Financial instruments — Impairment (IASB only)

Date recorded:

The IASB continued discussion of its proposed ‘three-bucket’ impairment model in discussing the following topics:

  • Transitional requirements;
  • Due process considerations; and
  • Re-exposure, comment period and permission to draft

Transitional requirements

In November 2012, the IASB tentatively decided to modify the criteria for the recognition of lifetime expected losses (the lifetime loss criteria) in the proposed impairment model. Because the transition requirements tentatively decided on during the July 2012 meeting include consideration of the lifetime loss criteria, the staff presented updated requirements reflecting the Board’s most recent tentative decisions. Those requirements, summarised below, reflect the Board’s tentative decision to change the credit quality criterion:

if the credit quality at initial recognition is not used at the date of initial application, the transition provisions should require these financial assets to be evaluated only on the basis that the likelihood that contractual cash flows may not be collected is at least reasonably possible (i.e. on the basis of the credit quality criterion) of whether the credit quality is below “investment grade” at the date of initial application.

The Board’s previous tentative decision provided that entities who do not use the initial credit quality information for existing financial assets when applying the new impairment model should evaluate those assets using only the credit quality criterion. As a consequence of the clarifications to the lifetime loss criteria in November 2012, the staff’s proposed modifications are intended to ensure consistency with the modified lifetime loss criteria without fundamentally changing the transition requirement.

One Board member expressed concern that the IASB’s transition proposals would generally result in recognition of lifetime losses at transition (for financial assets below “investment grade”) given the absence of available credit quality information at initial application. He believed that entities may be incentivised, if the entity is well capitalised, to not seek credit quality information in order to recognise lifetime losses on day one and establish a ‘cookie jar’ reserve. Taking this view further, he noted a belief that retails loans would generally be subject to lifetime expected losses at transition given a lack of credit quality information even though the Board established a practical expedient based on delinquency at its November 2012 meeting (i.e., the Board tentatively decided in November 2012 that entities are permitted to consider delinquency information in assessing the need to recognise lifetime expected losses (in which a rebuttable presumption was proposed that the criterion for recognition of lifetime expected losses is met if an asset is 30 days past due)). Therefore, he suggested that for those entities assessing the need to recognise lifetime expected losses based on delinquency information, the proposals should require application of lifetime expected losses at transition if the asset is considered delinquent; and otherwise, a 12-month allowance should be required.

The staff believed that most entities would be incentivised to not recognise lifetime expected losses. They also noted a belief that the need to seek credit quality information was not meant to be a free choice on the part of the entity, but rather, was seen as a requirement unless such information requires undue cost or effort to obtain. However, they expressed support for the clarification regarding application of delinquency information when it serves as the basis for expected loss recognition.

When put to a vote, the Board tentatively supported the staff recommendation subject to the addition of an amendment regarding delinquency information as outlined above.

Due process considerations

The IASB Due Process Handbook (the Handbook) includes mandatory and non-mandatory due process steps to be undertaken before the publication of an exposure draft or the issue of a new IFRS or an amendment to existing IFRSs. Highlighting the steps that the Board has undertaken in development of the current impairment model, the IASB staff believed that the Board had complied with the requirements of the Handbook in the development of the model and sought confirmation from the Board that it too believed all necessary steps had been undertaken. Board members were satisfied that all necessary due process requirements had been met.

Re-exposure, comment period and permission to draft

The staff requested permission to publish a re-exposure draft of the impairment model, adopt a 120-day comment period for the re-exposure draft and begin the balloting process.

With little debate, the Board tentatively agreed with the staff recommendation to re-expose the current proposals given that the proposals differ significantly from previous model reiterations subject to comment.

In discussing the comment period of 120 days for the re-exposure draft, one Board member asked about the interaction between the comment period on the IASB’s proposed model as compared to the FASB’s proposed exposure draft. The staff noted the FASB intends to publish its proposals before the end of the calendar year with a comment period the later of 120 days or 30 April 2013. It is the IASB’s intention to publish its re-exposure draft by the end of February 2013. The IASB staff acknowledged that the difference in timing poses some difficulties in analysing constituent feedback collectively, but noted that it intends to continue to perform some joint outreach with the FASB staff.

With no additional debate, the Board tentatively decided to adopt a comment period of 120 days for the re-exposure draft consistent with the normal minimum comment period outlined in the IASB’s Handbook.

The Board also granted the staff permission to begin drafting the ballot draft.

The staff then asked whether any IASB members intended to dissent to the proposals.

One IASB member noted that he was uncertain whether he would dissent. He acknowledged certain positive aspects of the proposals, including a belief that the proposals were superior to those proposed by the FASB. However, he expressed both conceptual and practical concerns with the IASB’s proposals, including a belief that the 12-month allowance was conceptually flawed, practical concerns with applying the criterion for recognition of lifetime expected losses and an aversion for the free choice in applying the simplified approach for trade and lease receivables.

Other Board members, speaking to the conceptual flaws with the 12-month allowance and the fact that convergence with the FASB was not achieved, requested that the Basis for Conclusions to the re-exposure draft clearly articulate the reasons the IASB tentatively decided on its proposed model (following assessment of many different model iterations) despite some conceptual flaws, while also summarising circumstances in which the IASB and FASB’s models yield similar and different results.

The IASB staff noted an intention to take this feedback on-board in drafting.

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