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Financial instruments – Amortised cost and impairment

Date recorded:

Treatment of initial expected losses

The Board continued the re-deliberations of the ED Financial Instruments: Amortised Cost and Impairment in the context of the application of the expected loss model on open portfolios.

After a short discussion the Board agreed to finalise an approach that allocates initial expected loss estimates over the life of the portfolio. The Board argued that this approach is consistent with the economics of the contract as the expected loss is reflected in (and covered by) the margin on the instruments. The Board also noted that if an instrument would not be priced at fair value, adjustment would be required as all financial assets are recognised at fair value at inception under IFRS (e.g. adjustment for an interest-free loan). The Board rejected the approach that would require recognition of a day 1 loss.

The Board also agreed to continue with an approach that spreads initial expected loss estimates using a non-integrated effective interest rate (EIR) (i.e. decoupling — separate calculation of contractual EIR and expected losses). The Board noted that the integrated EIR approach would be difficult to implement in practice and the decoupling should facilitate the operational issues raised by constituents (consistently with the EAP conclusions). The staff noted that the method of decoupling will be discussed at a next IASB meeting in October.

The staff also noted that the decoupled approach would not solve all the operational issues related to expected loss model and its application for open portfolios and that treatment of re-estimation of expected loses will be subject of discussion at a later stage in the project.

Finally, the Board discussed the option to use integrated EIR approach if an entity has the data and resources to calculate expected loss through a single integrated approach. After a significant discussion, the Board decided to address this issue after the model is finalised as future decisions (e.g. re-estimation of expected loses) might have consequences on applicability of calculation of integrated EIR.

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