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Financial instruments – Impairment — Disclosures

Date recorded:

The IASB's appendix to the joint Supplement of ED/2009/12 included disclosure proposals specifically related to impairment. During today's meeting, the Board discussed the remaining disclosure proposals from ED/2009/12 not addressed in the appendix, specifically the stress testing requirement and disclosures on the credit quality of financial assets and vintage information.

Disclosures — Write-off policy

ED/2009/12 included a proposal that an entity disclose its write-off policy and a definition for "write-off" that focused on an entity having no reasonable expectation of recovery and ceasing further enforcement activities. The IASB and FASB will be discussing the definition of "write-off" later in the week, but this meeting was to address user comments that they wanted information about assets still subject to recovery efforts after write-off.

The staff proposed expanding the original ED's disclosure requirement to provide information on an entity's write-off policy by incorporating discussion of whether written-off assets are still subject to enforcement activity and disclosing the nominal amount of written-off assets where collection is still being pursued. Additionally, recoveries of written-off amounts would be required to be shown in a separate line item in the reconciliation of changes in the allowance account.

Some Board members mentioned that providing qualitative information on the collection efforts was important to disclose, but that quantitative information should not be required. Ultimately, 10 Board members agreed to require of whether written-off assets are still subject to enforcement activity and disclosing the nominal amount of written-off assets where collection is still being pursued and 14 agreed to require recoveries in a separate line item in the reconciliation of changes in the allowance account.

Disclosures — Stress testing

ED/2009/12 proposed requiring information on stress testing when an entity performs this analysis for internal risk management purposes. Financial statement preparers and other comment letter respondents had several issues with this disclosure requirement including that it was only required for certain entities, it was difficult to isolate credit risk from other macroeconomic factors in stress test scenarios and the fact that requiring stress tests was the role of regulators rather than accounting standard setters. Financial statement users did support the disclosure requirement but stated it was the least important of the required disclosures.

Only one Board member expressed some level of support for retaining the stress testing disclosure requirement. The Board tentatively agreed to not require stress testing as part of the disclosure requirements.

Disclosures — Credit quality of financial assets

ED/2009/12 included a specific definition for the term "non-performing" assets as assets greater than 90 days past due and required a rollforward of changes in non-performing assets during the period.

The 'bad book' concept in the joint Supplement is based on management's credit risk management process rather than a specific bright-line such as 90 days past due. The Supplement also includes specific disclosure for the 'bad book' similar to those proposed for non-performing assets in ED/2009/12. However, because the 'bad book' concept does not have a specific requirement for transfers to the 'bad book' the staff recommended providing a disclosure for assets greater than 90 days past due for assets in the 'good book' (in case there are assets in this category that management has not identified as being managed through the 'bad book'). This requirement, along with the disclosures for the 'bad book' would provide users with comparable information to that originally proposed in ED/2009/12. The disclosure recommended by the staff would include information on 1) increases from loans becoming greater than 90 days past due during the period, 2) increases from acquisitions of loans already greater than 90 days past due, 3) decreases from recoveries of assets that were greater than 90 days past due but not included in the 'bad book', 4) renegotiations and 5) write-offs.

One Board member questioned the purpose of the staff recommendation and felt there was an inherent inconsistency in that the 'bad book' required disclosures were based on management's credit risk management while the proposed disclosure for 'good book' assets greater than 90 days past due is based on an arbitrary bright-line. Another Board member mentioned her concern with the 90 day bright-line.

One Board questioned the part of the proposal to include assets acquired greater than 90 days past due as he felt that the purchase price would include a significant discount for credit quality and therefore providing disclosure for these assets may be misleading.

The Board tentatively agreed with the recommendation to require disclosure for assets in the 'good book' greater than 90 days past due including information on 1) increases from loans becoming greater than 90 days past due during the period, 2) decreases from recoveries of assets that were greater than 90 days past due but not included in the 'bad book', 3) renegotiations and 4) write-offs. The Board agreed to hold off on any decisions for disclosure of purchased assets until purchased assets were discussed more broadly.

Disclosures — Vintage information

ED/2009/12 proposed specific disclosure of asset by year of origination and year of maturity. These disclosures were closely tied to the loss triangle disclosures which were replaced in the Supplement with information of backtesting.

Financial statement preparers had significant concerns with both the vintage information and loss triangle disclosures as they stated in open portfolios, credit risk is not managed on a vintage basis and therefore retaining and tracking this information would require systems modifications. Financial statement users were supportive of the disclosure proposals as they stated it helped in their analysis of credit quality for particular vintages and when underwriting standards had relaxed.

The staff noted these disclosures could provide relevant information in certain scenarios, such as mortgage loans, but would not provide meaningful information in other scenarios such as corporate debt or collateralised debt obligations where the underlying collateral pool comprises assets from various vintage periods.

Two of the three Board members representing the financial statement user community supported retaining the vintage disclosure in some form. One supported an approach that would limit the disclosure for vintage information to instances when it would be most useful to investors. The other requested that origination, provision and write-off information be tracked by vintage and questioned why entities would not have this information. The staff clarified that origination and write-off information could be tracked, but the provision was calculated at the portfolio level rather than the asset level and therefore an allocation of the provision to various vintages in the portfolio was not possible. However, the third Board member representing financial statement users acknowledged the difficulty in tracking vintage information for the provision and that providing origination information in isolation was not worth the costs and efforts preparers would incur in proving the information.

Eleven Board members tentatively agreed not to require the vintage information proposed in ED/2009/12.

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