.
In addition to the general approach, there are two alternatives applying to the ECL model: the simplified approach and the credit-adjusted effective interest rate approach.
For more information, please do not hesitate to contact our Managing Director – Dr. Tony Cheng at (852) 2593 9633, our Associate Director – Mr. Allan Bian at (852) 2593 9632 and our Associate Director – Mr. Alex Fu at (852) 2593 9626. Your enquiries via our portal at www.bmi-appraisals.com or by email to enquiry@bmintelligence.com are also welcome.
