The tool is used to estimate the 12 month or lifetime Expected Credit Loss (ECL) of loans within the scope of the IFRS 9 General Approach.
The tool relies on a detailed approach with a number of automations. In brief:
- On one hand, data and assumptions specific to the borrower (e.g. credit rating) and to the specific financial instrument (e.g. type, repayment plans, effective interest rate, collateral, etc.) are used. If the debtor does not have a credit rating, our team can assist you in estimating a synthetic rating for the purposes of this analysis.
- On the other hand, statistical models are automatically used to estimate 12 month or lifetime Probability of Default (PD) of the instrument, adjusted for macro factors. The statistical models are based on historical data on probabilities of default over time, transitions between different ratings, macroeconomic data and forecasts, and other information.
- Based on the data entered, the tool automatically estimates Loss Given Default (LGD), which can be adjusted also manually if necessary.
- Based on the above analyzes, the ECL is used to estimate the impairment of the instrument for the given period.
The methodology and the approach of the tool have been consulted with IFRS 9 experts at AFA, a leading audit and consulting company.
Advantages
- Market-based data for PD, LGD, etc.
- High detail of the analysis
- Automations in data inputs
- Automatic use of forward-looking macroeconomic information
- Potential use of scenarios
- Speed and ease of operation, especially after the initial input of debtor and instrument data
- Efficiency
- Synthetic Rating estimated for this tool may be used for other analyzes in CFO.tools, such as those related to transfer pricing.