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IFRS 7 — Disclosures regarding servicing contracts

Date recorded:

The IASB issued Disclosures – Transfers of financial assets in October 2010, which included the addition of paragraphs 42A-42H to IFRS 7 Financial Instruments: Disclosure and are effective for annual periods beginning on or after 1 July 2011.

In October 2012, the Committee was asked to clarify whether servicing agreements were within the scope of the transfer disclosures of IFRS 7. That submission contained two views:

  • View 1: servicing rights and servicing obligations do not constitute continuing involvement for the purposes of the transfer disclosures; and
  • View 2: servicing rights and servicing obligation do constitute continuing involvement for the purposes of the transfer disclosures.

In the January 2013 meeting, the Committee requested the IASB to consider clarifying the requirements for continuing involvement of paragraph 42C of IFRS 7 as it was not clear whether servicing contracts are continuing involvement for the purpose of applying the transfer disclosure requirements.

In February 2013, the Staff reported the Committee’s discussion to the IASB. The IASB confirmed that their intention was that servicing arrangements would meet the definition of continuing involvement for the purposes of the IFRS 7 disclosures and that paragraph 42C includes servicing arrangements in the transfer disclosure requirements.

In the May 2013 meeting, staff reported the IASB’s discussions to the Committee and recommended that the IASB should propose an amendment to paragraph 42C(c) of IFRS 7 to clarify that the requirements of that paragraph do not exclude servicing contracts from transfer disclosures.

At the September 2013 meeting, Staff provided the Committee with an analysis on how IFRS 7 could be clarified and whether the amendment should be proposed in an annual improvement project Annual Improvements to IFRSs 2012-2014 Cycle. Staff proposed to add a paragraph to the application guidance of IFRS 7 to clarify that paragraph 42C(c) does not exclude servicing contracts from the transfer disclosure. Staff also noted that paragraph 42E (b) of IFRS 7 requires disclosure of fair value of the assets and liabilities that represent the entity’s continuing involvement in the derecognised financial assets. Retrospective application of this proposed amendment to financial statements for any preceding periods might therefore require an entity to determine fair value for a servicing asset or servicing liability, which the entity might not have previously determined. Staff are concerned that it might be impracticable for an entity to determine the fair value of such a servicing asset or liability without using hindsight.

Consequently, Staff propose offering a specific exemption in the transition requirements for this proposed amendment in respect of comparative periods. This exemption would be that an entity does not need to apply the amendment to any period presented that begins before the date of initial application of the amendment. This is consistent with the transition requirements in paragraph 44M of IFRS 7 in Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) that added the transfer disclosure requirements. Similarly, first time adopters should get the same transition relief for application of this amendment. With respect to the effective date of the amendment, staff tentatively suggested setting the date to 1 January 2016 subject to change depending on the process of the entire annual improvement project.

In the September 2013 meeting, members requested clarification of the wording of paragraph B30 and also the guidance provided. Another member highlighted that as this is guidance, there should not be an effective transition date. A member agreed with the amendment in that servicing contracts should not be scoped out. Another member raised questions about the fees included in service contracts; staff were unsure about this as they had not looked into it and therefore the Chairman requested to seek clarification on this.

The Committee generally agreed with the staff recommendation to recommend to the IASB that it should propose an amendment to IFRS 7 as part of the Annual Improvements to IFRSs 2012-2014 Cycle. The Committee decided there were many drafting issues on the wording for the proposed amendments as set out in the staff paper in Appendix A. Three members agreed to work with staff on the proposed wording before the paper is presented to the Board.

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