Credit line accounting

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kijek
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Credit line accounting

Post by kijek »

Hi,

I have the situation:
There is credit limit 5000, with 5% monthly cost of capital usage.
On 01/01/2021 4000 was drawn, so 6400 to give back when repaying according with schedule (with repayment plan of 12 equal instalment rates, which driving minimum monthly repayment).
Customer started repaying in line with schedule.
another 1000 was drawn 01/07/2021 (with repayment plan of 12 equal instalment rates),
so customer plan is for 6 months (months 7-12 for credit line granted) is combination of 1st and 2nd drawdown driving MMR and only 2nd drawdown for months 13-18.
another 1000 was drawn 01/01/2022 (with repayment plan of 12 equal instalment rates).
My preference is to account each drawdown separately (will not need to look at cash flows, which depends on drawdown and might differ for each credit line customer due to behaviours).
And whether there is obligation to account whole credit line as one intrument (don't know and need to assess whether each drawdown would be the modification of instrument and resulting in derecognition or P&L gain/loss due to change in receivables at each reporting date, and which starting date I should use - how the cash should look like when few drawdown are active.

Thanks in advance for help
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Marek Muc
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Re: Credit line accounting

Post by Marek Muc »

I think it's best to account for each tranche independently in terms of amortised cost measurement and I don't see any IFRS 9 requirements that say otherwise. But we have a few experts in financial instruments among community members so hopefully they will chime in :)
JRSB
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Re: Credit line accounting

Post by JRSB »

I'm not one of those experts but I agree.. think we had a similar topic before around RCFs.
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JakobLavrod
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Re: Credit line accounting

Post by JakobLavrod »

I only worked on the receivable side, so little to no experience with a credit line as a liability. Still, the only reason a lender needs to care about the distinction is due to the need to forecast the consequence of additional drawdowns on ECL on the combined line. From the borrower's side, you would not expect that this distinction matters as you do not account for any ECL on your own debt, hence I agree that it should probably not be an issue nor have I seen anything in IFRS 9 that indicates a problem.
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kijek
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Re: Credit line accounting

Post by kijek »

ECL% will be one for whole credit line (each tranche will have the the same ECL% applied, but separate expected cash flows for easy amortised cost measurement) and will be based on historic data ECL% of similar target group (from instalment loan) and highest/worst dpd (repayment allocation will be FIFO, so first allocating first tranche) will be the whole credit line dpd bucket/IFRS9 stage,
credit line approach in my opinion will create complications:
a) simply, prudent aggregated balance spread into 12 periods when second drawdown occur, will create timing of decrease receivables comparing to each tranche measured separately (when multiple drawdown will be active), as first tranche balance will be 6 month cash flow in tranche approach and 12 month cash flow in tranche approach
b) credit line approach in case first drawdown will be close to 100% of credit limit will create decision to be made whether/which subsequent drawdown will reset the clock at each reporting date, so will materially modify the cash flows (when aggregated balance need to be spread into 12 periods)
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JakobLavrod
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Re: Credit line accounting

Post by JakobLavrod »

I realized that I might have misread the question and that it might have been asked from the lender's perspective. In such a case, it depends on who decides if a drawdown occurs. If it is the lender, then you can treat them separately since the lender can do a separate assessment for each, but if it is up to the borrower, you have to account for all drawdowns together as you also have an ECL contribution from the undrawn part. In essence, the "contract" is then the credit line. See 5.5.20 and B5.5.39 in IFRS 9 where revolving products are mentioned. I would also say from industry experience that there is a widespread consensus on this among financial institutions, using so-called ccf models for the undrawn part.
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kijek
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Re: Credit line accounting

Post by kijek »

Yes, regarding ECL calculation there is agreement that all drawdowns need to be assessed together, and CFF models will be applied for unused credit limit. My questions was rather to whether next step: cash flow calc might be separated by each drawdown for amortised cost calculation and from your opinions looks like it's good idea and there is now showstopers for it.
kijek
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Re: Credit line accounting

Post by kijek »

And second issue is transactional costs related with granting the credit limit, sales force will get 10% commission of granted limit:
a) when 100% will be drawn imediatelly it will be spread as revenue recognition e.g. sum of digits method, starting from credit line granting date/drawdown date / presented in revenue line as deduction from revenue
b) when i.e. 50% will be drawn I think acceptable simlification might be again full commission spread as revenue recognition e.g. sum of digits method, starting from credit line granting date/drawdown date / presented in revenue line as deduction from revenue, but if not acceptable simplification question mark ??? only 50% of commission might be spread as revenue recognition, and remaining 50% should be concidered in point c)?
c) and when nothing will be drawn CCF part (drawn% in future might be spread in time) and what will be the starting point (credit line granting date and whether this is acceptable, or expectation on future drawdowns dates, so putting on balance sheet and release when drawdown will occur) / presented in revenue line as deduction from revenue
d) what will not be CCF as one-off costs / presented in costs line
kijek
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Re: Credit line accounting

Post by kijek »

I found such topic
viewtopic.php?t=200&sid=ec822d586375d3b ... a639ab7311
, so looks like "sales force will get 10% commission of granted limit" need to be spread equally into 4 years, as this will not be fixed term/fixed amount committment
Thank you for yours help and knowledge
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