ICAI publishes Expected Credit Loss Framework in line with Ind AS-109

The Institute of Chartered Accountants of India ( ICAI ) has released a detailed framework for Expected Credit Loss ( ECL ) in alignment with Indian Accounting Standard (Ind AS) 109. This publication addresses the significant shift in credit risk provisioning, transitioning from the historical incurred loss model to a more forward-looking expected loss model.

This shift, which affects banks, NBFCs, and other entities, demands a thorough evaluation of past events, current conditions, and future projections to estimate potential credit losses.

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Recognition of Expected Credit Losses

The ECL framework under Ind AS 109 does not require a loss event to have occurred before recognizing credit losses. Instead, loss allowances are recognized based on expected losses, remeasured at each reporting date to reflect changes.

The Three Approaches

  – General Approach: Applicable for financial instruments where credit risk has not significantly increased since initial recognition, and lifetime ECL for those with significant credit risk increases.

   – Simplified Approach: Provides lifetime ECL without tracking changes in credit risk since initial recognition.

   – Purchased or Originated Credit-Impaired Approach: For instruments already impaired at initial recognition, lifetime ECL is applied.

Measurement of ECL

Ind AS 109 requires entities to measure ECL considering probability-weighted outcomes, the time value of money, and reasonable, supportable information. The measurement incorporates multiple forward-looking scenarios rather than relying on a single one.

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Application of ECL to Non-Financial Sectors

The guidance emphasises that ECL is applicable beyond the financial sector, extending to all entities with financial assets that fall within the scope of Ind AS 109, including lease receivables, trade receivables, and contract assets.

Governance and Controls

Effective implementation of the ECL model requires robust governance, high-quality data, and the involvement of various stakeholders to ensure proper application and compliance with regulatory standards.

This framework offers practical examples, illustrative cases, and FAQs to help entities implement the ECL model in line with Ind AS 109.

The publication highlights the profound impact of ECL on financial reporting and credit risk management across sectors.

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