Portfolio allowance (IFRS)
Under Portfolio Value Adjustments (PoWB) , provisions are shown in IAS / IFRS for bad debts that have already occurred on the balance sheet date but have not yet been recognized.
The international accounting standard IFRS requires banks to make value adjustments on receivables for credit risks.
In this context, the aim of IFRS is to correctly report the losses actually incurred on the balance sheet date. The risk provision created should reflect the credit defaults expected by the bank. Contrary to the HGB view, the principle of prudence does not apply under IFRS. The formation of a silent provision reserve, as permitted by Section 340f HGB, is therefore not permitted under IFRS.
For which receivables is the portfolio allowance made?
If receivables do not show any bad features or impairments, these are used as a bundle of receivables in the context of a portfolio analysis taking into account a LIP for the calculation of the PoWB.
In order to shield the latent risks in the receivables that are not individually valued, portfolio valuation allowances based on general credit risks (e.g. general economic risk) are made for the entire portfolio. The basis of assessment is the total amount of receivables minus the receivables that have already been individually adjusted. On the basis of ratings and scorings, a resulting probability of default is applied to the assessment basis. Country valuation reports are a special form of portfolio valuation allowances.
Determination of the PoWB
If indications of an impairment are identified (e.g. 90-day delay, IFRS EWB already exists), the receivable must be valued. If a need for value adjustment is determined, a corresponding EWB must be created. If there is no evidence of impairment, the need for value adjustments must be determined at portfolio level. The creation of a portfolio valuation allowance in addition to an existing individual valuation allowance based on individually identified risks is not permitted under IAS. This approach would lead to double consideration of the same risk and thus to the formation of hidden reserves. In the portfolio analysis, all financial assets - minus the individual impaired exposures - are included and summarized according to credit risk characteristics. In accordance with IAS 39 AG87, the type of asset, the industry, the geographical location, the type of collateral and other relevant factors should be taken into account. A grouping of the claims according to the legal form of the borrower (natural, legal or state) as well as remaining terms is possible according to IAS.
calculation
POWB formula:
PoWB = max (IA - S * EQ, 0.0) * (1 - EBQ) * PD * LIP
• IA = total gross utilization + irrevocable loan commitments
• S = collateral
• EQ = recovery rate
• EBQ = recovery rate
• PD = Probability of Default (probability of failure)
• LIP = "Loss Identification Period" = actual, but not yet known failure at the time of observation