Credit Worthiness 2

What does fvtpl stand for?

• Financial value terminated by period-based liabilities.

• Fair value through profit or loss.

• Fair value treatment of profitable loans.

• Financial volatility through profit and loss.

What percentage of risk weighted assets are banks required to hold in capital under Basel 3?

• 4%

• 6%

• 8%

• 10%

• none of the above

Which of these instruments are subject to the IFRS 9 impairment requirements? 

• Large trade receivables book for corporate customers. Typically, the credit terms allow for 60 days, and customers will be required to undergo a thorough credit screening and sign a contractual agreement. Trade receivables are measured at amortized cost. 

• Contracts with customers under IFRS 15.  

• Investments in bonds at amortized cost 

• All the above 

   

A colleague of yours says that although IFRS 9 assessments are relevant, you can just assess significant credit risk when contractual payments are more than 30 days due. You reply: 

• I must disagree. The 30-day rebuttable presumption is used only to assess whether there is objective evidence that a financial asset is credit-impaired. 

• I respectfully disagree – the rebuttable presumption is not an absolute indicator that lifetime expected credit losses should be recognized. One is still required to use forward-looking information to assess significant increases in credit risk in a portfolio basis. It cannot just rely on past-due information. 

• That’s correct! When an instrument is 30 days past due, it will always be an indicator that there has been a significant increase in credit risk. However, there are many ways in determining whether there has been a significant increase in credit risk. The standard’s principles are relevant but if you want to use the 30-day rebuttable presumption method, it is absolutely acceptable. 

• That is not 100% correct. You can only follow that approach if you align the timing of significant increases in credit risk and the recognition of lifetime expected losses to when a financial asset is regarded as credit impaired. In other words, if you want to use the 30-day rebuttable presumption, you need to make sure that the instrument is considered credit-impaired at the point of being outstanding for 30 days. 

Which of the following correctly describes what a 12-month expected loss represents? 

• The expected credit losses on a particular financial asset to be incurred over the next 12 months. 

• The present value of expected credit losses that result from all possible default events over the expected life of a financial instrument.

• The amounts expected to be written off over the next 12 months multiplied by a 12-month probability of default.

• A portion of the lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after reporting date.