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Financial instruments – Amortised cost and impairment

Date recorded:

The Board held an educational session related to decoupling and allocation of subsequent revisions of expected losses and related mechanics of the calculation. As this was an educational session only, no decisions were made.

The Board considered decoupled' approaches to allocate expected loss estimates (linear and non-linear as well as based both on discounted and undiscounted amounts).

The Board also considered the mechanics of the catch-up adjustment — both related to partial catch-up (i.e. recognition of changes to estimates of expected losses to the extent that reflects its age) and no catch-up (i.e. recognition of changes to estimates of expected losses only over the current and future periods, with no consideration to the amount of time that has passed in the portfolio).

The Board focused its discussion mainly on the distinction between the good book and the bad book concepts as well as question when to transfer exposures between good book and bad book as well as how much to transfer between good book and bad book. For the Board this issue represented the accounting question when to recognise the full expected losses of the loan as from the discussion it became clear that the Board favours full catch-up for the bad book and partial or no catch-up method for the good book.

Several Board members posed the question how to define the moment when to transfer between the good book and the bad book and suggested a range of criteria, some of them similar to the IAS 39 loss event identification criteria. A few Board members expressed their concerns that additional clarity is needed when the transfer should be recorded as the business practice around bad book and good book is very vague. They argued that the actual management practice within the industry is not necessarily comparable. The staff clarified that the issue of distinguishing between good book and bad book will be subject of the main October Board meeting. Some Board members observed that the transfer between good book and bad book has a very significant effect on reported profit or loss and therefore should be verifiable. They also observed that these transfers created the largest volatility of the profit or loss in the illustrative examples discussed.

Some Board members expressed their concerns about the economic meaning of the reported numbers under the catch-up approaches. They noted that under the proposals in the exposure draft, the balance reported on the balance sheet was the present value of future expected cash flows, but as you move towards a partial or no catch-up model, it is more difficult to interpret what the amount reported in the balance sheet as well as the balance reported in the statement of comprehensive income represents. The Board asked the staff to provide additional analysis on the issue for the following meeting.

Finally, one Board member also asked the staff to consider in its analysis regulatory requirements related to reporting good book and bad book portfolios.

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