Financial instruments – Amortised cost and impairment

Date recorded:

The IASB staff held an education session with the FASB and FASB staff to update them on the feedback received through the comment letter process and the Expert Advisory Panel (EAP). The information the IASB staff provided to the FASB was the same as that presented to the IASB during the 23 July 2010 Board meeting.

The staff summary of the comment letter feedback highlighted the following themes:

  • there was strong support for movement towards an expected loss impairment approach
  • the expected cash flow approach in the ED is too difficult to apply operationally
  • certain measurement principles (e.g., use of probability weighted averages in the estimate of expected cash flows) are too prescriptive
  • there is a lack of consideration for non-financial entities which have primarily non-interest bearing financial instruments
  • the presentation and disclosure requirements are too onerous and voluminous
  • the materiality consideration of the practical expedients negate the practicality and the expediency
  • concern over lack of convergence, and
  • desire to re-expose based on revisions to original proposals.

During the staff discussion of the results of the EAP , 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.

The education session quickly turned its focus to the process for redeliberations taken by the two Boards. Certain FASB Board members were highly critical of the IASB's decision to proceed with redeliberations and decision making, including already reconsidering areas where the Boards had diverging proposals, while the FASB exposure draft on financial instruments (including impairment) remains in the open comment period through 30 September 2010. The FASB Board members mentioned they receive feedback from their constituents that this project is the most critical joint project in which to reach a converged standard and that the IASB making fundamental decisions on the impairment model without input from either the FASB or FASB constituents impedes their ability to reach a converged solution.

The education session then moved to a discussion by the two Boards in which a better understanding of certain differences was identified, such as a fundamental difference exists in the definition of amortised cost under IFRS and U.S. GAAP.

The IASB staff then presented the FASB with the decision tree being utilised in the IASB redeliberation process. In discussing how to proceed going forward, one IASB Board member expressed his feeling that the education session had been fruitful and hoped that such efforts could continue even while the FASB is assessing the feedback it receives through its exposure draft. However, the IASB plans to continue its deliberations without adjusting or delaying their planned timeline.

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