EAD is the outstanding balance of the loan. significant financial difficulty of the issuer or the borrower; a breach of contract, such as a default or past-due event; the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or. If there is such a correlation and unemployment is forecast to be higher or lower than the historical average over the period in which losses have been observed, an adjustment would then be made to the historical amounts (for example, expected higher unemployment might mean that the provision applied to intercompany loans needs to be increased). Others will change substantially. Whilst the second and third bullet points above offer practical expedients for each of those determinations respectively, those practical expedients are likely to be practicable only if the loan has stated terms and conditions. If the terms of an intercompany financing are clarified or changed on adoption of IFRS 9, careful analysis might be required. © 2018 - Mon Oct 26 21:34:57 UTC 2020 PwC. a £2,500,000 shortfall) discounted back 1 year to the reporting date using the original effective interest rate of 5% (i.e. A rise in unemployment might not trigger an immediate increase in defaults, because customers prioritise paying electricity bills over other discretionary expenditures. Yes. Loan is an investment in a group company, B. Intercompany loans repayable on demand, D. Stage 1 intercompany loans and loans whose life is 12 months or less, IFRS 9 What’s new in financial instruments accounting for asset management: PwC In depth INT2018-06, IFRS 9 impairment: significant increase in credit risk: PwC In depth INT2018-04, Retail banking: practical implications of IFRS 9 classification and measurement: PwC In depth INT2018-03, Corporate banking: practical implications of IFRS 9 classification and measurement: PwC In depth INT2018-02, Treasury and securities portfolios: practical implications of IFRS 9 classification and measurement: PwC In depth INT2018-01, IFRS 15 for banks: PwC In depth INT2017-11, IFRS 9 Impact on the pharmaceutical industry: PwC In depth INT2017-10, Achieving hedge accounting in practice under IFRS 9: PwC In depth INT2017-09, IFRS 9 impairment: Revolving credit facilities and expected credit losses: PwC In depth INT2017-08, IFRS 9 disclosures by banks in 2018 interim reporting and transition documents: PwC In depth INT2017-07, IFRS 9 disclosures for corporates: PwC In depth INT2017-06, IFRS 9 impairment: how to include multiple forward-looking scenarios: PwC In depth INT2017-05, IFRS 17 marks a new epoch for insurance contract accounting: PwC In depth INT2017-04, New IFRSs for 2017: PwC In depth INT2017-02, IFRS 10 for asset managers and other related issues: PwC In depth INT2017-01, Amendment to IFRS 4 – relief for insurers regarding IFRS 9: PwC In depth INT2016-05, Brexit: Accounting implications of UK’s Brexit decision Volume 1: PwC In depth INT2016-04, Basel Committee guidance on accounting for IFRS 9 expected credit losses for banks: PwC In depth INT2016-02, IFRS 16 – A new era of lease accounting: PwC In depth INT2016-01, Getting governance right on IFRS 9 Expected Credit Loss: accounting policy and implementation decisions: PwC In depth INT2015-16, IFRS 9: Impairment of financial assets – Questions and answers: PwC In depth INT2015-13, Testing for impairment in the upstream industries - top reminders: PwC In depth INT2015-11, IAS 23 - Capitalisation of borrowing costs: PwC In depth INT2015-09, IAS 36 - Impairment of non-financial assets – Expanding on the top 5 tips for impairment testing INT2015-08, IFRS 13 disclosure requirements – Questions and answers: PwC In depth INT2015-07, IFRS 9: Hedging in practice - Frequently asked questions: PwC In depth INT2015-05, Alternative financing for extractive industries: PwC In depth INT2015-04, Distinguishing a business from an asset or a group of assets (pharmaceutical and life sciences industry): PwC In depth INT2015-03, IFRS 9: Expected credit loss disclosures for banking: PwC In depth INT2015-02, Frequently asked questions - Offsetting financial instruments for investment funds: PwC In depth INT2014-11, Investment entities amendment – Exception to consolidation: PwC In depth INT2014-10, IFRS 9: Expected credit losses: PwC In depth INT2014-06, IFRS 12 for asset management: PwC In depth INT2014-04, Revenue from contracts with customers (with industry supplements): PwC In depth INT2014-02, IFRS 7 and IFRS 13 disclosures: PwC In depth INT2014-01, 19 - Consolidated financial statements - redefining control, 44 - IFRIC 20 ‘Stripping Costs in the Production Phase of a Surface Mine’, Manual of Accounting - Interim financial reporting, Expected credit losses for intercompany loans. As HPASL is loss making, HP Aviation Limited has developed a strategy to maximise recovery by  allowing HPASL to repay the £10 million loan plus accrued interest in 1 years’ time, to allow it to realise the cash flows from the sale of its assets. These are explained further in Section E below. It should also be noted that an entity itself should determine whether an instrument that it holds is an equity or debt instrument, looking to the issuer only for reference. Management of HP has identified an intercompany financing transaction within the Supply & Trading division between HP Fuels Limited and HP Aviation Inc. ����!������,��{Y���E������q}rj�v�'����8n�)�q�N �El���@�q+���!|�[p�p00�� �Y' )N�#a`./Ä��@>/�K匋 TA* How should a lender assess intercompany loans for impairment? Management has considered whether there has been an actual or expected significant change in the operating results of the borrower since the loan was first recognised. Consider an electricity provider that has been granted a loan by another entity within its group. Paragraph 45.32 and FAQ 45.31.2 in PwC’s Manual of accounting offer guidance on information to take into account in determining whether a financial asset has had a significant increase in credit risk. If, however, this short-cut results in a material expected credit loss, further work will be required to estimate the actual loss in the event of a default. What if an entity wishes to change the terms of its intercompany financing? In certain cases, it might be clear that the loan is a debt instrument (and therefore within the scope of IFRS 9), particularly if there is a legal agreement that creates contractual rights and obligations between the two entities. HP is implementing IFRS 9 from 1 January 2018. Loans which are low credit risk typically have very low PDs. This intercompany financing is repayable on demand, does not bear interest, and has an outstanding balance of €10m. Typically, settlement of these intercompany balances occurs quarterly, but the outstanding balances are contractually repayable on demand. Management has made assessments relating to materiality of balances as part of its implementation plan. This In depth provides guidance on IFRS 9’s impairment requirements for intercompany loans. Ultimately, the question of how an entity is affected by IFRS 9 is that “it depends.” Some entities may find that classification and measurement of their financial assets will be substantially the same as they are currently under IAS 39 and that their impairment allowances may not be affected materially. Further guidance on discount rates is given at the end of this section. LGD is the percentage that could be lost in the event of a default. » IFRS 9 - Financial instruments This transaction was put in place some years ago to partially fund the acquisition of the subsidiary, using a beneficial tax structure. We can help you re-evaluate your accounting policies, financial statement note disclosures and other areas affected by the new requirements. This is illustrated within the Appendix under ‘How should expected credit losses be measured?’. Further information on establishing a PD and an LGD is provided in Sections D and E. HP LPG (UK) Limited has an outstanding intercompany loan with HP LPG (Germany) GmbH. the PD (‘probability of default’) – that is, the likelihood that the borrower would not be able to repay in the very short payment period; the LGD (‘loss given default’) – that is, the loss that occurs if the borrower is unable to repay in that very short payment period; and. If these expected trading cash flows and/or liquid assets cover the outstanding balance of the intercompany loan, the expected credit losses will be limited to the effect of discounting the amount due on the loan (at the loan’s effective interest rate) over the period until cash is realised and repaid to the lender. At initial recognition, intercompany loans are generally within ‘stage 1’, which requires a 12-month expected credit loss to be calculated for each intercompany loan balance. If the time period to realise cash is short or the effective interest rate is low, the effect of discounting might be immaterial. FAQ 49.59.5 in chapter 49 of PwC’s Manual of accounting explains that intercompany loans which are interest free and repayable on demand have an effective interest rate of 0%. IFRS 9 contains rebuttable presumptions that a loan that is 30 days past due has had a significant increase in credit risk (at para 5.5.11), and that a loan that is 90 days past due is credit-impaired (at para B5.5.37). External credit ratings agencies (such as Standard & Poor’s, Moody’s and Fitch), analytics agencies (such as Thomson Reuters and Bloomberg) and credit bureaux (such as Experian and Equifax) might directly provide related PD percentages. The expected cash flows from the sale of HPASL’s assets are £8 million as there is weaker demand for its specialist assets. Whilst inherently judgemental, management has determined that this scenario has an 80% probability of occurring. Therefore the impairment provision would be based on the assumption that the loan is demanded at the reporting date, and it would reflect the losses (if any) that would result from this. jessica.taurae@pwc.com. HP’s auditors will need to form their own views of materiality and discuss with management where further consideration might need to be given. This In depth only addresses instruments that are within the scope of IFRS 9 and that are not accounted for under IAS 27, ‘Separate Financial Statements’, or IAS 28, ‘Investments in Associates and Joint Ventures’. In addition, if any intercompany loan arrangements have previously been established at a market rate of interest, the entity should have information available on how this assessment was made. This allows the lender to calculate a 12-month expected credit loss under stage 1 of the general model, which is a simpler calculation than calculating lifetime expected credit losses under stage 2 or 3 (see Section E below). Management has gathered the following information to establish a PD: Management has determined that the global industry average and peer company credit ratings give a PD which is too low for the intercompany loan, given the historical defaults by HP Aviation (Overseas) Limited and its high gearing ratio.

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