The newly definition of default is used in the measure-
ment of expected credit losses and the assessment to
determine movements between stages. The definition of
default is also used for internal credit risk management
and capital adequacy purposes. According to the revised
definition of default, exposures that are considered
default are also considered Stage 3 exposures. This is
applicable for exposures that are default due to either
the 90 days past due default trigger or the unlikeliness
to pay default triggers.
The purpose of using multiple scenarios is to model the
non-linear impact of assumptions about macroeconomic
factors on the expected credit losses. Management’s
approval of scenarios can include adjustments to the
scenarios, probability weighting and management over-
lays to cover the outlook for particular high-risk portfo-
lios, which are not provided by the Group’s macroecono-
mists. The approved scenarios are used to calculate the
impairment levels. Technically, the forward-looking infor-
mation is used directly in the PDs through an estimate
of general changes to the PDs and the LGDs in the
expected credit loss calculation.
Calculation of expected credit losses
The expected credit loss is calculated for all individual
facilities as a function of the probability of default (PD),
the exposure at default (EaD) and the loss given default
(LGD). In general, the Bank’s IFRS 9 impairment models
and parameters draw on the Group’s internal models in
order to ensure alignment of models across the Group.
New models and calculations have been developed espe-
cially for IFRS 9 purposes, including models for lifetime
PD, prepayment and forward-looking LGD. All expected
credit loss impairment charges are allocated to individ-
ual exposures.
The forward-looking information is based on a three year
forecast period converging to steady state in year seven.
The base case is based on the macroeconomic outlook
as disclosed in the Group’s Nordic Outlook reports.
Modification
When a loan is replaced by a new loan or the original
loan contract is modified it is assessed whether this
should be accounted for as derecognition of the loan and
recognition of a new loan, or as a modification of the old
loan. This depends on whether the changes to the con-
tractual cash flows or other contractual terms are sig-
nificant or not. If the change is significant, it is accounted
for as derecognition of the old loan and recognition of the
new loan. If the change is not significant, the modification
is accounted for as a modification of the old loan. In gen-
eral, if the modification results in a new loan contract
and loan identification, the modification is considered
significant and leads to derecognition of the old loan and
recognition of a new loan. If this is not the case, the mod-
ification does not lead to derecognition of the original
loan.
Expected remaining lifetime
For most facilities, the expected lifetime is limited to the
remaining contractual maturity and is adjusted for
expected prepayment. For exposures with weak credit
quality, the likelihood of prepayment is not included. For
exposures that include both a loan and an undrawn com-
mitment and where a contractual ability to demand pre-
payment and cancellation of the undrawn commitment
does not limit the Bank’s exposure to credit losses to the
contractual notice period, the expected lifetime is the
period during which the Bank expects to be exposed to
credit losses. This period is estimated on the basis of
the normal credit risk management actions.
If the old financial asset is not derecognised, the original
effective interest rate remains unchanged, and the net
present value of the changed contractual cash flows rep-
resents the carrying amount of the financial asset after
the modification. The difference between the net present
value of the original contractual cash flows and the modi-
fied contractual cash flows are recognised in P/L as a
modification gain or loss. If the modification loss relates
to modifications on loans subject to forbearance meas-
ures the modification loss is presented in the income
statement under Loan impairment charges.
Incorporation of forward-looking information
The forward-looking elements of the calculation reflect
the current unbiased expectations of the Bank’s senior
management. The process consists of the creation of
macroeconomic scenarios (base case, upside and down-
side), including an assessment of the probability of each
scenario, by the Group’s independent macroeconomic
research unit, the review and sign-off of the scenarios
(through the organization) and a process for adjusting
scenarios given new information during the quarter.
DANSKE MORTGAGE BANK PLC IFRS FINANCIAL STATEMENTS 2022
37