Default Definitions: In the continuation of series on IFRS-9, let us first compare default definitions and other basic requirements for the calculation of PD, LGD and EAD within different frameworks.
Below table is a snapshot of comparison between BASEL, IFRS-9 and IAS-39. We would start with comparison of default definition and then move onto calculation of PD, LGD and EAD.
|Driver||IAS-39||BASEL (Unexpected Losses)||IFRS-9(Expected Losses)|
|Default Definition||180 Days Past Due or Bankruptcy or deceased||90 Days Past Due or Bankruptcy or deceased and Forbearance(including Term extension or Restructuring of Loans)||90 Days Past Due or Bankruptcy or deceased and Forbearance(including Term extension or Restructuring of Loans)|
|EAD||Actual Balance at observation||Expected Balance at default over next 12 months, downturn expectations||Expected Balance at default over next 12 months or Lifetime, downturn expectations|
|PD||Calculations based on observed default||Point in Time Probability of Default||Point in Time Probability of Default|
|LGD||Expected Future Cash-flows from Default||Expected Future Cash-flows from Default||Expected Future Cash-flows from Default|
- BASEL-3 is also known as CRDIV-CRR (The Capital Requirements Directives/ Capital Requirements Regulation)
- In case of IFRS-9 PD will be calculated either for 12 months or for Lifetime depending upon the stage a particular account falls into(Stage1- 12 Months PD, Stage2 Lifetime PD)
In the following articles we would cover each of the aspect mentioned in the table above in detail.
Previous Article(Introduction to IFRS-9)
Next Section: Classification and Measurement of Financial Assets and Liabilities