Financial instruments — Impairment

Date recorded:

Loan Commitments and Financial Guarantee Contracts

This Agenda Paper summarises the discussions to date. No decisions were made.

Impairment Transition requirements

The exposure draft proposed that requirements should be applied retrospectively on initial application, except when it is not possible to determine (without undue cost and effort) whether the credit risk of a financial instrument has increased significantly since initial recognition.  When it is not possible to make such a determination, the amount of the allowance is based on the credit risk at each reporting date for the remaining life of the financial instrument.  Consequently, a loss allowance at an amount equal to the lifetime expected credit losses should be recognised until the financial instrument is derecognised, unless the financial instrument has a low credit risk at a reporting date.  However, this does not apply for financial instruments whose past-due status is used to assess changes in credit risk, because it is assumed that the information will be available to make the assessment. 

The majority of respondents supported the transition requirements. Some requested that the IASB consider more practical ways to assess whether there has been a significant increase in credit risk at the date of transition. This was to address the concern that the proposals as drafted would result in all instruments that are not ‘low credit risk’ and for which the entity does not have access to information about the initial credit risk to be measured at lifetime expected credit losses.

The vast majority of respondents supported retrospective application of the proposals without requiring the restatement of comparatives.

The staff recommends that the IASB confirm that at the date of transition entities may apply:

  • The low credit risk criteria to identify instruments for which the credit risk has not significantly increased; and
  • The rebuttable presumption for contractual payments that are more than 30 days past-due to identify instruments that experienced significant increases in credit risk

Furthermore, the staff recommended that the IASB include a more practical way to determine significant increases in credit risk which is to consider the credit risk of the asset at reporting date and compare to criteria on origination of the financial asset type. This is consistent with the decision taken in October 2013 where the IASB decided that the assessment of significant increases in credit risk could be implemented more simply by establishing the initial maximum credit risk for a particular portfolio (by product type and/or region) (the 'origination' credit risk) and then comparing the credit risk of financial instruments in that portfolio at the reporting date with that origination credit risk.

For the remainder of instruments the staff recommended to clarify that the entity should use the best available information without undue cost or effort to obtain or approximate the credit risk on initial recognition. The entity will then use this information to determine if the instruments experienced significant increases in credit risk.

If the entity is not able to determine or approximate the credit risk on initial recognition, the entity should measure the allowance as the lifetime expected credit losses until the financial instrument is derecognised.

One Board member raised concerns with the choice that the staff seemed to be introducing with their recommended transition requirements. He stated that he believed entities should always use all relevant information that is available and should not focus solely on 30 days past-due as a means for determining whether there has been a significant increase in credit risk for a particular financial instrument.

The staff noted that the intention with their proposal is to link the 30 day past-due rebuttable presumption with the transition requirements. The intention will always be that an entity look at all available information to determine whether credit risk has significantly increased or not. They did express that they will ‘clean up’ the drafting before they ballot the final proposals.

The Board supported the staff recommendation subject to drafting concerns being addressed.

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