Financial instruments: Impairment (including effective date of IFRS 9)

Date recorded:

At this meeting the staff asked the Board if they:

  • were satisfied that the due process requirements have been met for the IFRS 9 chapter on Impairment;
  • agreed that the chapter on impairment did not have to be re-exposed;
  • were satisfied that it had undertaken sufficient consultation and analysis to be able to begin the balloting process for impairment and whether any members proposed to dissent to the publication of the impairment chapter of IFRS 9.

All the Board members present at the meeting indicated that they were satisfied and agreed that the staff can start the balloting process. There were no indications of dissenting opinions on the impairment chapter. 

Mandatory effective date of IFRS 9

The IASB discussed the mandatory effective date that will apply to the completed IFRS 9 as a whole (i.e. classification and measurement, impairment and hedge accounting). The staff analysis focussed mainly on the period required to implement the expected credit loss impairment model as that is the phase that is expected to require the greatest amount of lead time for most entities.

The message in the comment letters has been clear and was supported with messages received during the IASB’s outreach activities that financial institutions need three years lead time from the date of the issuance of the final Standard.  The reason of this lead time included that entities would need to construct risk models, gather information not currently available, managing complexities with interaction with regulatory capital requirements and regulatory reforms.  Furthermore, respondents to the 2013 exposure draft on Insurance Contracts commented that the effective date of IFRS 9 and the new Insurance Contract Standard should be aligned. These respondents were concerned about the introduction of new accounting mismatches that may arise in the period between the application of IFRS 9 and the new Insurance Contract Standard.  However, the staff noted that the transition requirements proposed in the exposure draft for Insurance Contracts would go far in elevating such issues.  For example, entities would be allowed to redesignate financial assets measured under the fair value option and revoke designations of investments in equity at fair value through other comprehensive income on initial application of the insurance standard if these caused accounting mismatches.   

At the November 2013 meeting, the IASB tentatively decided to confirm that the mandatory effective date of IFRS 9 will be no earlier than annual periods beginning on or after 1 January 2017.  Given that respondents noted a three year lead time, some qualified this three year lead time as starting form when deliberations have been completed.  Given that the Board completed deliberations in January 2014, the staff identified two alternative mandatory effective dates:

  • 1 January 2017; or
  • 1 January 2018.

The main arguments for 1 January 2017 are

  • a 2017 effective date allows for current implementation projects to keep their momentum and funding;
  • regulators have indicated that the timely completion and implementation of an expected loss impairment model is of utmost importance;
  • IFRS 9 would be applicable to a wide range of entities and delaying the implementation just for insurers would be inappropriate;
  • the insurance project is still ongoing and a mandatory effective date is not set in stone yet.

The main arguments for 1 January 2018 are

  • the Board’s decisions are tentative until finalised and that implementation would only start once the requirements are issued, which means that the three year lead time would not be met if the effective date is before 2018;
  • it would provide the IASB more time to progress with the insurance project and would allow entities more clarity on what the final requirements might be for insurance contracts

During the meeting the Board members argued about different approaches and reasons for the two different alternatives.  One of the main arguments to emerge was to create some sort of exemption from applying IFRS 9 for entities that would be affected by insurance contract accounting.  The broad approaches were:

  • Exempt entities that are regulated insurance companies from applying IFRS 9 until the project on accounting for insurance contracts is completed.  This would result in some entities in a group structure applying IAS 39 and IFRS 9 resulting in group accounts with a mixed use of the two standards; or
  • Exempt entities that will be significantly affected by insurance contract accounting from applying IFRS 9 until the project on accounting for insurance contracts is complete. This would result in a group wide adoption of IFRS 9 (if not significantly affected) or a group-wide exemption (if significantly affected).

Both of these alternatives were met with some criticism from other Board members.  Exempting regulated insurance companies would not be a realistic alternative as some companies operate as a bank and insurance company in the same legal entity.  Hence, the problem would not be fixed taking this approach.  Secondly, exempting entities that will be significantly affected by insurance companies give rise to structuring opportunities and requires judgement around what is meant by ‘significant’.  One Board member quipped that this would be a great opportunity for a non-insurance company to go out and buy an insurance subsidiary.

Some of the Board members were sympathetic to the plight of insurance companies, but for these Board members IFRS 9 had a much wider application than just insurance companies, and it had been far too long since the credit crisis not to make IFRS 9 effective as soon as possible. 

Some also made the point that there were no guarantees that the insurance project would even be finished to allow an effective date of 1 January 2018.  In other words, even if IFRS 9 was only made effective from 1 January 2018, it might not coincide with the effective date of IFRS 4 (phase 2).

After taking all the arguments into account and considering the time it takes for endorsement, the Board tentatively decided to select an effective date of 1 January 2018 as the effective date for mandatory application of IFRS 9. 

Related Meeting Notes

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.