Cover note (Agenda Paper 27)

In this meeting, the IASB deliberated the feedback received in response to its request for information (RFI) Post-implementation Review—IFRS 9 Financial Instruments—Impairment. The deliberation was focused on the two overarching areas of the impairment requirements—the general approach to recognition of the expected credit loss (ECL) and determining significant increases in credit risk (SICR).

This paper was not discussed as it was an overview paper.

Feedback analysis—General approach (Agenda Paper 27A)

This paper summarised the feedback received in response to the RFI on the general approach to recognition of ECL in IFRS 9.

Overall, the feedback from respondents was positive and they supported the general approach of recognising two different amounts (i.e. the 12-month and lifetime ECL) based on changes in credit risk since initial recognition. While almost all respondents saw no fatal flaws and considered the approach achieves an appropriate cost-benefits balance, they suggested reconsidering its application on some particular financial instruments.

Staff recommendation

The staff recommended that the IASB should not take any further action on the matters identified with regards to the general approach in IFRS 9 based on their analysis of the feedback. The staff plans to seek input from the IFRS Interpretations Committee (IFRS IC) to obtain further evidence on whether the application challenges reported for intragroup financial instruments have substantial consequences and whether they arise from a financial reporting issue that can be addressed by the IFRS IC.

IASB discussion

Overall, IASB members were supportive of the staff’s analysis and recommendation.

IASB members noted that the comments received from respondents on the general approach to recognition of ECL in IFRS 9 are an affirmation that the requirements introduced by the standard are working as intended. About the issues raised by respondents on some financial instruments, specifically on intragroup financial instruments, IASB members agreed with the staff analysis that the principles of IFRS 9 have sufficient guidance and allow entities to tailor the approach, considering reasonable and supportable information without undue cost. Further, on double counting issues highlighted by respondents on purchased financial assets that are not credit impaired, IASB members commented that bringing any additional requirements into the standard will only add further complexity. Some IASB members suggested that the board might want to consider the need for any additional education material. This may help in providing a steer towards better application of IFRS 9 requirements for intragroup instruments. Almost all IASB members agreed that seeking input from the IFRS IC would be useful, specifically on whether the application challenges reported for intragroup financial instruments have substantial consequences or not.

IASB decisions

All IASB members voted in favour of the staff recommendation.

Feedback analysis—Significant increases in credit risk (Agenda Paper 27B)

This paper summarised the feedback received in response to the RFI on the requirements in IFRS 9 for determining SICR.

Almost all respondents expressed support for the principles-based approach, stating that there are no fundamental questions (fatal flaws) with the requirements. Many preparers noted that the absence of prescribed methods for assessing SICR in IFRS 9 enables entities to tailor their approaches based on instrument characteristics, industry context, and their credit risk management practices. However, applying judgement is necessary and varying practices are also inherent in the alignment between accounting and credit risk management practice without which benefits of any comparability would be limited. Many respondents (prudential and securities regulators, some standard-setters and accounting firms) expressed concerns that despite the principles and guidance, there is inconsistent application of requirements IFRS 9 and the varying practices are not always justified by differences in how entities manage credit risk.

Staff recommendation

The staff recommended that the IASB take no further action on matters identified with regards to requirements for determining SICR based on their analysis of the feedback. The staff will consider feedback on potential enhancements to disclosure requirements on determining SICR at a future IASB meeting, along with feedback for other disclosures.

IASB discussion

Most of the IASB members were in support of the staff recommendation to take no further action and to not issue any further illustrative examples or additional application guidance on requirements for determining SICR. They agreed with the staff recommendation that any such illustrative examples will be limited to specific complex fact patterns. Therefore, they would be unlikely to help many entities as the outcome could be dependent on small changes to facts and circumstances. IASB members further highlighted that the concerns expressed by respondents reflect an application issue with the requirements by different entities rather than an issue with the underlying principles in the standard. One of the IASB members suggested that there is scope for the board to look further at the issues flagged by respondents around varying practices in disclosures on SICR and how entities are applying the requirements in their disclosures.

IASB decision

13 of the 14 IAS members voted in favour of the staff recommendation.

Literature review update (Agenda Paper 27C)

This paper provided a summary of the additional academic literature identified relevant to the PIR of the impairment requirements in IFRS 9 since the initial review done in February 2023.

The IASB members are welcome to ask any questions or make any comments on the updated review of the academic literature summarised in this paper.

IASB discussion

IASB members noted that the academic literature review indicates that applying the ECL model in IFRS 9 improves the timely recognition of credit losses compared to the approach in the incurred loss model.

IASB members also discussed that the unintended consequences of the application of the ECL model as noted from the academic literature review, including increased credit monitoring of borrowers by banks and reduced lending to borrowers, would be expected and reflects improvement in controls noted by banks on credit risk monitoring. The academic studies suggest that the statistical model for ECL cannot be applied during times such as COVID-19. Therefore, post-model adjustments (PMAs) might be required to be applied for the ECL model to work effectively in such scenarios. One of the IASB members suggested that the board should consider monitoring further PMAs and whether they are applied in “normal” times as well.