Financial instruments - Impairment

Date recorded:

Results of outreach on model choices from IASB and FASB

The IASB opened the discussion with the results from their outreach to the Basel committee and a number of international banks regarding the "4'" model previously discussed at the 8 December 2010 meeting. Specifically, the IASB staff asked (1) whether the model was "operational", (2) should the expected loss estimate for a specified time period be a bright line 12 months or an amount based on expected losses for the foreseeable future, but no less than 12 months, and (3) is the proposed good book/bad book split operational.

The informal feedback received by the IASB indicated:

  1. Both committees supported the 4' model and believed it to be operational.
  2. The Basel committee's preference was for the foreseeable future option because they believe it would provide a more adequate allowance.
    The strong preference of the international banks was that the bright line 12 month approach as they believe using a foreseeable future approach adds a level of unnecessary complexity. Further, the interpretation of foreseeable future could be different across companies causing a lack of comparability across disclosures.
  3. Both committees indicated that the good and bad book split appears operational. However, the Basel committee's preference is that the bad book is not limited to only past-due and non-performing loans. Further, a suggestion was made to use the term "problem" loans so that banks with less sophisticated systems will still be able to apply the guidance.
    The international banks indicated (1) that the line between the good and bad book should be based on the quality of the asset, not the method of calculation (e.g., portfolio vs individual) (2) the split should be grounded in the preparer's risk management practices, and in order to avoid potential unintended consequences, consideration should be given to introducing a backstop measure – possibly based upon Basel or regulatory definitions and (3) flexibility should be maintained in terms of "collectible/uncollectible" definitions as these terms are open to interpretation and disclosure should be used to develop market convergence.

The discussion then turned to the results of the FASB outreach on similar queries to US banks. The FASB's response indicated:

  1. The 4' model resulted in a number of conceptual issues. The "2" model previously discussed in the 8 December 2010 meeting should be considered as a viable alternative to the 4' model.
  2. There was a mixed response to the bright line of twelve months versus foreseeable future; however the responses leaned towards foreseeable future. A comment from one bank was that a bright line was preferred, but for a longer timeline than 12 months.
  3. The good and bad book split was operational and was similar to that guidance already included in US GAAP.

The IASB and FASB members then discussed these results and were concerned that there were conflicting views as to not only the choice of the timeframe for the expected loss period but also for the preference of one model over the other. The discussion then went back and forth between all members on each of the responses described above. The Board held the following two votes in order to move the process forward:

  1. How many board members from each board prefer to amend the 4' model to indicate that the time period for estimated losses should be for the reasonably foreseeable future, but at least 12 months?
    • IASB – 10 members voted in favour
    • FASB – 5 members voted in favour
    This represents a majority in both groups and thus the model will be amended.
  2. How many board members from each board are in favour of promoting the 4' model with the inclusion of the criteria indicated in (1) above?
    • IASB – 13 members voted in favour
    • FASB – 4 members voted in favour

Forward looking plan

The ED will include both 2 and 4' models but will indicate a preference to 4'. The Boards indicated that the period for comment will be two months and should include examples of the application of each model.

This concluded the meeting on the financial instruments - impairment project.

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