Comment letter analysis

The staff presented the Board with the analysis of comment letters on the Exposure draft ED/2009/12 Financial Instruments: Amortised Cost and Impairment. The Board did neither discuss the issues in detail nor did it take any decisions during this meeting. The Board will start the process of re-deliberations on one of the following meetings.

Based on the analysis, most constituents supported the move towards expected loss model for impairment. Nonetheless, some concerns were expressed over the possibilities for earnings management. Some Board members noted that a proposed disclosure package should alleviate these concerns. The Board also briefly discussed the concerns expressed over pro-cyclicality of the proposals and noted that accounting should provide a true and fair view of the situation at the year end and thus would reflect the effects of the cycle. In the view of some Board members that would not mean that the proposals are necessarily pro-cyclical.

Some constituents suggested that the wording of the ED is unclear whether the approach requires considering future expectations when estimating expected cash flows. The Board members noted that they do not see much difference between the objectives of the proposed IASB and FASB approaches. Nonetheless, they admitted that neither of the proposals is expressed clearly and thus the final guidance is likely to be in the middle between these proposals.

The constituents raised some concerns over operationality of the proposal and referred to the work of the EAP on Impairment in areas of open portfolios, lack of historical data, EIR calculation and tracking of losses and related requirement on maintaining of data.

Further concerns were expressed over the proposed catch-up adjustment (changes in estimates of expected losses to be recognised immediately in profit or loss), its consistency with the overall model as well operational challenges. The Boards also noted that concerns were expressed over the probability weighted average method for calculating expected losses (similar to concerns over probability weighted methods expressed in other projects, e.g. proposed revisions to IAS 37).

Finally, the staff noted that constituents expressed also concerns over the practical expedients, presentation and disclosure requirement that were perceived onerous and application of the proposals for non-financial institutions and non-interest bearing financial instruments.

Commenting on the due process, many constituents stated their concerns related to the status of the EAP work and the possibility to comment on the final standard arising from the EAP recommendations and Board re-deliberations.

Summary of work of the Expert Advisory Panel (EAP)

The staff presented the Board with the summary of deliberations of the EAP prepared by the participating Board members and the staff. No decisions were taken at this meeting. The staff noted that the three most important issues for simplifications were:

• Use of estimated lifetime expected loss
• Decoupling of the contractual EIR calculation and expected losses calculation (e.g. by annuity approach or building block approach)
• Application of the guidance to open portfolios through using several possible approaches how to apply the guidance to 'good book' and 'bad book' portfolios.