Financial Instruments: Replacement of IAS 39 — Impairment

Date recorded:

The Board was joined by FASB staff and FASB Board members via video link. The Board discussed the responses to the Request for Information published in July and next steps.

The main message from respondents to the Request for Information was that the expected loss approach would pose significant operational challenges (especially in the area of cash flow estimates and complexity of required calculations) and would entail substantial costs and lead time to implement. Views of constituents on other issues were generally mixed. Constituents requested some additional guidance and clarification on specific issues, but on the other hand requested more prescriptive requirements on portfolio assessment of impairment. Moreover, in their view, further simplification of the approach would be desirable in order to make the principles operational.

The FASB members noted that the FASB did not discuss the impairment issue yet, but the range of interpretation of what was meant by expected loss model was wide. Some constituents understand expected loss in Basel II sense or, alternatively, as a possibility to include losses due to worsening of the economic conditions. This difference in opinion and expectations could pose a challenge in the deliberation process.

Several Board members raised the issue of application of the model to trade receivables of non-financial entities. There was a high degree of consensus that these instruments should not be excluded from the model, but additional application guidance for trade receivables should be included to alleviate the concerns raised by the industry.

Some Board members expressed their concerns over timing of the project. Given estimated lead time (2-4 year after publication of the final standard in order to adjust the systems), some Board members preferred a more thorough discussion, perhaps in the form of issuance of DP rather than ED. Other Board members were concerned that the model is not sufficiently developed for issuance of the ED. They were particularly concerned that additional guidance would be developed only after the ED has been published. Nonetheless, other members pointed to the political environment and the clear need for new guidance that was already pledged by the Board. Moreover, they pointed that alternative views were already explored by the Board in June and July and expected loss model was identified as the way forward.

The Board decided to provide a clear objective and emphasise principles that would be reinforced by clear and concise application guidance. It was felt that providing a comprehensive guidance was impossible as it could not provide guidance for all the issues. Some members of the Board expressed their concerns that if insufficient guidance was provided regulators would step in and impose additional requirements.

The Board decided to establish an Expert Advisory Group on Impairment that would assess the need for development of further guidance. FASB will participate in such discussion. The Board also considered the need for further outreach to constituents perhaps in a way of roundtables as part of deliberations on the ED.

The Board reaffirmed its decision to require one single impairment model to all financial instruments measured at amortised cost. Therefore, it did not support any exception for trade receivables, instruments trade in active markets, or individually significant assets.

The Board then considered possible simplifications of calculations required. The Board did not approve the proposed usage of the straight-line method for measurement of expected losses on initial recognition, as opposed to the effective interest rate method. It was felt that the issue was too technical in nature and should be first assessed by the Expert Advisory Group.

The Board also noted that additional discussion on application of the principles on portfolio level should be included in the ED. Some Board members noted that the application guidance should include also guidance on how portfolios should be identified.

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