Annual Report 2019
Central Bank of the Republic of Armenia
Notes to the 2019 consolidated financial statements
30.
Risk management (continued)
Impairment assessment (continued)
The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit
loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance
is based on the 12 months' expected credit loss (12mECL). The 12mECL is the portion of LTECL that represent the ECLS
that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
Both LTECL and 12mECL are calculated on either an individual basis or a collective basis, depending on the nature of
the underlying portfolio of financial instruments.
The Group has established a policy to perform an assessment, at the end of each reporting period, of whether a financial
instrument's credit risk has increased significantly since initial recognition, by considering the change in the risk of default
occurring over the remaining life of the financial instrument. Based on the above process, the Group groups its assets
into Stage 1, Stage 2, Stage 3 and POCI, as described below:
Stage 1:
Stage 2:
Stage 3:
POCI:
When assets are first recognized, the Group recognizes an allowance based on 12mECL. Stage 1
assets also include facilities where the credit risk has improved and the asset has been reclassified
from Stage 2.
When an asset has shown a significant increase in credit risk since origination, the Group records an
allowance for the LTECL. Stage 2 assets also include facilities, where the credit risk has improved
and the asset has been reclassified from Stage 3.
Assets considered credit-impaired. The Group records an allowance for the LTECL.
Purchased or originated credit impaired (POCI) assets are financial assets that are credit impaired on
initial recognition. POCI assets are recorded at fair value at original recognition and interest revenue
is subsequently recognized based on a credit-adjusted EIR. ECL are only recognized or released to
the extent that there is a subsequent change in the lifetime expected credit losses.
Definition of default and cure
The Group considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL calculations when
the counterparty's rating downgrades lower than the rating predefined by the Group. Regardless of the change in credit
grades in all cases when the borrower becomes 90 days past due on its contractual payments, financial instrument is
considered as defaulted.
As a part of a qualitative assessment of whether a customer is in default, the Group also considers a variety of instances
that may indicate unlikeliness to pay. When such events occur, the Group carefully considers whether the event should
result in treating the customer as defaulted and therefore assessed as Stage 3 for ECL calculations or whether Stage 2
is appropriate. Such events include:
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Internal rating of the borrower indicating default or near-default;
The borrower requesting emergency funding from the Group;
A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of
the collateral;
A covenant breach not waived by the Group;
The debtor (or any legal entity within the debtor's group) filing for bankruptcy;
Debtor's listed debt or equity suspended at the primary exchange because of rumors or facts about financial
difficulties.
It is the Group's policy to consider a financial instrument as 'cured' and therefore re-classified out of Stage 3 when none
of the default criteria have been present for at least six consecutive months. The decision whether to classify an asset
as Stage 2 or Stage 1 once cured depends on the updated credit grade, at the time of the cure, and whether this indicates
there has been a significant increase in credit risk compared to initial recognition.
PD estimation process
For the counterparties that have ratings assigned by the international rating agencies Annual Transition Matrix of Moody's
rating company is used.
For the counterparties that do not have ratings assigned by the international rating agencies the probability of default is
assessed based on internal Financial Stability Index using extrapolation of rated counterparties' probability of default.
Exposure at default
The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the
impairment calculation.
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