Financial asset classification and expected credit losses under IFRS 9
Daehan Foods holds the following financial assets at 31 December 20X5. First, a portfolio of trade receivables of ₩8,000 million has ageing of ₩4,000 million current, ₩1,800 million 1–30 days, ₩1,000 million 31–90 days, and ₩1,200 million more than 90 days. The over-90-day balance relates to a retailer that entered administration in November; Daehan expects to recover 40%. Daehan applies the simplified approach and uses loss rates of 1%, 5%, 20%, and 45% for the respective buckets, but adjusts the over-90-day rate for the administration. The existing loss allowance is ₩180 million. Second, Daehan holds a five-year corporate bond with fixed coupons and an early repayment feature that pays the issuer's accumulated amortized cost plus a 2% penalty. The bond is held in a business model whose objective is achieved by collecting contractual cash flows and selling; Daehan has no recent sales. Third, Daehan originated a ₩2,000 million loan that it intends to hold to collect. The borrower missed one payment in December, but Daehan expects full recovery.
1. Classify the corporate bond and the originated loan under IFRS 9. Explain the SPPI and business model assessments.
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Corporate bond. The contractual cash flows are fixed coupons and principal. The early repayment feature pays amortized cost plus a 2% penalty. A prepayment feature can still meet SPPI if the prepayment amount substantially represents unpaid principal and interest, including reasonable compensation for early termination. A 2% penalty is likely reasonable compensation, so the bond passes SPPI. The business model is hold to collect and sell, so the bond is measured at FVOCI. Interest revenue, ECL, and foreign-exchange effects are recognized in profit or loss; other fair value changes go to OCI. If the 2% penalty were not reasonable compensation, SPPI would fail and the bond would be FVTPL.
Originated loan. The loan is a plain-vanilla receivable with principal and interest, so it passes SPPI. Daehan intends to hold it to collect contractual cash flows, so it is measured at amortized cost. The missed payment affects ECL staging, not classification, unless Daehan changes its business model.
2. Calculate the expected credit loss allowance for trade receivables and the additional allowance required.
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Trade receivables use the simplified approach, so measure lifetime ECL. The over-90-day rate is adjusted because the retailer is in administration: expected recovery is 40%, so the loss rate is 60%, not 45%. ECL:
- Current: ₩4,000m × 1% = ₩40m.
- 1–30 days: ₩1,800m × 5% = ₩90m.
- 31–90 days: ₩1,000m × 20% = ₩200m.
- Over 90 days: ₩1,200m × 60% = ₩720m.
- Total allowance = ₩1,050m.
The existing allowance is ₩180m, so recognize an additional ₩870m impairment loss. The administration is objective evidence that the historical rate is no longer representative; forward-looking information and recovery expectations must be reflected.
3. Assess whether the missed payment on the originated loan triggers lifetime ECL.
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A missed payment is evidence that credit risk may have increased significantly since initial recognition, but it is not automatically lifetime ECL. Daehan must assess whether the missed payment, together with other qualitative and quantitative information, indicates a significant increase in credit risk. If so, the loan moves to Stage 2 and lifetime ECL is recognized. If not, it remains in Stage 1 with 12-month ECL. The expectation of full recovery affects loss given default but does not eliminate the need to assess probability of default. If the loan becomes credit-impaired, it moves to Stage 3 and interest revenue is calculated on the net carrying amount. Daehan should document the judgement because one missed payment is close to the 30-day rebuttable presumption.