1.33 On what basis was the rescheduled [investee] loan treated as low credit risk with only 12-month expected losses?
UK Company B · a UK-listed technology and logistics group · Regulator-style question
In brief
Note 3.6 measures expected credit losses on loans at amortised cost at 12-month losses because they [wording masked] calls the provision immaterial. The only such loan at [date] is a [amount] loan to [investee] (carrying amount [amount]) that remained outstanding after its [date] maturity under a monthly repayment plan at [n]% interest. IFRS 9 treats low credit risk as a strong capacity to pay in the near term and does not allow a guarantee to create it; the report does not explain how a rescheduled loan met that test.
The evidence, as filed
Screenshot withheld to protect the company’s identity: Annual Report 2024, page 199; Annual Report 2025, page 225; Annual Report 2024, page 201. Their wording or layout could lead back to the company even with names and figures masked; the evidence list below records what each page shows.
What the report shows, and what the rule requires
| What the annual report shows | What the rule requires |
|---|---|
| What the annual report shows Loan to [investee] carried at [amount], past its [date] maturity and rescheduled at [n]%, with a 12-month expected credit loss on the stated ground that loans at amortised cost are low credit risk. | What the rule requires A stated assessment of whether credit risk on the loan had increased significantly (with lifetime losses if so), or the reason it still met the low-credit-risk test without relying on the guarantee. |
What we checked: Note 3.6 policy, table and loan terms; the 2025 report's account of the loan's settlement.
The rule
IFRS 9 Financial Instruments, paragraph 5.5.10
Version relied on: UK-adopted international accounting standards (UK Endorsement Board), as in force for financial years beginning in or after January 2025
An entity may assume credit risk has not increased significantly since initial recognition if the instrument has low credit risk at the reporting date.
IFRS 9 Financial Instruments, paragraph B5.5.22
Version relied on: UK-adopted international accounting standards (UK Endorsement Board), as in force for financial years beginning in or after January 2025
An instrument counts as low credit risk only if default is unlikely and the borrower can comfortably meet its near-term contractual payments; collateral alone does not make it so.
Why it applies here: a loan that was not repaid at maturity and was rescheduled at a markedly higher rate shows signs the standard links to a significant increase in credit risk, and the low-credit-risk relief cannot rest on the guarantee.
Why it matters
If credit risk had increased significantly, lifetime expected losses (net of what the guarantee is expected to recover) were required and the stated policy basis does not describe how this loan was measured; the amount may be small, but the disclosure of the basis is not accurate for the one loan it covers.
Exposure
A question on credit-loss staging; the likely outcome is a clearer statement of the assessment in the next report.
Our workings
the policy in Note 3.6 says loans [wording masked] so carry 12-month expected losses, which are immaterial. The loan at amortised cost of [amount] (2023: [amount]) is a [amount] loan to [investee] [company], guaranteed by [investee] since the Group's divestment; interest was [n]% to [date], when it was due to mature, and a repayment plan of [amount] a month at [n]% was then agreed.
none is needed for the question; the carrying amount at stake is [amount].
The guarantee may still keep the loss small, so the measured amount may be right while the stated basis is not. The 2025 report shows the balance of [amount] was later settled for [amount] in cash and [amount] in warrants over the guarantor's preferred stock.
Management’s best defence, and our reply
Management can argue that the loan is guaranteed by [investee], that instalments were being paid under the repayment plan, and that the expected loss after the guarantee was small whether measured over 12 months or over the loan's life, so the stage makes no difference to the figures and 'immaterial' remains true. The higher rate can be presented as a commercial renegotiation rather than a sign of distress. That case is tenable on the amount, which is why the point is a question. However, IFRS 9 does not let a guarantee or collateral make a loan low credit risk, and a borrower that did not repay at maturity and needed a rescheduled plan does not show a strong capacity to pay in the near term, so the basis the note gives does not fit this loan.
The fix
- State for the loan whether credit risk had increased significantly since initial recognition, the stage applied, the role of the guarantee in measuring the loss, and the amount of the allowance.
Question for the company
At [date], on what basis was the [investee] loan (carrying amount [amount]) treated as low credit risk with a 12-month expected credit loss, given that it remained outstanding after its [date] maturity and was rescheduled at [n]% interest; was the [investee] guarantee relied on for that conclusion; and what lifetime expected loss would have been recognised had a significant increase in credit risk been identified?
Evidence relied on
| # | What it shows | Type | Where |
|---|---|---|---|
| 1 | The policy treats loans at amortised cost as low credit risk with 12-month losses | Document | Annual Report 2024, page 199 |
| 2 | The provision is described as immaterial | Document | Annual Report 2024, page 199 |
| 3 | The loan is carried at [n] (2023: [n]) | Document | Annual Report 2024, page 199 |
| 4 | The line is a single loan to [investee] | Document | Annual Report 2024, page 201 |
| 5 | The loan is guaranteed by [investee] | Document | Annual Report 2024, page 201 |
| 6 | Maturity passed and the loan was rescheduled at [n]%, up from [n]% | Document | Annual Report 2024, page 201 |
| 7 | In [date] the balance was settled partly in cash and partly in warrants | Document | Annual Report 2025, page 225 |
Prepared by Pramanex from the company’s published annual reports, without the company’s involvement, to show how an annual report review reads. The company is not named, and nothing on this page is a statement about any identifiable company. Observations are not an audit, review or other assurance engagement, and not legal advice. A regulator-style question is a question, not a conclusion.
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