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Financial instruments — Impairment

Date recorded:

Paper 5A – Loan Commitment and Financial Guarantees

The IASB discussed the feedback received during outreach, including the fieldwork, and comment period on the requirements to estimate the expected credit losses on loan commitments and on financial guarantee contracts that are within the scope of the exposure draft. In particular the IASB discussed:

  • the period over which to estimate the usage behaviour; and
  • the discount rate to be used when measuring expected credit losses on revolving loan commitments.

The staff recommended that the board reconfirm the proposals in the exposure draft for loan commitments and guarantee contracts in general. However, the staff recommended that for revolving credit facilities where there is a present obligation to extend credit:

  • the expected credit loss should be estimated over the behavioural life; and
  • the behavioural life should represent the period over which an entity is exposed to credit risk and that faithfully reflects the economics of the transaction. In determining the behavioural life for revolving credit facilities, an entity could consider factors such as:
    • historic information and experience about the period in which the entity expects the facility to remain open;
    • the behaviour patterns of the customers as well as the entity itself; or
    • the period over which the balance is repaid.

One Board member wanted the staff recommendation to be based on a principle rather than a focused solution for revolving facilities. The board made a decision on the staff recommendation, however, they also decided to discuss at a future meeting whether the staff recommendation could be applied more broadly.

The Board voted as follows:

  • Expected credit losses, including expected credit losses on the undrawn facility, should be estimated for the period over which an entity is exposed to credit risk and over which future drawdowns cannot be avoided.
    Thirteen IASB members agreed with this decision. One IASB member was not present.
  • Expected credit losses on the undrawn facility should be discounted using the same effective interest rate, or an approximation thereof, used to discount the expected credit losses on the drawn facility.
    Fifteen IASB members agreed with this decision. One IASB member was not present.
  • The provision for the expected credit losses on the undrawn facility should be presented together with the loss allowance for expected credit losses on the drawn facility if an entity cannot separately identify the expected credit losses associated with the undrawn facility.
    Thirteen IASB members agreed with this decision. One IASB member was not present.

 

Paper 5B – Financial assets measured at FVOCI

The IASB discussed the feedback received from respondents on the recognition of expected credit losses for financial assets measured at FVOCI. In particular, the IASB considered whether to introduce a practical expedient for these financial assets (i.e. relief from applying 12-month expected credit losses). The IASB also discussed some clarifications on the proposals to enhance the application.

The staff argued that because the collection of contractual cash flows is as important for financial assets measured at FVOCI as for financial assets measured at amortised cost, the information in profit or loss should be the same as for financial assets measured at amortised cost. By implication, the information about the non-collectability of those contractual cash flows is equally relevant, i.e. expected credit losses should be recognised in the same way for both financial assets measured at FVOCI and those that are measured at amortised cost.

Consequently the staff did not recommend relief from the 12-month expected loss criteria for financial assets at FVOCI in stage 1 of the proposed model. The staff also recommended that the final standard clarifies that expected credit losses reflect management’s expectations of credit risk rather than the market’s assessment of credit risk and acknowledge that market information is a relevant consideration for management in making that assessment.

One board member raised concerns that he believed a financial asset should be impaired if market information has been showing a prolonged decline in fair value. In other words, this board member wanted to apply an approach similar to the impairment model in IAS 39 Financial Instruments: Recognition and Measurement as we have it today for instruments classified as available for sale (AFS). The staff and the other board members immediately questioned this board members understanding of the proposals. They all made it clear that market information would be considered, but that this is not the same model as for AFS in IAS 39. The expected loss model would not allow preparers to completely ignore market information but that would be a measurement question where the board has already decided that preparers should look at all available information to calculate expected credit losses.

Fourteen IASB members agreed with this decision. One IASB member was not present.

 

Paper 5C – Interest Revenue calculation and presentation

The IASB discussed responses received on the proposed requirements. It considered whether the interest revenue calculation should change in some circumstances, on what basis the calculation should change and for what population of assets it should change. The IASB also considered whether the recognition of interest revenue should be symmetrical, in line with the general model proposed in the exposure draft.

The staff suggested that net interest remains the better reflection of the economic yield. The staff recommended confirming the proposals in the exposure draft.

Fifteen IASB members agreed with this decision. One IASB member was not present.

 

Paper 5D – Purchased and originated credit-impaired financial assets

The IASB discussed the responses received on the proposals to financial assets that have the objective evidence of impairment on initial recognition (referred to as purchased or originated credit-impaired). The IASB also considered whether to add additional guidance for originated credit-impaired financial assets.

The staff recommended that the IASB reconfirm the position in the exposure draft but that more guidance be placed in the final standard to clarify the position.

Fourteen IASB members agreed with this decision. One IASB members was not present.

 

Paper 5E – Simplified approach for trade receivables and lease receivables

The IASB analysed responses received on the simplified approach for trade and lease receivables.

The staff recommended that the IASB should confirm that:

  • there is an accounting policy choice to always measure the loss allowance for trade receivables that constitute a financing transaction in accordance with IAS 18 Revenue (or have a significant financing component in accordance with the revenue recognition project) at an amount equal to lifetime expected credit losses, and to also make such a choice for lease receivables;
  • for trade receivables that do not constitute a financing transaction (i.e., that do not have a significant financing component in accordance with the revenue recognition project), the loss allowance shall always be measured at an amount equal to lifetime expected credit losses; and
  • trade receivables that do not constitute a financing transaction (i.e., that do not have a significant financing component in accordance with the revenue recognition project) shall be measured at the transaction price on initial recognition.

The IASB also noted that the applicability of accounting policy choice for lease receivables to different populations of those receivables would be further considered when the Leases project is finalised.

Thirteen IASB members agreed with this decision. One IASB member was not present.

 

Paper 5F – Mandatory effective date of IFRS 9

Following its discussion in July 2013, the IASB decided to defer the mandatory effective date and consider the minimum time period that would be appropriate for the implementation of the proposed impairment requirements, in order to determine the earliest date for the mandatory effective date of IFRS 9 Financial Instruments.

However, to assist entities in their planning, the IASB tentatively decided that the mandatory effective date of IFRS 9 will be no earlier than annual periods beginning on or after 1 January 2017.

Fourteen IASB members agreed with this decision. One IASB member was not present.

Related Meeting Notes


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