SLFRS 9: Financial Instruments is effective for the accounting periods beginning on or after January 01, 2018. SLFRS 9 replaces the impairment model for financial instruments from “Incurred Loss Model” in LKAS 39, to “Expected Credit Loss Model” which relates to assessing significant credit risk of financial instruments.
Expected Credit Loss Model is required to measure, whether the significant credit risk of financial instrument in Sri Lanka has increased since initial recognition at end of each reporting date. The model takes into account the reasonable and supportable forward-looking information without undue cost or effort when making the assessment of significant credit risk. In making the assessment, the changes in the default risk occurring over the expected life of the financial instrument is considered while comparing with the default risk as at the initial recognition.
However, the past due status also can be used to determine the credit risk, if forward-looking information are not available. Regardless of the method used to assess the credit risk, there is rebuttable presumption that the credit risk of financial asset has increased significantly when contractual payments are more than 30 days past due, which can be disregarded based on the reasonable information available.
There are three stages of Expected Credit Loss Model on the basis of assessed significant credit risk as follows.
|Stage 01||Stage 02||Stage 03|
|Criterion||Credit risk has not increased significantly||Credit risk has increased significantly||Credit risk has increased significantly and objective events have taken place|
|Model||12-Month Expected Credit Loss Model||Lifetime Expected Credit Loss Model||Lifetime Expected Credit Loss Model|
|Allowance||Separate impairment allowance account is recognised||Separate impairment allowance account is recognised||Impairment is deducted from the financial asset|
|Interest Revenue based on||Gross carrying amount of financial asset||Gross carrying amount of financial asset||Net carrying amount of financial asset|