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Explanation:
Under IFRS 9, loans are categorized into three stages:
Since the financial results deteriorated significantly (indicating SICR) but the loan is not credit-impaired, it is classified as Stage 2: Underperforming.
For an Underperforming loan, the Lifetime ECL is calculated as:
Lifetime ECL = Lifetime PD × Lifetime LGD × EAD = 9% × 65% × $1,000,000 = $58,500.
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24.4.3. During a recent portfolio review, a regional bank’s risk management team noticed that the financial results of Hoffman Development had deteriorated significantly over the last year due to unfavorable macroeconomic conditions. Hoffman Development has a loan outstanding with the bank that was considered high quality at the time of origination. Despite Hoffman Development's poor results, the loan is not credit impaired. The relevant loan information is shown below:
| Next 12-Months | Next 24-Months | Lifetime of Loan | |
|---|---|---|---|
| Probability of Default (PD) | 5% | 7% | 9% |
| Loss Given Default (LGD) | 40% | 60% | 65% |
| Exposure at Default (EAD) | 1,000,000 | 1,000,000 | 1,000,000 |
Under IFRS 9, how should the loan be classified, and what is the credit loss we should recognize?
A
Performing: $58,500
B
Underperforming: $58,500
C
Performing: $400,000
D
Underperforming: $20,000