ECL on bank current accounts
ECL on bank current accounts
Are the bank current accounts subject to ECL under IFRS 9 or they are exempt?
Thank you
Thank you
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Re: ECL on bank current accounts
They are not exempt. You need to prepare ECL for your bank balances as well.
Re: ECL on bank current accounts
you might have bigger problems if you're not expecting full recovery of your bank balances...
Re: ECL on bank current accounts
well, we recently discussed a tax receivable which government is unable to settle due to cash flow issues - sh*t happens!
Re: ECL on bank current accounts
Giannos, what are your circumstances locally where you are thinking about an ECL on your bank account?
- JakobLavrod
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Re: ECL on bank current accounts
Hi!
Interesting question. If you have the money as a non-maturity deposit, I would refer to:
IFRS 9.5.5.19 The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice.
Should the contractual time be seen as essentially 0 for a non-maturity deposit? Or is the idea that the "extension option" is a behavioural such?
Interesting question. If you have the money as a non-maturity deposit, I would refer to:
IFRS 9.5.5.19 The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice.
Should the contractual time be seen as essentially 0 for a non-maturity deposit? Or is the idea that the "extension option" is a behavioural such?
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Risk Control at Svenska Handelsbanken
Re: ECL on bank current accounts
Hi
This is the reason for which I placed this question in the forum!
I was confused by what I was reading in the various technical articles and from the discussions with colleagues about ECL on bank balances.
Some articles and colleagues argue that the ECL on bank deposits are applicable on deposits which whether these are on term deposits or on demand.
On the other side, there is the rule that the maximum period to consider when measuring ECL is the maximum contractual period over which the entity is exposed to credit risk, which in the case of current accounts is deemed to be zero.
This is the reason for which I placed this question in the forum!
I was confused by what I was reading in the various technical articles and from the discussions with colleagues about ECL on bank balances.
Some articles and colleagues argue that the ECL on bank deposits are applicable on deposits which whether these are on term deposits or on demand.
On the other side, there is the rule that the maximum period to consider when measuring ECL is the maximum contractual period over which the entity is exposed to credit risk, which in the case of current accounts is deemed to be zero.
- JakobLavrod
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Re: ECL on bank current accounts
Found this from EY that makes the same interpretation:
For demand deposits that have no fixed maturity and can be withdrawn by
the holder on very short notice (e.g., one day) (assuming there is no contractual
or legal constraint that could prevent the holder from withdrawing its cash at
any time), the period used by the holder of such demand deposits to estimate
ECLs would be limited to the contractual notice period, i.e., one day. This is the
maximum contractual period over which the holder is exposed to credit risk. In
accordance with paragraph 5.5.19 of IFRS 9, extension periods at the option of
the holder are excluded in estimating the maximum contractual period because
the holder can unilaterally choose not to extend credit and thus can limit the
period over which it is exposed to credit risk. Furthermore, demand deposits
do not fall under the revolving credit facility exception (see section 11 below)
as they do not comprise an undrawn element
(page 39 in https://assets.ey.com/content/dam/ey-si ... il2018.pdf)
For demand deposits that have no fixed maturity and can be withdrawn by
the holder on very short notice (e.g., one day) (assuming there is no contractual
or legal constraint that could prevent the holder from withdrawing its cash at
any time), the period used by the holder of such demand deposits to estimate
ECLs would be limited to the contractual notice period, i.e., one day. This is the
maximum contractual period over which the holder is exposed to credit risk. In
accordance with paragraph 5.5.19 of IFRS 9, extension periods at the option of
the holder are excluded in estimating the maximum contractual period because
the holder can unilaterally choose not to extend credit and thus can limit the
period over which it is exposed to credit risk. Furthermore, demand deposits
do not fall under the revolving credit facility exception (see section 11 below)
as they do not comprise an undrawn element
(page 39 in https://assets.ey.com/content/dam/ey-si ... il2018.pdf)
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Risk Control at Svenska Handelsbanken
Re: ECL on bank current accounts
There are potentially, in extremely rare circumstances, ongoing 'overnight' risks to bank balances, though if those circumstances existed there could well be enhancements such as government guarantees or whatever, but it's possible I guess, in certain countries....
Re: ECL on bank current accounts
Thank you Jakob. Very useful article!
Re: ECL on bank current accounts
You do have to consider cash and cash equivalents for ECL purposes. However, in my opinion there is a bit of an inconsistency between IAS 7 and IFRS 9 in this respect. On one hand IAS 7 says that cash equivalent must be subject to insignificant changes in value, and on the other hand you have IFRS 9 saying that you need to consider all financial assets at AC for ECL purposes. If you really need to book an ECL impairment, this would suggest that the impairment is material and that your asset is not a cash equivalent. Or you could simply make a judgment that the ECL impairment for cash equivalents is always immaterial otherwise they would not be cash equivalents. I guess this is where accounting meets philosophy :p
However, for demand bank deposits (which are cash, not cash equivalents) an ECL impairment can actually be material -- which would have to be recognised -- but the balance would continue being reported as cash.
However, for demand bank deposits (which are cash, not cash equivalents) an ECL impairment can actually be material -- which would have to be recognised -- but the balance would continue being reported as cash.
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Re: ECL on bank current accounts
Hi Giannos and Community:
Giannos, you mention that you reviewed technical articles that dealt with the ECL in relation to bank balances... could you (or other member of community) share the links to these, please. For my part, I share two papers, one from PWC that would indicate that ECL does not apply to them (I don't know if conceptually or just practically as indicated in the community comments above, and another from EY that would indicate that it would apply ECL
https://www.pwc.ch/en/insights/disclose ... ected.html
Page 23:
https://assets.ey.com/content/dam/ey-si ... f?download
Giannos, you mention that you reviewed technical articles that dealt with the ECL in relation to bank balances... could you (or other member of community) share the links to these, please. For my part, I share two papers, one from PWC that would indicate that ECL does not apply to them (I don't know if conceptually or just practically as indicated in the community comments above, and another from EY that would indicate that it would apply ECL
https://www.pwc.ch/en/insights/disclose ... ected.html
Page 23:
https://assets.ey.com/content/dam/ey-si ... f?download
- JakobLavrod
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Re: ECL on bank current accounts
I think the key is what you find in the EY article:
"Cash and cash equivalents, such as current accounts that are classified as
financial assets measured at amortised cost, are also subject to the general
approach. However, due to the fact that a current account is on demand,
12-month and lifetime expected losses are the same. This means that the
expected credit losses will be small. However, being subject to the general
approach, an entity would still need to track the credit risk in order to identify
significant deterioration as this information is required for disclosure
purposes"
Basically, since maturity is something like 1 day, what you need to access is the probability that you will not be able to withdraw your funds from the bank. For a solid bank under normal circumstances, this risk is immaterial. However for a bank in serious financial troubles, here one would need a ECL. But in most normal cases, it should not be required. I guess the example in Lebanon where people commit bank robberies as a mean to withdraw funds would be on the other end...
https://www.youtube.com/watch?v=XVEXpAb6yYs
"Cash and cash equivalents, such as current accounts that are classified as
financial assets measured at amortised cost, are also subject to the general
approach. However, due to the fact that a current account is on demand,
12-month and lifetime expected losses are the same. This means that the
expected credit losses will be small. However, being subject to the general
approach, an entity would still need to track the credit risk in order to identify
significant deterioration as this information is required for disclosure
purposes"
Basically, since maturity is something like 1 day, what you need to access is the probability that you will not be able to withdraw your funds from the bank. For a solid bank under normal circumstances, this risk is immaterial. However for a bank in serious financial troubles, here one would need a ECL. But in most normal cases, it should not be required. I guess the example in Lebanon where people commit bank robberies as a mean to withdraw funds would be on the other end...
https://www.youtube.com/watch?v=XVEXpAb6yYs
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Risk Control at Svenska Handelsbanken
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- Posts: 44
- Joined: 31 Mar 2023, 00:57
Re: ECL on bank current accounts
Thanks Jacob,
interesting and useful analysis.
interesting and useful analysis.