Financial Instruments: Impairment

Date recorded:

Possible issues to be addressed in the exposure draft by application guidance or clarification

The staff explained that the purpose of this discussion was to follow up on issues that came out from responses to the Board's Request for Information on their Expected Cash Flow approach (ECF). The staff's agenda paper sets out recommendations on what issues should be addressed by application guidance and clarification in the ED and also what issues should be explored by the Expert Advisory Panel (EAP) set up to deal with application issues of the ECF.

Board members asked about the role of the EAP and whether their remit would be restricted to the items set out in the agenda paper. The staff explained that the issues to be considered by the EAP had not yet been finalised and the list in the agenda paper was not an exhaustive list. The FASB who were in attendance by video link and other Board members questioned whether and when the output from the EAP would be incorporated in the final standard on impairment.

The staff explained that the EAP will be working alongside the issuance of the ED and their role will be to advise the Board on the type, nature, and extent of application guidance to be included in the final standard. The EAP would also help facilitate field testing of the proposals.

The Board agreed with each of the following staff recommendations:


  1. To provide principles based guidance in the ED that focuses on two aspects of portfolios based versus individual estimates: (a) using the approach that provides the best estimate and (b) ensuring that if entities switch between approaches, that does not result in double counting.
  2. Regarding estimation of cash flows, that the ED provide concise application guidance on how to source and adjust historical data drawing on existing guidance in IAS 39.AG89 and charging the EAP with analysing the remaining issues related to cash flow estimates that respondents to the RFI raised.
  3. To provide application guidance for trade receivables in the ED without illustrative examples.
  4. Rather than provide further application guidance in the ED, the EAP should be charged with addressing process driven implementation issues related to the ECF approach.
  5. To include in the ED clarifications regarding point-in-time versus through the cycle estimates, expected value versus most probable value and the use of entity specific versus market date and addressing the differences of fair value (to amortised cost based on ECF) in the basis for conclusions.



In this session the staff presented their paper considering three potential approaches to transition for new impairment rules based on ECF. These three include:

  • Option 1: Retrospective application to all financial instruments
  • Option 2: Prospective application to only new financial instruments with initial recognition on or after adoption of the ECF approach and grandfathering the old rules for existing financial instruments.
  • Option 3: A customised transition approach that combines prospective application for new financial instruments where initial recognition is on or after adoption of the ECF approach with either (a) retrospective application or (b) a change in measurement (involving discounting revised expected cash flows by the original EIR, and recognising the adjustment to opening reserves) for financial instruments recognised before adoption of the new standard.

Board members discussed these options and generally agreed that Options 1 and 2 were not appropriate. Instead Option 3 seemed the most appropriate, however, there were concerns about the retention of the existing EIR for certain financial instruments initially recognised before adoption of the new standard for which full retrospective application was not elected. The concern was that this has the effect of reducing reserves and increasing interest income over the remaining life of the instrument as the original EIR under the existing incurred loss model would be higher than the EIR derived under the ECF approach.

Alternative EIRs that better represented the EIR under the ECF approach were suggested to solve the issue. However, it was acknowledged that such an EIR could be negative unless it was bound by a corridor (eg limit to between the risk free rate and the contractual rate). It was agreed that these alternatives would be considered by the staff as part of developing the customised transition approach further.

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