The Expected Credit Losses ("ECL") assessment is a critical financial measurement for estimating potential losses due to credit risk in financial instruments. This assessment is essential for organizations that hold loans, receivables, or other financial assets.
Under HKFRS 9 / IFRS 9, companies are required to assess the ECL for their financial assets. This requires entities to consider historical, current, and forward-looking information, including macroeconomic data. The expected credit loss model mandates that the ECL measurement reflect a probability-weighted outcome, accounts for the time value of money, and incorporates forward-looking information.
As a result, credit losses will be recognized earlier, as entities can no longer wait for an incurred loss event to occur before acknowledging credit losses. HKFRS 9/ IFRS 9 also expands the scope of impairment requirements to include certain issued loan commitments and financial guarantees. All instruments covered by the new impairment criteria will adhere to a single ECL model.
There are 3 different approaches for ECL assessment:
The General Approach: An entity shall recognize a loss allowance for the financial instrument based on either 12-month ECLs or lifetime ECLs at each reporting date, depending on whether there has been a significant increase in credit risk on the financial instrument since initial recognition.
The Simplified Approach: An entity shall recognize a loss allowance for the trade receivables, contract assets and lease receivables based on lifetime ECL at each reporting date.
The Specific Approach for Purchased or Originated Credit-Impaired Assets: Applies to financial instruments that are credit-impaired at initial recognition. An entity shall recognize a loss allowance for such financial instruments based on lifetime ECL at each reporting date.
With extensive experience in conducting ECL assessments, WeValue valuation team offers a tailored assessment approach that meets each client's unique requirements. Furthermore, in a situation of increasingly complex fair value reporting standards and more stringent regulatory scrutiny, we assist clients in efficiently resolving financial reporting valuation issues.
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