IFRS Risk Assessment and Management 3 — Questions and Answers
Question 1: Under IFRS 9, the three-stage impairment model for financial assets classifies assets in Stage 2 as those that have:
- No significant increase in credit risk since initial recognition
- A significant increase in credit risk since initial recognition but no objective evidence of default (Correct answer)
- Objective evidence of impairment at the reporting date
- Been written off entirely
Correct answer: A significant increase in credit risk since initial recognition but no objective evidence of default
Stage 2 assets have experienced a significant increase in credit risk but are not yet credit-impaired, requiring lifetime ECL recognition.
Question 2: Which of the following is NOT a qualifying criterion for hedge accounting under IFRS 9?
- There is an economic relationship between the hedged item and the hedging instrument
- The hedge ratio is designated and documented at inception
- Hedge effectiveness must be between 80% and 125% (Correct answer)
- The effect of credit risk does not dominate value changes
Correct answer: Hedge effectiveness must be between 80% and 125%
IFRS 9 removed the strict 80–125% effectiveness bright line; instead, it requires an economic relationship and that the hedge ratio reflects actual risk management.
Question 3: An entity issues a fixed-rate bond and designates it as the hedged item in a fair value hedge using an interest rate swap. Where is the cumulative fair value adjustment to the bond reported?
- Other comprehensive income
- Directly in equity
- As an adjustment to the carrying amount of the bond (Correct answer)
- Off-balance sheet
Correct answer: As an adjustment to the carrying amount of the bond
In a fair value hedge, the carrying amount of the hedged item is adjusted for the hedged risk, with changes going through profit or loss.
Question 4: IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in:
- A forced liquidation transaction
- An orderly transaction between market participants at the measurement date (Correct answer)
- A negotiated private transaction between related parties
- A transaction at historical cost adjusted for inflation
Correct answer: An orderly transaction between market participants at the measurement date
Fair value under IFRS 13 is an exit price in an orderly transaction between knowledgeable, willing market participants.
Question 5: A company uses Value-at-Risk (VaR) as a market risk sensitivity metric in its IFRS 7 disclosures. What must it also disclose to help users understand the VaR methodology?
- The entity's internal audit committee structure
- Assumptions, limitations, and parameters used in the VaR model (Correct answer)
- The names of counterparties involved in hedging contracts
- The entity's tax rate and deferred tax balances
Correct answer: Assumptions, limitations, and parameters used in the VaR model
IFRS 7 requires entities using VaR or similar methods to explain assumptions and limitations so users can assess the reliability of the information.
Question 6: In the context of IFRS 9 expected credit loss (ECL) calculations, Probability of Default (PD) should reflect:
- Historical default rates only, with no forward-looking adjustments
- Forward-looking information including macroeconomic forecasts (Correct answer)
- Only contractual terms of the financial asset
- Regulatory capital requirements set by Basel III
Correct answer: Forward-looking information including macroeconomic forecasts
IFRS 9 ECL models must incorporate forward-looking information, including economic scenarios and forecasts, not just historical data.
Question 7: Which approach under IFRS 9 allows entities to always measure impairment loss allowances for trade receivables at lifetime expected credit losses?
- General approach
- Simplified approach (Correct answer)
- Credit-adjusted approach
- Stage 1 approach
Correct answer: Simplified approach
The simplified approach permits (and in some cases requires) lifetime ECL for trade receivables, contract assets, and lease receivables without tracking stage transfers.
IFRS Risk Assessment and Management 3
Under IFRS 9, the three-stage impairment model for financial assets classifies assets in Stage 2 as those that have: