Collateral under IFRS 9

​Under IFRS 9, the treatment of collateral in the measurement of Expected Credit Losses (ECL) for financial assets involves several key considerations. Here’s how collateral is generally treated:

1. Incorporation into ECL Calculations:

• Credit Loss Mitigation: The value of collateral and other credit enhancements should be considered when measuring ECL. Collateral can reduce the credit losses expected in the event of default, as it can be used to recover some or all of the outstanding loan amount.

• Fair Value of Collateral: The fair value of the collateral at the time of default is taken into account. This value should be discounted to present value using the effective interest rate of the asset or an appropriate discount rate.

2. Recognition of Collateral:

• Legal Right to Collateral: For collateral to be considered in ECL calculations, the lender must have a legal right to obtain and sell or use the collateral in the event of the borrower’s default.

• Enforceability: The enforceability of rights over the collateral under various scenarios, including bankruptcy or other legal proceedings, should be considered.

3. Collateral Valuation and Reassessment:

• Regular Valuation: The value of the collateral should be reassessed regularly to reflect changes in market conditions, deterioration, or improvements in the quality of the collateral.

• Impact on Loss Allowance: Changes in the value of the collateral can affect the loss allowance. An increase in the collateral value may reduce the ECL, while a decrease may increase the ECL.

4. Treatment of Collateral-Dependent Financial Assets:

• Lifetime ECL for Collateral-Dependent Assets: If a financial asset is considered collateral-dependent, meaning its repayment is expected primarily through the sale of the collateral, IFRS 9 requires the recognition of lifetime ECLs.

5. Foreclosure and Repossession:

• Recognition of Assets Acquired Through Foreclosure: If the entity repossesses collateral (e.g., property in a mortgage loan), the asset is recognized in the entity’s financial statements at its fair value at the repossessions date, and the associated financial asset is derecognized.

6. Disclosures:

• Collateral-Related Disclosures: Entities must disclose information about their collateral practices, including the types of collateral held, the valuation techniques and assumptions used, and the effect of collateral on ECLs.

The treatment of collateral under IFRS 9 requires judgment, especially in estimating the fair value of collateral and its impact on ECL calculations. The approach should be consistent and based on reasonable and supportable information.