Okay, so before we get stuck into IFRS 9, let's briefly think about the old IAS 39 standard. So here, provisions for credit losses were measured in accordance with what was known as an incurred loss model. So they were recognized only once they'd actually been an incurred loss event. And actually, entities were prohibited from taking into account expectations of future credit losses. The whole thing was pretty complex and convoluted as different impairment models applied to financial assets and debt instruments and equity. So now, let's think about IFRS 9. This is a totally different focus. Now, we're looking at a forward based expected credit losses model. And when this came in, it was commented that it was likely to result in the earlier recognition of credit losses as entities no longer needed to wait for an incurred loss event. An entity will initially classify financial assets what is referred to as stage one. Now, we'll get into that in more detail shortly. But the initial recognition of a financial asset is always going to be at stage one. And then at a subsequent balance sheet date, it must further determine whether financial asset is still at stage one or it needs to be moved to stage two or stage three. So we'll get into what these stages are shortly, but it's worth saying that for each of these stages, what we're seeking to determine are the expected credit losses, and we do that by multiplying two things together. We take the probability of default, the likelihood of default, and we multiply that by the expected credit loss. Okay. So let's take a deeper dive into stage one. So here, credit risk has not increased significantly since initial recognition. So we recognize what is referred to as 12 month expected credit losses. And let's figure out what that really means. So first, we take the probability of default occurring in the next 12 months, so the probability of default happening in the next 12 months, and we then multiply that by the loss given a default within that 12 month period. So to be clear, we're thinking about losses in the near term, the near 12 month period here. We recognize interest income on a gross basis. You might say, hey, well what does that, what does that mean a gross basis? Well, look, you're gonna take the the interest and you're gonna multiply it by the initial amount of the financial asset. So we're not gonna be deducting any expected credit loss provision from that. So when we work out interest, the expected credit loss is not factored into that at all. Let's take about stage two. So what's going on here? We'll hear the credit risk has increased significantly since initial recognition. When the financial asset transfers to stage two, we're required to recognize lifetime expected credit losses. So what we're gonna do here is we're gonna treat this slightly differently. We're gonna look at not the 12 month losses but lifetime losses. And interest income continues to be recognized on a gross basis. Now, let's think about stage three. So the financial asset is, at this point, actually credit impaired. Effectively, there's been an incurred loss event and that's really similar to the sort of treatment that would've been normal under the old IS 39 model. So we continue to recognize lifetime expected credit losses but now the treatment of interest is different. So we recognize interest income on a net basis. So what does that mean? Well, let's just refresh what we said a moment ago. Interest income is calculated based on the gross amount, but now we deduct from that gross amount the expected credit losses. So interest income is calculated on the net amount. Right. So what? So who's impacted by this? Well, one, the major impact is gonna be on financial institutions with large lending portfolios, but two, also for corporates. When they think about the timing and measurement of bad debt provisions on their trade receivables.
