Financial Instruments
Treatment under IFRS
Classification by business model and contractual cash-flow characteristics into FVTPL, FVOCI or amortised cost. An expected-credit-loss (ECL) model is used for impairment.
- Categories: amortised cost, FVOCI (with/without recycling) and FVTPL.
- ECL model: a three-stage approach – a 12-month ECL is recognised already at initial recognition.
- Hedge accounting: a strict framework with effectiveness requirements.
- Derivatives: always measured at fair value (even without a hedging relationship).
Treatment under German GAAP (HGB)
German GAAP distinguishes between non-current and current assets. Measurement is at (amortised) cost under the lower-of-cost-or-market principle. There is no ECL model; allowances are recognised only when a concrete default risk exists.
- § 253 (1) HGB: cost is the measurement ceiling.
- § 253 (3)/(4) HGB: the lower-of-cost-or-market principle, depending on classification as a non-current or current asset.
- § 340e (3) HGB: trading-book financial instruments of credit institutions are measured at fair value less a risk discount.
- § 254 HGB: the formation of valuation units (the German-GAAP form of hedge accounting).
Key differences
- No ECL model; HGB recognises an allowance only on an actual default or an identifiable risk.
- No fair-value measurement of debt instruments held as non-current assets (except the trading book of credit institutions).
- Derivatives, as pending transactions, are generally not recognised under HGB; where their fair value is negative, a provision for onerous contracts must be recognised.
- Hedge accounting under HGB uses valuation units (§ 254 HGB) and is less formalised than under IFRS 9.
Example
Worked example
Assumptions: A loan of €1,000,000 (3-year term) is fully recoverable at origination. Its credit risk deteriorates: year 1 performing (IFRS stage 1), year 2 significantly increased credit risk (stage 2), year 3 default (stage 3). Expected losses are €5,000 (stage 1, 12-month ECL), €50,000 (stage 2, lifetime ECL) and €200,000 (stage 3, incurred loss). Assumption for HGB: a concretely identifiable default risk (the condition for a specific write-down) only exists in year 3. All amounts in euros.
Step 1 – The ECL model (IFRS) vs the lower-of-cost-or-market principle (HGB)
IFRS 9 requires a loss allowance equal to the expected loss already on initial recognition (12-month ECL) and increases it to the lifetime ECL as risk rises. HGB recognises a specific write-down only once a concrete default risk is identifiable (§ 253 (3)/(4) HGB, lower-of-cost-or-market) – it has no forward-looking day-one loss on a fully recoverable loan.
Step 2 – Loss allowance over time (balance)
| Year | IFRS stage | IFRS allowance | HGB allowance |
|---|---|---|---|
| 1 | Stage 1 (12-month ECL) | 5,000 | 0 |
| 2 | Stage 2 (lifetime ECL) | 50,000 | 0 |
| 3 | Stage 3 (default) | 200,000 | 200,000 |
Step 3 – P&L effect per year (change in allowance)
| Year | IFRS expense | HGB expense |
|---|---|---|
| 1 | 5,000 | 0 |
| 2 | 45,000 | 0 |
| 3 | 150,000 | 200,000 |
| Total | 200,000 | 200,000 |
The total loss is identical (€200,000); IFRS spreads it forward over the term, whereas HGB recognises it only once the risk is concretely identifiable.
Step 4 – Journal entries
IFRS – year 1 (recognition of the 12-month ECL):
| Account | Debit | Credit |
|---|---|---|
| Loan-loss expense (P&L) | 5,000 | |
| Loss allowance on the loan | 5,000 |
HGB – year 3 (specific write-down on identifiable default):
| Account | Debit | Credit |
|---|---|---|
| Write-down of receivables (P&L) | 200,000 | |
| Allowance on the receivable | 200,000 |
Key takeaway
IFRS 9 is forward-looking: even a fully recoverable loan carries an expected-loss allowance (12-month ECL), extended to the lifetime ECL as risk rises. HGB is event-driven: a specific write-down arises only once a concrete default risk is identifiable. For latent risk in the receivables portfolio HGB also permits a general (portfolio) allowance – but this is not a full equivalent of the ECL model. The cumulative expense is the same under both systems (€200,000); the difference lies in the timing of recognition.