Quite urgent, if I may say.
I am looking at approaches to models for ECL estimation of trade finance deals/cases transactions.
There are two approaches, depending the financing compenent of the deal, summarised below:
Simplified model
- Required for trade receivables or contract assets that do not contain a significant financing component (or are accounted for under the one-year practical expedient as per IFRS 15)
Optional for trade receivables or contract assets that do contain a significant financing component and lease receivables
ECLs are measured at an amount equal to lifetime ECLs at initial recognition and throughout the life of the asset
No need to track changes in credit risk of the asset
Often use provisioning matrices that are based on historical data and adjusted for forward-looking information
General model
- Required for all financial assets that are not measured at fair value through profit or loss, except for those that are eligible for the simplified model
ECLs are measured at an amount equal to 12-month ECLs if there has not been a significant increase in credit risk since initial recognition, or lifetime ECLs if there has been such an increase
Need to assess at each reporting date whether the credit risk on the asset has increased significantly since initial recognition
Often use valuation models that use probabilities of default, loss given default and exposure at default
Questions/Clarifications@
1- How accurate/correct is this table? Please feel free to correct and augment with what completes the picture.
2-Under the simplified model, it says " often use provisioning matrices that are based on historical data.." a) what happens in "not often" cases? b) what can be done in the absence of historical data? are we talking about historical default data (PDs Transitions)? or historical LGDs?
3-The General model is to be used for "all financial assets that are not measured at fair value through profit or loss". which financial assets are not measured at fair value through profit or loss; short list only plz?
Kind Regards and thank you in advance,