Agenda Paper summaries

There are three agenda papers prepared for the February Board meeting where the findings from the external editorial review of a draft of IFRS 17 Insurance Contracts (draft IFRS 17) will be addressed.

Paper 2A considers whether to amend the requirements in draft IFRS 17 on changes to the carrying amount of the contractual service margin (CSM). Paper 2B discusses a narrow exemption to the requirements to group insurance contracts when a regulation or law constrains an entity from fully pricing the insurance risks transferred based on the characteristics of each policyholder. Paper 2C summarises the findings of the external review and identifies other minor issues together with the Staff’s proposed response.

Changes to the CSM (2A)

The Staff recommends that for contracts measured under the general model (i) all changes in estimates of the present value of future cash flows arising from non-financial risks (other than those arising from incurred claims), including those that are directly caused by experience adjustments, are adjusted against the CSM, and (ii) the amount of the CSM recognised in profit or loss is determined by allocating the carrying amount of the CSM to coverage units after all other adjustments have been made to the CSM at the start of the period (this is the only recommendation that would not be a change from draft IFRS 17). The Staff further recommends that the definition of an experience adjustment should be amended to exclude any investment components from experience adjustments arising from differences between (i) expected incurred claims and expenses and (ii) actual incurred claims and expenses. The final Staff recommendation is that for contracts measured under the variable fee approach, all changes in estimates of the present value of future cash flows  that do not relate to the underlying items should adjust the CSM (other than those relating to incurred claims).

Narrow exemption for the grouping of regulatory-affected pricing of insurance contracts (2B)

If an exemption for grouping contracts is provided, the Staff recommends that it should apply only to contracts that would fall into different groups because law or regulation constrains the entity’s practical ability to set a different price or a different level of benefits for policyholders with different characteristics.

Responding to the external editorial review (2C)

There are 14 issues raised by both the Board members and the external reviewers that have resulted in the Staff proposing a change in the text of draft IFRS 17, and 15 clarifications to the text of draft IFRS 17 that the Staff proposes in the light of comments received. The Staff plans to ask a general question as to whether the Board agrees with the Staff proposals with individual issues being discussed on request only. The paper includes nine further items for which the Staff proposes to take no action because the Board has already considered and decided on these issues.

Next steps

The Staff will continue with the drafting process, reflecting the decisions made at this meeting.

The Staff expects to issue IFRS 17 in the first half of 2017.

Financial Instruments with Characteristics of Equity research project - Agenda paper 5

The purpose of this session is to continue discussions on the Financial Instruments with Characteristics of Equity (FICE) project. The staff will present the following agenda papers:

• (a) Summary of discussions to date - Agenda paper 5A
• (b) Contractual terms – Agenda paper 5B
• (c) Accounting within equity – Agenda paper 5C

The Board will be asked to comment on the staff analysis and their recommendations.

Financial Instruments with Characteristics of Equity research project- Summary of discussions to date- Agenda paper 5A

Recap

The research phase of this project involves evaluating potential ways to improve the classification of liabilities and equity, and the related presentation and disclosure requirements.

The Board has explored the features to distinguish liabilities and equity: (i) the type of economic resources required to settle the claim; (ii) the timing of the transfer; (iii) the amount required to be transferred; and (iv) the priority of the claim relative to other claims.

The Board has been developing an approach (labelled Gamma, see discussion in February 2016), which distinguishes claims based on a combination of these features and would lead to outcomes broadly aligned with IAS 32. In December 2016, the Board discussed how the Gamma approach would apply to classifying derivatives whose classification under IAS 32 has been challenging in practice, focusing on whether derivatives with certain features would meet the ‘dependent solely on the residual amount’ criterion.

Appendix A summarises three approaches and Appendix B summarises classification outcomes for some simple instruments under the proposed approaches.

Financial Instruments with Characteristics of Equity research project – Contractual terms - Agenda paper 5B

Background

This paper explores whether rights and obligations arising from non-contractual terms (e.g. those arising from law) should be taken into account when classifying a financial instrument as equity or liability under the Gamma approach. The Staff analysed two instruments, the rights and obligations of which are created or affected by law: 1) mandatory tender offers (MTO) imposed by law and 2) bonds that are contingently convertible to ordinary shares as a result of regulatory requirements. The Staff looked at whether limiting the liability/equity classification assessment to contractual terms only would result in consistent accounting for items with similar economic consequences.

Staff analysis

MTOs

MTOs are similar to written put options on NCIs (NCI puts), as both instruments give the NCIs the right to decide whether or not to sell their shares to the entity. For the NCI puts, IAS 32 requires an entity to recognise a gross liability at the present value of the amount payable upon exercise of the option. In contrast, for the MTO, if the entity’s obligation under the law to offer repurchase of the NCIs is not considered in classifying the claim, no gross liability would be recognised (as it would be outside the scope of IAS 32 due to its being a legal obligation, and outside the scope of IAS 37 because the MTO is executory in nature. Furthermore, IAS 37 is not designed to address the classification of equity and liabilities). Accordingly, this would lead to instruments with similar economic consequences being accounted for differently.

Contingently convertible bonds

If the legal conversion option is not taken into account, the convertible bond would be classified as a liability in its entirety (assuming no other contractual equity features). The Staff believes that not considering the legal requirements would be consistent with IFRS 9’s requirements on the asset-side classification. This is because IFRS 9 contains an example illustrating that the effect of regulation should not be considered when assessing whether the instrument’s cash flows meet the SPPI condition.

The Staff emphasises throughout the paper that the financial instrument accounting requirements contained in IFRS literature are premised on contractual rights and obligations (except for IFRIC 2 which relates to a narrow-scope fact pattern). In view of the inconsistency noted above in relation to MTOs, the Staff considered, but decided against, the alternative of considering rights and obligations that arise from law as equivalent to contractual terms. This is because this would require a fundamental change to financial instruments accounting (including recognition, reclassification and derecognition), which is beyond the original intention of the FICE project of addressing the distinction between liabilities and equity in IAS 32. 

Staff recommendation

The Staff recommends that:

• (a) the Gamma approach be applied only to the contractual terms of a financial instrument;
• (b) the Board not reconsider IFRIC 2 given that the Staff is not aware of any challenges with its application; and
• (c) the Board consider how to address the accounting for MTOs based on feedback to be received on the forthcoming discussion paper, including potential disclosure requirements.

Financial Instruments with Characteristics of Equity research project – Accounting within equity - Agenda paper 5C

Background

This paper contains examples illustrating the accounting under the Gamma approach for equity components that arise from (1) convertible bonds and (2) written put options, using journal entries and the statement of changes in equity. The examples also illustrate the proposed approach of attributing profit or loss and other comprehensive income to derivative equity instruments.

Symmetric prepayment options – Due process steps - Agenda paper 3

Background

At its January 2017 meeting, the Board tentatively decided to propose a narrow-scope amendment to IFRS 9 so that a prepayable financial asset would be eligible to be measured at amortised cost (or at FVTOCI subject to the business model condition) if certain criteria are met.

In view of the narrowness of the scope of the proposed amendment and the urgency to resolve the issue to meet the proposed 1 January 2018 effective date deadline (set to align with that of IFRS 9 in order to avoid preparers having to apply fair value accounting to financial assets containing such prepayment options and then having to change back to amortised cost once the proposed amendments become effective), the Staff has asked for, and has obtained, approval from the Due Process Oversight Committee to reduce the normal 120-day comment period to 30 days.

Staff recommendation

The Staff recommends a 30-day comment period for the proposed amendments, and further seeks the Board’s permission to ballot.

Post-implementation Review of IFRS 13 Fair Value Measurement — Due process steps followed during Phase 1 of the PIR — Agenda paper 7

In its January 2017 meeting, the Board tentatively agreed to proceed with Phase 2 of the post-implementation review (PIR) of IFRS 13, including the publication of a request for information (RFI) on four core issues identified from Phase 1 of the PIR.

The Staff plans to share the draft RFI document with the Board in March and to publish the completed RFI in May 2017.

Staff recommendation

The Staff recommended a 120-day comment period for the RFI.

Discussion

The Board unanimously approved the recommendation with no discussion.

Definition of a business - Summary of the comments received - Agenda paper 13

Background

This paper summarises the feedback received on the proposed amendments to the definition of a business included in the exposure draft ED/2016/1 Definition of a Business and Accounting for Previously Held Interests.

Summary of feedback received

Minimum requirements to be a business

Most respondents agreed with the proposed clarification that for a set of assets and activities to be a business, it must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs. A couple of respondents observed that it is not clear which inputs and processes should be acquired in order to constitute a business, and that the minimum elements of a business should be expanded to include non-readily available inputs that are required to contribute to the creation of outputs.

Market participant capable of replacing missing elements

Most respondents agreed with the proposal to remove the statement that a set of activities and assets is a business if market participants can replace the missing elements and continue to produce outputs.

Revised definition of output

Most respondents agreed with the proposal to narrow the definition of output to focus on goods and services provided to customers, investment income or other revenues. A few respondents asked for clarification of the term ‘other revenues’ as they believed that this term can be broadly interpreted thus giving rise to diversity in practice.

Assessment of concentration of fair value

Most respondents agreed with the proposal that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set of activities and assets acquired does not constitute a business.

Nevertheless, many respondents were concerned with the proposal to use the above assessment as a ‘screening test’, i.e. if the above condition is met, it would be inappropriate to assess further whether the acquired set of activities and assets is a business. These respondents were concerned that the screening tests may result in inappropriate conclusions in certain circumstances. Instead of characterising the assessment as a screening test, the respondents proposed changing it into an indicator, a rebuttable presumption, or an optional test.

In addition, some respondents requested further guidance on whether, and how, some assets (e.g. goodwill and deferred tax assets) and liabilities (e.g. deferred tax liabilities), as well as bargain purchase gains, should be considered in performing the proposed screening test, in terms of determining the fair value of the gross assets acquired.

Furthermore, some respondents requested additional guidance on determining when it is appropriate to combine assets into a single identifiable asset (e.g. acquisition of a leasehold land and a building attached to that land) and what would be considered ‘similar’ for the purposes of the proposed screening test.

Evaluating whether an acquired process is substantive

Many respondents expressed concerns or requested further clarifications on the proposed guidance on identifying a substantive process, including the guidance on acquired outsourcing agreements. They believed that the proposed assessment is complex and highly judgemental. They recommended that the Board simplify the proposed guidance or provide additional examples on how to apply it.

Illustrative examples

The respondents were generally supportive of these examples. Suggested improvements include alignment with the FASB’s examples, as well as re-drafting to help clarify the understandability and consistency of the examples.

Goodwill

Most respondents agreed with the proposal to specify that presence of an insignificant amount of goodwill does not mean that the acquired assets should automatically be considered a business.

A few respondents observed that the reference to the presence of goodwill as an indicator that an acquiree constitutes a business may not be consistent with the new guidance on substantive process. They believed that this test has limited conceptual merit. Since the determination of whether goodwill is present is performed after the determination of whether a transaction is a business, its use as an indicator that an acquiree is a business is circular. These respondents suggested clarifying this potential inconsistency, or deleting the presence of goodwill as a separate indicator.

Convergence with the FASB’s proposals

Most respondents recommended that the wording of the Board’s proposals be aligned with that of the FASB’s proposals to the extent that the two boards have reached converged conclusions.

Next steps

The Staff will provide an analysis of the comments received together with recommendations on how to proceed at a future meeting.

Research Programme - Research Update - Agenda paper 8

This paper gives a brief update on the status of the different research projects.

There are currently 8 active research projects, 2 of which are nearing completion. There are also 8 projects in the research pipeline. Apart from the projects that were frequently discussed in 2016, the Staff has restarted work on ‘goodwill and impairment’ and further expects to start providing education sessions on ‘dynamic risk management’ with the Board in March 2017. The Staff also plans to restart work on ‘business combinations under common control’ in Q2 of 2017.

Cover note and summary of the model — Agenda paper 9

In the December 2016 Board meeting, the Staff presented an overview of the proposed new accounting model for rate-regulated activities. The purpose of this session is to present a more detailed analysis on various aspects of the proposed model. The following topics will be discussed at this meeting:

• The model’s general approach — Agenda paper 9A
• Scope of the model — Agenda paper 9B
• Recognition of regulatory assets and regulatory liabilities — Agenda paper 9C

In addition, AP 9D contains several examples to illustrate the application of the recognition criteria described in AP 9C.

Appendix A contains a summary of the proposed model.

The Staff intends to discuss the following topics at a future Board meeting: (a) measurement, impairment and derecognition; (b) presentation and disclosure; (c) interaction with other Standards; (d) assessment of the model’s consistency with the revised Conceptual Framework; (e) comparison with the FASB’s equivalent standard: Topic 980 Regulated Operations; (f) transition and withdrawal of IFRS 14 Regulatory Deferral Accounts; and (g) whether the next consultation document should take the form of a second DP (the first DP on this topic was issued in September 2014) or an ED.

The model’s general approach — Agenda paper 9A

Background

This paper summarises the objective, underlying principle and general approach of the model. See AP 9 to the December 2016 Board meeting for an overview of the core features of the model.

Staff analysis

The Staff has applied the principles of IFRS 15, together with the Board’s latest thinking in the Conceptual Framework project, when developing the core principle and general approach of the model.

This was done in response to stakeholders’ request that the proposed accounting model should:

1. recognise as regulatory assets and regulatory liabilities only those regulatory adjustments that are consistent with the definitions of assets and liabilities in the Conceptual Framework (i.e. balance sheet-side recognition);
2. use the principles of IFRS 15 to provide a principle-based framework for recognising regulatory adjustments (i.e. income statement-side recognition); and
3. provide transparent and understandable information about the effects of the rate regulator’s intervention on the entity’s financial position, performance and cash flows.

The Staff emphasises throughout the paper that it is the imposition of the rate-setting mechanism on the entity and the customer base that creates the regulatory asset/liability.

• The notion of a ‘customer base’ means that the entity’s customers are seen as a single body. This means that the entity’s rights and obligations are not affected by individuals leaving or joining the customer base. The ability to subject the current customer base to the same rate adjustments ensures the continued existence of the entity’s right to charge a higher rate, or obligation to charge a lower rate, in the future.
• At inception of the regulatory agreement the agreement is executory, as neither the entity nor the customer base has performed, and no regulatory asset/liability should be recognised.
• Once either the customer base or the entity has started to perform, any imbalance between the current rate and the services delivered will be adjusted in the future through the rate-setting mechanisms. An imbalance could be caused, for example, by the entity not meeting performance targets or consumption being different from expectations.
• If an imbalance in performance exists, the agreement ceases to be executory and a regulatory asset/liability should be recognised. The asset is the entity’s right to be compensated for past performance. The liability is its obligations to the customer base for which it will not be compensated. In each case the corresponding entry is recognised in the income statement.
• The Staff believes that this approach is consistent with the asset and liability definitions in the Conceptual Framework, as well as the core principle of IFRS 15 (reworded to reflect the specific nature of this project): that an entity should recognise regulatory performance adjustments to depict the transfer of rate-regulated goods or services to the customer base in an amount that reflects the compensation to which the entity expects to be entitled in exchange for those goods or services.

The Staff also analysed whether a rate-regulated entity should apply the requirements of other Standards, including IFRS 15, without amendment, before applying the model. They concluded that although the rights and obligations created by the regulatory agreement complement those created by its contracts with individual customers, they are distinct and subject to different risks. Consequently, the Staff concluded that reporting the relationship between them separately would make it easier to compare financial reporting across rate-regulated entities that are subject to different levels of rate regulation and is more transparent.

Staff recommendation

The Staff will ask the Board whether it agrees with the suggested approach.

Scope of the model — Agenda paper 9B

Background

This paper discusses the scope of the model.

Staff analysis

The Staff argue that a cornerstone of the model is that a regulatory agreement creates rights and obligations for the entity that are distinguishable from those of an entity that is not subject to rate regulation. Without a rate-setting mechanism, the entity would be free to negotiate the price and the performance specifications with individual customers. The Staff argues that the scope of the model should require an entity to carry out activities that are subject to a formal regulatory pricing framework that is binding on both the entity and the rate regulator, ruling out self-regulating entities. This is because when an entity can modify the price and the performance specifications for its goods or services its rights and obligations would not be sufficiently distinguishable from those of an entity that is not subject to defined rate regulation.

In addition, the Staff argues that the rate-setting mechanism must clearly establish a right and obligation on the part of the entity to adjust the price to make good the imbalance in the performance between the entity and the customer-base. Such a requirement is necessary to exclude, for example, market regulation that merely caps the price that an entity could charge, but which does not establish any rights or obligations. To this end, the Staff argues that the rate-setting mechanism should include the features set out in (b) below.

Staff recommendation

The Staff recommends that the scope of the model require:

1. an entity to carry out activities that are subject to a formal rate-setting framework that is binding on both the entity and the rate regulator; and
2. the rate-setting framework to include a rate-setting mechanism that:
   1. establishes how the regulated rate is calculated;
   2. identifies how the rate reflects the satisfaction of the entity’s regulatory obligations; and
   3. adjusts the future regulated rate for the effects of imbalances in performance between the entity and its customer-base.

Recognition of regulatory assets and regulatory liabilities — Agenda paper 9C

Background

This paper analyses the recognition criteria for regulatory assets and regulatory liabilities.

Staff analysis

The Staff believes that the recognition criteria should clearly reflect the supplementary approach taken by the model and that regulatory adjustments must create a right for or obligation of the entity as set out in APs 9A and 9B.

The paper sets out the staff view on how the recommended approach to accounting for costs incurred in acquiring, constructing or enhancing the entity’s own assets is consistent with IFRS 15’s requirements on costs incurred to fulfil a contract, and IAS 20’s requirements on the recognition of government grants related to an entity’s own asset. In short, if the amounts are not included in the cost of another asset by applying another Standard (given that the model takes a supplementary approach), the entity should assess whether the entity is entitled to recover specified costs through the rate to be charged to the customer base in terms of the regulatory agreement. If so, the costs should be recognised as a regulatory asset with a corresponding adjustment in profit or loss. Such an asset would then be amortised in the same way as an IFRS 15 contract asset. The Staff believes that the recognition of a regulatory asset in this case is justified as there is an ‘imbalance’ between the performance of the entity and the customer base – the entity has satisfied (at least partially) its regulatory obligations (through delivering services using the new assets), but the customer base will only pay for it in the future through an increase in rate. The same logic applies to the case where the customer base prepays (through the regulated rate) the future construction costs, in which case a regulatory liability is recognised which will be amortised to profit or loss as the entity uses the new asset to transfer services to the customer base.

With regard to the recognition of regulatory assets, there was some concern about how its recoverability would affect recognition, especially in cases where the increase in rate is not yet approved or may be renegotiated by the regulator. The Staff believes that the guidance on constraining the amount of variable consideration in IFRS 15 could be applied in this case. The Staff also plans to include some factors that are specific to the rate-regulated environment that would affect the likelihood and magnitude of the revenue reversal through regulatory adjustment.

Staff recommendation

The Staff recommends that the model require an entity to recognise a regulatory asset/liability only when:

1. the regulatory adjustment represents a right or obligation arising from the extent to which the performance of the entity exceeds, or has been exceeded by, the performance of the customer base;
2. the resulting regulatory asset or regulatory liability has not already been recognised as an asset or a liability by applying other Standards; and
3. it is highly probable that a significant reversal in the amount of cumulative compensation recognised will not occur.

Conceptual Framework - Agenda paper 10

The IASB will continue its discussion of the comments received on the Conceptual Framework exposure draft (the ‘CF ED’). The topics for this meeting are as follows:

• Whether the appendix on ‘cash-flow-based measurement techniques’ should be retained (AP 10B);
• Review of existing Standards for potential inconsistencies with the revised CF (AP 10C);
• Effects of the revised CF (AP 10D);
• Minor comments on concepts supporting asset and liability definitions (AP 10E);
• Due process (AP 10F).

In addition, the tentative decisions made to date are summarised in AP 10A.

The redeliberation of the CF ED is entering the final stages. None of the papers for this meeting includes any technical discussions - they relate mostly to housekeeping matters.

The Staff intends to discuss the following topics in the March 2017 Board meeting: (a) transition to the forthcoming amendment to paragraph 11 of IAS 8 for rate-regulated activities; (b) due process steps for updating references to the Framework for the Preparation and Presentation of Financial Statements and related quotes in Standards.

Conceptual Framework – Measurement - Appendix A: Cash-flow-based measurement techniques - Agenda paper 10B

Feedback from respondents and Staff analysis

Appendix A to the CF ED clarifies a number of points that need to be considered when developing a cash-flow-based measurement technique. Four respondents believed that the appendix should not form part of the CF since it addresses practical rather than conceptual issues. Another respondent believed that the discussion in the appendix is incomplete.

The Staff believes that the appendix provides useful explanations on various issues and that expanding it would make the discussion unnecessarily complicated.

Staff recommendation

The Staff recommends retaining the appendix subject to drafting changes.

Conceptual Framework – Review of existing Standards for potential inconsistencies with the revised Conceptual Framework - Agenda paper 10C

Background

This paper is for information purpose only.

The CF ED already includes a discussion of the inconsistencies between the Standards and the revised CF. Feedback received on the ED has prompted the Staff to analyse potential additional inconsistencies identified by the respondents. Appendix A to the paper sets out the Staff’s response to those purported inconsistencies.

The Staff concludes from their analysis, including a review of the newly issued Standards and amendments since the publication of the ED, that no substantive inconsistencies are noted in addition to those discussed in the ED.

Conceptual Framework - Effects of the revised Conceptual Framework - Agenda paper 10D

Background

This paper summarises the work performed by the Staff in assessing the effects of the revised CF during redeliberations of the ED, which covered the following areas:

1. The effects of the proposed definitions of assets and liabilities;
2. The effects of the revised CF for preparers; and
3. Potential additional inconsistencies between the Standards and the revised CF identified by the respondents.

All these topics have been discussed by the Board previously where tentative decisions have been made (point 3 will be discussed in the current meeting – see AP 10C). No additional discussion is presented in this paper.

The Staff will ask the Board whether it is satisfied with the additional work performed.

Conceptual Framework - Minor comments on concepts supporting asset and liability definitions—Agenda paper 10E

Background

This paper proposes various minor drafting changes on concepts supporting the asset and liability definitions in response to comments received on the ED.

The Staff will ask the Board to raise any specific matters for discussion.

Conceptual Framework - Due process summary for the Conceptual Framework for Financial Reporting—Agenda paper 10F

Background

This paper summarises the project history and the due process steps undertaken by the Staff in developing the revised CF.

Staff recommendation

The Staff will ask the Board for permission to ballot, and recommends that the Board and the IC start using the CF as soon as it is issued (i.e. it is effective upon publication).

IFRS Implementation Issues - Agenda paper 12

The purpose of this session is to discuss the following:

• IFRS 9 Financial Instruments: Modification or exchange of financial liabilities – IC tentative decisions: Agenda paper 12A
• IFRS 9 Financial Instruments: IFRS 9 Impairment – application of the requirements in paragraph B5.5.40(c) of IFRS 9: Agenda paper 12B

IFRS 9 Financial Instruments: Modification or exchange of financial liabilities – IC tentative decisions – Agenda Paper 12A

Background

In November 2016, the IC discussed the question of whether an entity recognises a gain or loss in profit or loss (P/L) when a financial liability is modified or exchanged and that modification or exchange does not result in the derecognition of the financial liability. The gist of the issue is whether the financial liability’s EIR should be revised in such a case. See AP 6 to the IC’s November 2016 meeting for details. In short:

• Outreach conducted by the Staff indicated that most entities adjust the EIR in such instances under IAS 39, resulting in the gain/loss on modification being amortised to P/L over the remaining life of the modified financial liability (so no gain/loss recognised in P/L on the day of modification). These entities expect to continue with such practice under IFRS 9.
• In contrast, the IC believed that the EIR should not be adjusted in such instances under IFRS 9. Accordingly, a gain/loss should be recognised in P/L on the day of modification.

The IC then discussed whether they should publish their conclusion as an agenda decision, as an amendment to IFRS 9, or as an interpretation.

The IC rejected the agenda decision approach on grounds that it is non-authoritative, and that people might not even be aware that the IC has reached such a conclusion. The IC also rejected amending IFRS 9 as they believed that the requirements of IFRS 9 do not need to be changed – all that is needed is an authoritative explanation of how to apply the relevant requirements to the case at hand. Accordingly, the IC tentatively decided to develop a draft interpretation.

Staff recommendation

The Staff will ask the Board whether they would object to the development of a draft interpretation on this issue.

IFRS 9 Financial Instruments: IFRS 9 Impairment – application of the requirements in paragraph B5.5.40(c) of IFRS 9 – Agenda Paper 12B

Background

A question arose in practice on how to determine the period over which the entity is expected to be exposed to credit risk for financial instruments such as credit card facilities within the scope of the IFRS 9.5.5.20.

This paper summarises the relevant requirements of IFRS 9 and the discussions on this topic by the Transitional Resource Group for Impairment of Financial Instruments. The Board will be asked to confirm its intention behind the relevant requirements.

When measuring expected credit losses (ECL), IFRS 9 generally requires that the maximum period to consider is limited to the maximum contractual period over which the entity is exposed to credit risk and not a longer period, even if that period is consistent with business practice. IFRS 9.5.5.20 provides an exception to this principle in that for certain qualifying financial instruments, the entity should measure ECL over the period that the entity is exposed to credit risk even if that period extends beyond the maximum contractual period.

IFRS 9.B5.5.40 sets out three factors that an entity should consider in determining such a period (the ‘expected life’ of the instrument). In particular, B5.5.40(c) requires an entity to consider the credit risk management actions that it expects to take once the credit risk on the financial instrument has increased when determining the expected life of the instrument.

The Staff’s analysis sets out how the nature and extent of credit risk mitigation actions (e.g. withdrawal of undrawn facility versus contacting the customers for payment with no removal of the undrawn facility; and the level at which the threshold is set before any credit mitigation actions are taken) could affect the expected life. Furthermore, the Staff explains how different instruments within a portfolio might have different expected lives based on their risk exposures. This is because an entity would likely have different credit risk mitigation actions for instruments with different risk exposures.

Staff recommendation

The Staff intends to prepare a webcast to provide education on this topic.