Undrawn commitments to funds and investees

A DFI's undrawn commitments can be as large as its funded portfolio: limited partner commitments to private equity and infrastructure funds drawn over five to ten years, signed but undrawn loan facilities to project companies, and commitments to subscribe for further equity in investees. These are different instruments with different accounting. A commitment to lend that will result in an amortised cost loan is within the IFRS 9 impairment requirements and needs an ECL provision from signing; a commitment to invest in fund units or shares is not a loan commitment and has no ECL, but it affects the fair value of the related investment and the DFI's liquidity. Treating all commitments the same way either omits required provisions or creates provisions that IFRS 9 does not require, and incomplete disclosure hides the DFI's real funding obligations from its shareholder.

For each undrawn commitment, what will the DFI receive when it funds: a loan (debt), fund units or partnership interests, or shares? For loan commitments, will the drawn loan be measured at amortised cost, or at FVTPL because it fails SPPI or is designated? Is any loan commitment at a below-market rate, net-settleable or designated at FVTPL, bringing it fully into IFRS 9? Over what period is the DFI exposed to credit risk on the undrawn amount, and can it realistically cancel the commitment if the borrower deteriorates? For fund commitments, does the fair value of the fund interest reflect the obligation to meet future capital calls? Are commitments to subsidiaries, associates and joint ventures captured for IFRS 12 and IAS 24 purposes?

1. Classify each commitment by the instrument it will create: loan commitment, commitment to acquire equity or fund units, or commitment to provide other support.
2. Loan commitments are generally outside IFRS 9 except for impairment and derecognition; bring a loan commitment fully into IFRS 9 if it is designated at FVTPL, can be settled net, or is at a below-market rate.
3. For loan commitments whose drawn amounts will be measured at amortised cost, recognise an ECL provision from the date the DFI becomes irrevocably committed, measured over the period of exposure.
4. For below-market loan commitments, recognise the commitment initially at fair value and subsequently at the higher of the ECL allowance and the amount initially recognised less cumulative income.
5. For commitments to acquire fund units or equity, do not apply the loan commitment ECL model; where the related investment is at fair value, include the effect of the unfunded commitment in the fair value of that investment (the unit of account typically includes the obligation to fund), and assess separately whether a commitment to an investee in distress is onerous or otherwise needs recognition.
6. Track commitments by counterparty type for disclosure.

ECL on an undrawn loan commitment is the present value of the expected cash shortfalls on the amounts expected to be drawn, using the probability of drawdown, the borrower's probability of default and loss given default, over the maximum contractual period during which the DFI is exposed to credit risk. Where the commitment and the drawn loan cannot be separated, the combined ECL is presented against the loan, with any excess over the gross carrying amount presented as a provision. Fund and equity commitments are not measured separately under IFRS 9 when the investment is at fair value; their effect is reflected in that fair value. Disclosed commitment amounts are the undrawn contractual amounts, translated at the closing rate.

Disclose: (1) undrawn loan commitments and their maximum exposure to credit risk, with ECL by stage and a reconciliation of the provision; (2) undrawn commitments to funds and to acquire equity, by type and expected drawdown profile where useful for liquidity analysis; (3) commitments relating to joint ventures, separately from other commitments; (4) for an investment entity, commitments and intentions to provide financial or other support to unconsolidated subsidiaries; (5) commitments to related parties; (6) the liquidity risk analysis, which includes the earliest period in which loan commitments could be drawn.

• Recognising no ECL on signed but undrawn loan facilities because no cash has been advanced
• applying the loan commitment ECL model to limited partner commitments to funds
• measuring ECL on undrawn term facilities that the DFI can cancel unconditionally over a period longer than the maximum contractual period (to the earliest date it can cancel), when the extension to the behavioural exposure period applies only to revolving facilities that combine a drawn and an undrawn component
• ignoring that a below-market loan commitment is fully within IFRS 9
• disclosing only the funded portfolio and omitting large fund commitments
• valuing a fund interest using NAV on drawn capital only, with no consideration of whether the unfunded commitment has positive or negative value
• omitting commitments to joint ventures and investment entity subsidiaries from IFRS 12 disclosures