Financial instruments – Amortised cost and impairment

Date recorded:

User feedback summary

The staff presented the Board with a summary of feedback from outreach with users of financial statements. No decisions have been taken.

The staff noted that most of the feedback from users was consistent with the general feedback received (as discussed at the July Board meeting). In particular, most users supported the move towards an impairment approach based on expected losses but expressed concerns about its complexity and subjectivity. The main difference between the feedback from users and other constituents was the users' focus on disclosure requirements. Users argued that extensive disclosure might help to counterbalance subjective management judgement and provide useful information.


General approach for re-deliberations

The Board discussed the general approach for re-deliberations. The Board agreed that the re-deliberations should focus on open portfolios. The staff noted that any model that is applicable and operational for open portfolios would be applicable and operational for closed portfolios.

The Board also noted that it will deliberate the impairment approach jointly with the FASB once the FASB comment period on the FASB Accounting for Financial Instruments ED ends at the end of September 2010.


Objective and approach

The Boards discussed the objective of amortised cost measurement. The staff noted that constituents supported the overall objective but some respondents felt that the objective should be modified to address impairment specifically. The staff noted that the Board would need to reconsider a separate objective if it decides to pursue decoupling of credit losses from the effective interest rate calculation. The Board agreed to consider the issue at that point.

The Board considered four alternative impairment approaches:

  • Expected loss approach
  • Modified incurred loss approach
  • Fair value based approach
  • Impairment approach based on IAS 36 Impairment of Assets

Based on the strong support of the expected loss approach to impairment, the Board agreed to pursue the expected loss approach.

The Board discussed the modified incurred loss approach based on IBNR provision. Most Board members felt that the modified incurred loss approach would be subjective and the link between specific events and specific outcome might prove to be elusive.


Scope of expected loss: outlook period and conditions

The Board discussed the length of the outlook period and conditions to consider when determining an expected loss. The discussion focused on high-level issues related to the outlook period and did not focus on practical implications of how to measure expected loss or practical expedients that could be used. These topics would be discussed at one of the future Board meetings.

The Board confirmed the decision from the ED that the expected loss approach should be based on lifetime expected losses. Nonetheless, as one Board member noted, estimate of lifetime losses should not mean explicit forecasting but should allow using long term averages as practical expedients. As one Board member noted, the lifetime approach is consistent with other proposed Standards and was also supported by banking supervisors.

The Board then discussed the conditions when calculating expected loss. The FASB in its Accounting for Financial Instruments ED proposed to determine the expected loss based on past and existing conditions whereas the IASB proposed in the ED to consider all reasonable and supportable information and conditions.

One Board member noted that the difference between the IASB and FASB approach was not that large, and both could be adjusted through wording. In his view, the FASB did not intend to freeze the situation' on current level and the IASB did not intend to allow pick and choose' the information — e.g. by allowing using future information. He suggested to work with the FASB on a common ground in this area and to base the assessment on the best available information.

One Board member suggested that the information should be limited to the best estimate of conditions that market participants would consider in the assessment, but not market participant view of credit risk. Another Board member suggested that the consensus forecast should be input to the consideration. He noted that in his view the correct conditions and management consideration of future conditions relate to two different issues that would diverge especially when a market has developed a specific opinion on performance of a specific class of assets.

Finally, the Board tentatively agreed that all reasonable and supportable information and conditions should be considered in determination of expected losses. As one Board member noted, even if the IASB rejected the through-the-cycle impairment approach, long term average loss rates would be one of the inputs to calculation of lifetime expected losses. The IASB will discuss the conditions to consider in determining an expected loss together with the FASB to try to come to a converged solution.

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