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Financial instruments — Impairment (IASB only)

Date recorded:

The IASB held an IASB only session to consider the feedback received from constituents on its “three-bucket model”. The general framework for the three-bucket model was developed jointly with the FASB. However, following the completion of the joint deliberations in July, the FASB decided to explore an alternative model in response to the feedback received from US constituents.

The staff presented the Board with an agenda paper summarising the detailed feedback received and highlighted the key messages as being:

  • The majority of respondents favoured a model that distinguishes assets that have deteriorated from those that have not, but as additional costs and complexity arise in making this distinction, the Board needed to ensure that the benefits of this information outweighed the cost of obtaining it.
  • The criteria used in determining when lifetime losses are measured needs to be clarified, particularly what is meant by “more than insignificant deterioration in credit quality” and when it is considered “reasonably possible that contractual cash flows will not be paid in full”.

The staff analysis also noted the practical issues of applying the transfer criteria to retail loans, resulting in requests from some respondents for the Board to consider and clarify the relevance of delinquency information in making this assessment. In the absence of a converged solution, some respondents stated a preference for reconsidering the supplementary document or the original IASB Exposure Draft.

Based on the feedback received, the staff suggested the Board consider the following factors in clarifying the transfer criteria:

  1. Whether the deterioration criteria should be based on a percentage (or multiple) increase in the probability of default or an absolute (or fixed) increase in the probability of default;
  2. The term structure of credit and whether a cumulative lifetime probability is used in making the assessment of whether lifetime losses should be recognised;
  3. The relationship between the two criteria and achieving the right balance between the two; and
  4. Striking an appropriate balance between the benefits and costs of making the distinction.

Most Board members voiced support for the continuing development of the three-bucket model. The need to refine and clarify the transfer criteria was widely accepted. A number of Board members raised concerns relating to absolute measures of credit quality in countries with less developed corporate bond markets. One Board member suggested that a set of indicators would me more appropriate than a single measure. This was echoed by another who said that the application of the criteria would need to differ between retail and commercial lending portfolios as well as high and low credit quality assets.

One Board member requested that the outreach originally received on the time proportional approach set out in the supplementary document be recirculated, stressing that this was with the aim of being able to justify why the three-bucket model is being developed in preference to the time proportional approach rather than with the aim of going back to this model. Other Board members stressed the importance of understanding the FASB model before finalising an Exposure Draft on the three-bucket model. However, some Board members, highlighting their preference for the three-bucket model, noted that a model which recognises full lifetime losses on day one (akin to the FASB model) is open to abuse given the high degree of subjectivity involved in estimating lifetime losses on day one. Other Board members acknowledged that subjectivity in estimating lifetime losses on day one, but highlighted that all expected loss models require a high degree of judgment in the estimation of the losses.

The staff will consider feedback during today’s meeting in the continued development of the three-bucket model.

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