Financial Instruments — Impairment

Date recorded:

Loan commitments and financial guarantee contracts

The Boards discussed whether to include within the scope of the proposed impairment model:

  • For the IASB,
    • loan commitments that are not accounted for at FVTPL, and
    • financial guarantee contracts to which IFRS 9 applies and that are not accounted for at FVTPL.
  • For the FASB,
    • loan commitments that are not accounted for at FVTPL, and
    • financial guarantee contracts that are not accounted for either at FVTPL or as an insurance contract*.

*The FASB staff indicated that the insurance contracts project team would be considering the issue of which insurance contracts fall within the scope of the insurance model (as opposed to the impairment model) at a future FASB only meeting given the interaction with current guidance in US GAAP.

The IASB and FASB staffs presented multiple recommendations regarding the scope and application of loan commitments and financial guarantee contracts within the impairment model as follows:

  • The proposed impairment model should apply to loan commitments and financial guarantee contracts to which IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies / that are not accounted for at FVTPL in accordance with US GAAP.
  • The proposed impairment model should apply to instruments that create a present legal obligation to extend credit. When estimating expected credit losses the maximum contractual period over which the entity is exposed to credit risk shall be considered.
  • The usage behaviour shall be estimated over the lifetime of a loan commitment when estimating expected lifetime losses.
  • The final requirements should state explicitly that expected credit losses of undrawn loan commitments or financial guarantee contracts should be reported separately as a liability.

Regarding the first recommendation (i.e., whether the impairment model should apply to loan commitments and financial guarantee contracts to which IAS 37 applies), one IASB member noted that he did not disagree with the staff recommendation, but he had concerns with both the IAS 37 model and the impairment model. He noted IAS 37 has its flaws given the “probable” threshold which provides the “wrong” answer for individual items but the “right” answer for portfolios. He also noted that IAS 37 produces peculiarities given that two credit instruments with the same economics are accounted for differently based on funding. However, he noted that IAS 37 was preferable in certain respects to the current impairment proposals in that it accounts for all of the cash flows associated with the asset. Specifically, IAS 37 requires recognition of a loss if the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it (per IAS 37.68). On the contrary, the impairment model does not take into account the expected benefits. Instead, it focuses on losses; thereby resulting in day 1 losses in the allowance for Bucket 1 which may not reflect economic reality. He concluded this summary by noting that neither answer was perfect, but he did not have a proposal as to how best to move forward.

However, when put to a vote, both Boards tentatively agreed with all of the recommendations as set forth by the staffs.

The IASB staff then presented multiple recommendations for IFRS reporting. Those recommendations included:

  • The discount rate to be applied to discounting the expected credit losses arising from a loan commitment or a financial guarantee contract shall be the rate that reflects:
    • current market assessments of the time value of money (i.e., risk free rate); and
    • the risks specific to the cash flows (but only if, and to the extent that, the risks are taken into account by adjusting the discount rate rather than by adjusting the cash shortfalls being discounted).
  • As part of the impairment project the accounting for revenue arising from loan commitments or financial guarantee contracts shall not be changed.

One IASB member questioned why discount rate application was considered an IASB only issue. The FASB staff indicated that its constituents had not expressed specific concerns regarding the need for explicit guidance on the discount rate to be applied. Therefore, the FASB staff was not proposing any additional guidance.

With no additional debate, the IASB tentatively agreed with the IASB only recommendations as set forth by the IASB staff.


The Boards discussed disclosures for the three-bucket impairment model being developed by the Boards. The staffs, providing a detailed analysis of its disclosure objectives (which was based on providing financial statement users with an understanding of how management applies the three-bucket impairment model), outlined recommendations for both quantitative and qualitative disclosures. In addition, the staffs developed proposed disclosures designed to enable users of financial statements to compare purchased credit-impaired assets (‘PCI’, i.e., those purchased with an explicit expectation of loss) to other assets. The staffs intend these disclosures as a complement to what currently exists in US GAAP and IFRSs, as the disclosures recommended as part of this meeting were intended to address the new elements of the impairment model; namely, the expected loss data and credit migration between the three buckets. However, both the IASB and FASB will be holding separate meetings to discuss the overall suite of proposed disclosures under IFRSs and US GAAP, respectively.

Disclosures recommended by the staffs are summarised as follows:

Expected Loss Objective Disclosures

Expected Loss Calculations

A discussion of the inputs and specific assumptions the entity factors into its expected loss calculations. Such discussion would include the basis of inputs (e.g., internal historical information or rating reports)


How the information above is developed and utilised in measuring expected losses. For example, the estimation techniques used

Transfer Criteria

A qualitative analysis that describes the indicators and information used to determine whether the transfer criteria has been satisfied

Collateral Disclosures

A description of collateral held as security and other credit enhancements and, by measurement objective (i.e., 12 months’ or lifetime expected credit losses), their financial effect (e.g., quantification of the extent to which collateral and other credit enhancements mitigate credit risk) in respect of the amount that best represents the maximum exposure to credit risk


Balances of fully collateralised financial assets


A discussion of the quality of collateral securing an entity’s financial assets


An explanation of any changes in quality of collateral, whether because of a general deterioration, a change in appraisal policies by the reporting entity, or some other reason

Credit Migration Objective Disclosures

Allowance Roll Forward Narrative Disclosures

A discussion of the changes in credit loss expectations and the reasons for those changes (e.g., loss severity, change in portfolio composition, change in volume of assets whether purchased or originated, significant event or conditions that are affecting the calculation of the allowance that were not expected when originally calculated)


A discussion of the changes in estimation techniques used and the reasons for the change


Reasons for a significant amount of write-offs


How assets are grouped for disclosure purposes, if necessary, including specific information on what credit characteristics are considered similar to enable grouping

Risk Disaggregation

A disaggregation of an entity’s financial assets measured under the impairment model into lower, moderate, and higher risk categories, for each measurement objective


A description of how the entity determines which financial assets fall into the lower, moderate, and higher risk categories

PCI Disclosures

A comparison of PCI to other financial assets subject to impairment accounting. The gross carrying amount, impairment allowance, contractually required amounts expected to be collected, and contractually required amounts not expected to be collected for purchased-credit impaired financial assets must be displayed, along with the carrying amount and allowance for purchased and originated non-credit impaired assets


For PCI financial assets, the amount recognised due to the effect of favourable changes in the lifetime expectations of cash flows not expected to be collected (i.e., the non-accretable difference)


How the favourable change has affected net income


To which accounts the favourable changes have been reclassified

Financial Asset Ending Balances

The balance of financial assets disaggregated by measurement objective and the allowance related to these financial assets


The balance of financial assets evaluated on an individual basis and for which impairment is measured with a measurement objective of lifetime expected credit losses and the allowance related to these financial assets

In considering the proposals set forth by the staffs:

Both Boards were supportive of proposed disclosures in the following areas:

    • Expected Loss Calculations, although several Board members commented that such disclosures should be entity-specific as opposed to allowing for the use of boilerplate disclosures.
    • Transfer Criteria
    • Allowance Roll Forward Narrative Disclosures
    • Financial Asset Ending Balances
  • Regarding the proposed collateral disclosures, many Board members believed the scope of collateral disclosures needed to be narrowed to introduce qualitative description of the collateral policy (however, the FASB noted that a qualitative description is already required in US GAAP). Further, Board members preferred that no specific disclosures were required in relation to financial assets in Bucket 1. Instead, disclosures would focus on financial assets which have moved to the lifetime measurement objective. Both Boards tentatively agreed with these counter-proposals.
  • Regarding proposed risk disaggregation disclosures, many IASB members expressed concern that the proposal for an entity to disaggregate its financial assets measured under the impairment model into lower, moderate and higher risk categories, for each measurement objective, would be costly and complex to implement and apply. However, other Board members noted that the banking industry is currently required to provide risk disaggregation information in many jurisdictions for regulatory purposes, and thus, they believed this information could be leveraged. Believing this information to be very useful to users, they preferred that the disclosures be amended such that entities are required to provide risk disaggregation information to the extent provided for regulatory purposes. However, if disaggregation information is not currently provided in accordance with regulatory requirements, the proposals set forth above should be applied. The IASB tentatively supported this counter-proposal and directed the staff to develop this principle in drafting.

FASB members noted that principles set forth in the proposed disclosures are consistent with those currently in US GAAP. As such, they tentatively supported the principles outlined in the proposals. They did acknowledge, however, that they would implement the principles of the proposed disclosure in a manner consistent with current US GAAP guidance, absent any ‘tweaks’ deemed necessary.

  • Regarding proposed purchased-credit impaired disclosures, Board members preferred to maintain the proposed objectives set forth in the staff’s proposals without prescribing any required format for such disclosures. This discussion followed from the staffs’ proposals being accompanied by a tabular disclosures complying with the requirements described in the staffs’ proposals.

Another Board member noted that the comparison of purchased-credit impairment to other financial assets subject to impairment accounting should be based on similar financial assets.

Both Boards tentatively agreed with the staff recommendations subject to the above amendments.

  • Both Boards were supportive of the proposed disclosures regarding financial asset ending balances. However, many Board members requested the inclusion of a rollforward of financial assets and the allowance by measurement category as part of the proposals. Some Board members questioned the need of a rollforward of the financial asset balance, but others thought it was needed to foreshadow risk. Ultimately, both Boards tentatively agreed to require a rollforward of financial assets and the allowance by measurement category as part of the proposals. However, they directed the staff to develop more fully this requirement (including avenues to make the requirement more cost effective for preparers) and conduct directed outreach on this proposal.

Finally, many Board members asked how the above disclosure requirements would apply to non-financial institutions. The staff noted that they intended to bring this issue back as a sweep issue.

Next steps

Subsequent to agenda topics, the FASB Chair discussed next steps as part of the FASB’s deliberation efforts. The FASB Chair indicated that in outreach it conducted with various constituents and stakeholders, concerns were expressed with the expected loss approach previously agreed to by the Boards. The concerns appear to be directed at application of the ‘Bucket 1’ measurement objective of expected losses relating to a loss event that is expected in the next 12 months. Some of the stakeholders expressed concern that, under the latest proposal, reserves for loan portfolios might not reflect the appropriate amount of risk (i.e., some stakeholders believed that the proposal would likely result in lower reserves for portions of loan portfolios). In addition, stakeholders raised questions about the proposed guidance for determining when financial assets should be transferred to ‘Bucket 2’, which requires an estimate of lifetime expected losses.

The FASB Chair then indicated that before issuing an exposure draft, the FASB plans to discuss at a future meeting several remaining topics, in conjunction with reviewing a summary of outreach conducted to date by the FASB staff on application guidance expected to supplement the current proposals. Accordingly, the FASB did not vote on the issuance of an exposure draft on impairment at this meeting.

The FASB Chair indicated that there was some ‘flexibility’ in the current schedule, and the FASB hoped that most of these topics could be discussed during the August meeting in order to avoid a substantial delay in issuance of an exposure draft.

She noted that the FASB still strongly desires a converged standard with the IASB on impairment; however, the FASB believes it is essential that the board addresses the questions that have been raised in the US before moving forward with an exposure draft so that the FASB can feel confident that the proposal would result in an improvement in financial reporting.

In response, the IASB Chair expressed frustration with the FASB’s decision and ended the meeting by saying “...we really have done our job very poorly” [if the Boards are unable to come to a conclusion after three attempts over a three year period].

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