Financial instruments – Impairment

Date recorded:

The IASB concluded its redeliberations on the clarifications and enhancements to the proposals in the Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses ('the Exposure Draft').

At this meeting, the IASB considered the proposed presentation and disclosure requirements in the Exposure Draft.

Paper 5A: Presentation and Disclosure

The IASB discussed the feedback received on the proposed presentation and disclosure requirements, and considered whether any changes to the requirements should be made.


A large number of respondents opposed the requirement for the reconciliation of the gross carrying amount for financial assets. The primary reason was that such a reconciliation is extremely onerous to produce and therefore very costly.

Respondents noted that the movement of the gross carrying amount is not readily available as it is not used for current credit risk management purposes (the carrying amount is a financial reporting number whereas credit risk managers focus on credit exposures) and cited the following operational difficulties:

  1. Credit risk systems do not contain cash receipt information. Therefore a significant amount of resources will need to be invested in order to develop new systems to produce the flow information solely for disclosure purposes; and
  2. Producing the reconciliation would require ECL to be calculated and changes in credit risk tracked at an individual exposure level. Respondents pointed out that the ED specifically permit ECL to be estimated and significant increases in credit risk assessed on a portfolio/collective basis.

One Board member was conscious about the fact that the more aggregated the information was, the less meaningful it would be. He was also concerned that the aggregation would not focus on the right type of information for it to be relevant to users if the Board did not require a detailed full disclosure.

However, the IASB tentatively confirmed the proposals in the Exposure Draft to require a reconciliation between the opening balance to the closing balance of the loss allowance.

The IASB tentatively decided to retain the requirement to provide a reconciliation between the opening balance and closing balance of the gross carrying amount of financial assets. However, the IASB also tentatively decided to clarify that the objective of the reconciliation is to provide information only about the key drivers for changes in the gross carrying amount to the extent that the changes relate to changes in the loss allowance during the period.

Sixteen IASB members agreed with this decision.


A number of respondents expressed concern about the operational difficulty of providing quantitative information about collateral, and stated that the proposed disclosure requirements should generally be more qualitative in nature and take into consideration the wider range of credit risk mitigation factors. These respondents considered the current collateral requirements in IFRS 7 Financial Instruments: Disclosures, supplemented by the proposed requirement in paragraph 40(a) of the ED to provide the most relevant and useful information.

Some respondents commented that the proposed requirement in paragraph 40(b) would require financial assets to be tracked on an individual basis to identify those assets that are fully collateralised and have an ECL of zero, because they could be managed on a collective basis with other financial assets that are not fully collateralised.

Respondents also commented that the requirement in paragraph 40(c) would require them to perform their lifetime ECL calculations twice—firstly with the collateral proceeds included in the cash flows, and secondly with those proceeds excluded—to determine the extent to which collateral reduces the severity of the ECL. They viewed this as being burdensome.

The IASB tentatively confirmed the proposals in the Exposure Draft for disclosures about collateral or other credit enhancements, subject to clarifications that :

  1. Qualitative information should be disclosed about how collateral and other credit enhancements have been incorporated into the measurement of expected credit losses on all financial instruments; and
  2. Quantitative information about the extent to which collateral or other credit enhancements affects the expected credit loss allowance (or provision) does not require information about the fair value of collateral to be provided.

Sixteen IASB members agreed with this decision.

Other disclosures

There have been some of the disclosure requirements that the IASB did not discuss in great detail. The IASB tentatively confirmed these disclosures as proposed in the Exposure Draft subject to the following modifications and clarifications:

Disclosure objectives

  1. Enhance the objectives by expanding them to emphasise that the information provided should enable a user of the financial statements to understand:
    1. How an entity manages credit risk in the context of an expected credit loss impairment model;
    2. The methods, assumptions and information used to estimate expected credit losses;
    3. An entity’s credit risk profile (the credit risk inherent in the financial instruments), including significant credit concentrations; and
    4. Changes, and the reasons for the changes, in the estimate of expected credit losses during the period.

Qualitative disclosures

  1. No longer require the discount rate disclosures concerning the use of the effective interest rate or an approximation thereof included in paragraph 39 (c) of the Exposure Draft.
  2. Include an explanation of the policy for the modification of financial instruments, including how an entity assesses that the credit risk of modified financial assets is no longer considered to be ‘significantly increased’ as compared to what it was at initial recognition.
  3. Following the September 2013 tentative decision to emphasise that macroeconomic information need to be considered when assessing whether there has been a significant increase in credit risk, include an explanation of how such information has been incorporated in the estimates of expected credit losses.

Quantitative disclosures

  1. Modification disclosures:
    1. Only require the disclosure of the gross carrying amount of financial assets that were previously modified and for which the measurement of the loss allowance changes from lifetime to 12-month expected credit losses during the period. (paragraph 38(a) in the ED); and
    2. Clarify the requirement in paragraph 38(b) of the ED to refer to the deterioration rate (ie the percentage) of financial assets previously disclosed in accordance with paragraph 38(a) for which credit risk has subsequently increased significantly, resulting in the measurement of the loss allowance reverting to lifetime expected credit losses.
  2. Write-off policy disclosures:
    1. Clarify that the term ‘nominal amount’ refers to the contractual amount outstanding; and
    2. Clarify that the requirement in paragraph 37 of the ED to disclose the nominal amount of assets subject to enforcement activity only applies to financial assets that have been written-off during the period, while narrative information is provided about financial assets previously written-off but still subject to enforcement activity.
  3. Credit risk disaggregation disclosures:
    1. Modify the requirement in paragraph 44 of the ED to permit the use of an ageing analysis for financial assets for which delinquency information is the only borrower-specific information available to assess significant increases in credit risk; and
    2. Delete the requirement in paragraph 44 of the ED that an entity should disaggregate its financial instruments across at least three credit risk rating grades to understand its exposure to credit risk, but instead require credit risk disaggregation to be aligned with how credit risk is managed internally and that a consistent approach be applied over time.

Sixteen IASB members agreed with these modifications and clarifications.

Related Meeting Notes

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