The adoption of IFRS 9 raises the potential that loan impairment amounts for ITA and IFRS purposes will differ
The s. 20(1)(l) reserve for doubtful loans for a money-lending business of a financial institution is in essence the lesser of a reasonable amount and 90% of the reserve or allowance for impairment determined in accordance with GAAP. IFRS 9, which replaced IAS 39 effective after 2018 (which, in the case of public entities, in turn replaced s. 3015 of the CICA Handbook, as it used to be called), adopts a risk-weighted approach, and unlike the old accounting standards, it incorporates predictive elements.
The expected-credit-loss model comprises the following three stages:
- Stage 1. An allowance is recorded on the initial recognition of a non-credit-impaired financial asset The allowance under this stage is measured on the basis of the expected lifetime cash shortfalls that would result if a default occurs within 12 months after the reporting date, weighted for the probability of a default
- Stage 2. The allowance is recorded relating to a financial asset or a group of financial assets where there has been a significant increase in credit risk since the initial recognition. In this stage, the amount of loss allowance is equal to the expected credit loss over the life of the financial asset
- Stage 3. The allowance for credit-impaired loans is recorded. In this stage, one or more events have taken place to cause the financial asset to become impaired.
There is some concern that only stage 3 amounts will be recognized by CRA as impaired as required by s. 20(1)(l)(ii)(D).
Neal Armstrong. Summary of Arthur Driedger and Stephen Wong, “IFRS 9: Financial Instruments,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p.6 under s. 20(1)(l)(ii).