Financial Instruments: Impairment

Date recorded:

Guidance for variable interest rates

The Board decided to provide application guidance on variable rate instruments that requires a catch-up adjustment (a mechanism that is used to ensure that the carrying amount of a variable rate instrument unwinds to the remaining expected cash flows by an adjustment to profit or loss, which changes the carrying amount of the instrument).


Presentation and disclosures

The Board discussed in detail the requirements for presentation and disclosure resulting from the change to the expected losses model of impairment. Some Board members expressed their concerns that the proposed disclosures were overly burdensome and would be too complex and costly to implement. On the other hand, the majority of Board members thought that the disclosures were necessary for the decision-usefulness of the financial statements.

The Board decided to require the following disclosures:

  1. interest revenue based on contractual cash flows, adjustment for allocation of initial expected losses and changes in expectations of expected losses on the face of statement of comprehensive income
  2. reconciliation of the provision account for credit losses by class of financial instruments
  3. vintage information of financial assets held at amortised cost
  4. loss triangle in table format and qualitative information in case of significant changes in loss estimates
  5. disaggregation of the change in expectations of expected losses
  6. management's assumptions and methodology in determining expected losses
  7. high level 'sensitivity analysis' on key assumptions and effect of using reasonably possible alternatives
  8. stress testing information if management performed stress testing for the internal risk management purposes
  9. reconciliation of non-performing financial assets held at amortised cost
  10. additional disclosures on transition from incurred loss model to expected loss model

The most significant discussion of disclosures focussed on the requirement to provide information on stress testing (#8 above). Some Board members felt that such disclosures are not appropriate as they would reduce comparability (not all entities would perform stress testing) and would not provide useful information (boilerplate disclosures). Other Board members disagreed. They argued that merely disclosing that the entity performed stress testing was potentially useful. Moreover, most of financial intermediaries may be required to perform stress-testing by the regulators.

Some discussion was directed also to the vintage and loss triangle disclosures (#3 and #4 above). Some Board members felt that those disclosures were not cost beneficial, and on an aggregate level as proposed would not provide the intended information. They pointed out that practices in risk management might differ among entities, and thus the quality of the portfolio was very much influenced not only by the date when the financial instruments were originated but also by the type and quality of an entity's risk management practices. Most Board members disagreed. They noted that these data should be available to any institution as they are based on contractual cash flows and are necessary to assess the risk profile of any portfolio for internal risk management purposes.


Interaction with other IFRSs (IAS 28 and IFRS 4)

The Board considered the consequential amendments to IAS 28 and IFRS 4 resulting from the change of the impairment model.

The Board decided to use the impairment indicators in IAS 36 to determine whether additional impairment testing was required for an investment in associate. The Board considered this approach appropriate, as the amount of impairment loss is measured in accordance with IAS 36 under current IAS 28 requirements.

The Board also agreed to retain the existing requirement for reinsurance assets in IFRS 4 as it felt that eliminating the loss event guidance in IAS 39 would not result in a change in accounting policies for entities applying IFRS 4 to reinsurance assets.


Comment period

The Board briefly discussed the expected comment period. The staff re-affirmed the intention to publish the Impairment ED in October. The staff proposed an extended 180-day comment period for the ED so the Expert Advisory Panel would have a sufficient time to finalise its application guidance for re-deliberations. Some Board members proposed an even longer comment period (9 months). The Board agreed that an extended comment period is desirable given the complex nature of the proposal but deferred a final decision on the comment period to a future Board meeting.

Related Meeting Notes

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