Forward-Looking Information for ECL

HKFRS 9 and IFRS 9 requires consideration of forward-looking information in the following areas:

Recognition of expected credit losses under General Approach.

The objective of the impairment requirements is to recognise lifetime expected credit losses for all financial instruments for which there have been significant increases in credit risk since initial recognition — whether assessed on an individual or collective basis — considering all reasonable and supportable information, including that which is forward-looking. [5.5.4]

If reasonable and supportable forward-looking information is available without undue cost or effort, an entity cannot rely solely on past due information when determining whether credit risk has increased significantly since initial recognition. [Extracted from 5.5.11]

Collective and individual assessment basis

Lifetime expected credit losses are generally expected to be recognised before a financial instrument becomes past due. Typically, credit risk increases significantly before a financial
instrument becomes past due or other lagging borrower-specific factors (for example, a modification or restructuring) are observed. Consequently when reasonable and supportable
information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk.[B5.5.2]

This comprehensive credit risk information must incorporate not only past due information but also all relevant credit information, including forward-looking macroeconomic information, in order to approximate the result of recognising lifetime expected credit losses when there has been a significant increase in credit risk since initial recognition on an individual instrument level. [Extracted from B5.5.4]

Valtech’s Input

We recommend the use of regression analysis to determine the impact of relevant economic factors on the default rates and hence ECL rates. By using regression analysis, we can use data that is location specific. In more advanced situation, we can customize a regression model based on industry or even company specific factors.

Building regression models to cater for the standard’s requirements in considering forward-looking information can be easier than you’ve expected. Please feel free to reach us for further support.