Cover note (Agenda Paper 27)

The IASB is undertaking the post-implementation review (PIR) of the expected credit losses (ECL) requirements in IFRS 9. The plan for phase 1 of the PIR (identification of matters to be examined) was discussed in the IASB meeting in July 2020. Between September 2022 and January 2023, IASB members and staff have been performing outreach with the purpose to assist the IASB in identifying matters to gather further information on in the Request for Information (RFI). The IASB will analyse responses to the RFI in phase 2 of the PIR.  

The questions asked to stakeholders related to the following areas of the requirements:

• The general approach to recognition of ECL
• Determining significant increases in credit risk (SICR)
• Measurement of ECL
• Purchased or originated credit-impaired financial assets
• Simplified approach for trade receivables, contract assets and lease receivables
• Loan commitments and financial guarantee contracts
• Interaction between ECL and other requirements
• Transition
• Disclosures

The staff also asked particular stakeholders additional questions which could be more relevant to those groups.

Next steps

• The IASB will be asked to approve the publication of, and set a comment period for, the RFI at a future meeting—after IASB members have reviewed a pre-publication draft.
• The staff expect the RFI will be published around the end of May 2023.

Analysis of outreach feedback—General model (Agenda Paper 27A)

This paper analysed feedback from outreach in phase 1 of the PIR of the ECL requirements in IFRS 9. The staff summarised general feedback on the application of the ECL requirements, as well as specific feedback on the following areas:

• The general approach to recognition of ECL
• Determining SICR
• Measurement of ECL

Summary of general feedback

Overall, stakeholders expressed positive views about the application of the ECL requirements and that the requirements are generally working well in practice, including in periods of enhanced economic uncertainty such as during the COVID-19 pandemic.

Whilst for many stakeholders the impact of the changes introduced by the ECL requirements has been significant, most stakeholders specifically commented that the forward-looking ECL model in IFRS 9 results in a more timely recognition of credit losses, and stakeholders also mentioned improvements of entities’ internal controls and alignment to credit risk management. Nonetheless, stakeholders said they observed diversity in practice in how entities apply ECL requirements, thus lack of comparability, at least in part, because of the high level of judgement involved.

Stakeholders suggested that the IASB should consider including additional application guidance or clarification, and also enhancing disclosure requirements in IFRS 7 aimed at resolving existing lack of consistency.

The staff agreed that, whilst diversity in practice is not optimal, some diversity in practice might arise because entities adopt different credit risk management practices and that, the effect of that diversity may not always be a significant detriment to the usefulness of information provided to the user of financial statement.

Staff recommendation

The staff recommended that the IASB ask questions in the RFI about the general approach to recognition of ECL, determining SICR and measurement of ECL.

IASB discussion

IASB members were all supportive of the staff suggestions to include questions about the matters identified in the paper in the RFI. A few comments were raised about potential RFI questions related to post-model adjustments or overlays (PMA) and ECL measurement for intercompany loans highlighting the importance to clearly differentiate whether the ECL model would not be working as intended or rather there would be a need for more information being disclosed. 

Analysis of outreach feedback— Other areas (Agenda Paper 27B)

This paper continued to analyse feedback from outreach in phase 1 of the PIR of the ECL requirements in IFRS 9. The staff provided the analysis of feedback on the remaining areas of the ECL requirements in IFRS 9, namely:

• Purchased or originated credit-impaired financial assets
• Simplified approach for trade receivables, contract assets and lease receivables
• Loan commitments and financial guarantee contracts
• Interaction between ECL and other requirements
• Transition

The IASB members were asked whether they agree with the staff recommendations of this paper, and whether there are any additional matters that the IASB should ask questions about in the RFI.

Staff recommendation

The staff recommended that the IASB ask questions in the RFI about the matters identified in the paper.

IASB discussion

IASB members were all supportive of the staff suggestions to include questions about the matters identified in the paper in the RFI. IASB members recommended carefully drafting the RFI questions in a way that does not create an expectation of a comprehensive review of the model or give the impression that there are issues in areas for which no questions were raised during the feedback.

Analysis of outreach feedback— Disclosures (Agenda Paper 27C)

This paper continues to analysed feedback from outreach in phase 1 of the PIR of the ECL requirements in IFRS 9. The staff analysed feedback from outreach related to the credit risk disclosure requirements in IFRS 7.

The IASB members were asked whether they agreed with the staff recommendations of this paper, and whether there are any additional matters that the IASB should ask questions about in the RFI.

Overview of feedback

Most feedback during outreach related to credit risk disclosures. Stakeholders across the various stakeholder groups were of the view that there is a lack of consistency in the type and granularity of information disclosed by different entities. However, stakeholders expressed mixed views about the root cause for this lack of consistency. Some stakeholders attributed the lack of consistency to the disclosure objectives being too principles-based and suggested that the IASB adds further minimum disclosure requirements, specifies the format of some disclosures, and adds more illustrative examples in IFRS 7. Some auditors said that IFRS 7 provides clear disclosure objectives that are designed to enable entities to tailor the information disclosed to what is relevant in the context of their credit risk exposure. A few other stakeholders said that the lack of consistency in credit risk disclosures is also due to the different credit risk management practices applied by entities.

Most stakeholders said they generally observe a lack of consistency in the disclosures provided about the PMA determining SICR, changes in the loss allowance and the gross carrying amounts and sensitivity analysis.

The staff noted that feedback from outreach suggests there is significant lack of consistency and thus stakeholders suggest the IASB adds more specificity to these disclosure requirements.

Staff recommendation

The staff recommended that the IASB ask questions in the RFI about whether the objective-based disclosure requirements in IFRS 7 for credit risk are working well in practice.

IASB discussion

IASB members were all supportive of the staff suggestions to include questions about the matters identified in the paper in the RFI. IASB members highlighted the importance to clearly differentiate whether disclosures issues would be in the content or rather in the content being presented.

Review of academic literature (Agenda Paper 27D)

This paper provided an overview of the academic literature relevant to the PIR of the ECL requirements in IFRS 9.

The IASB members were asked whether they have any questions or comments on the academic literature summarised in this paper.

Key messages

Market participants reacted positively to IFRS 9. However, there was mixed evidence on whether managerial discretion on application of ECL model resulted in increased earnings management after the implementation of IFRS 9.

There is evidence from several academic papers that the loss allowances for credit losses increased on transition to IFRS 9. Also, the ECL model resulted in more timely recognition of allowances for credit losses. The application of the ECL requirements in IFRS 9 resulted in more useful information for the purposes of predicting credit and equity risk. One academic paper concluded that the ECL model in IFRS 9 is less procyclical than the incurred loss model in IAS 39.

The study found that the banks with subsidiaries applying IFRS 9 charged higher loan fees to their customers than banks without such subsidiaries. Also, implementing the ECL requirements were followed by a decrease in lending to small and medium-sized entities (SMEs). Evidence based on a sample of Chinese entities showed that entities incurred higher audit fees after transition to IFRS 9.

On the interaction between IFRS 9 and the supervisory rules, researchers concluded that IFRS 9 might enhance financial stability through reducing the build-up of losses and overstatement of regulatory capital and through extended disclosure requirements. Also, banks with regulatory capital constraints were more likely to adopt the Basel Committee on Banking Supervision (BCSB)’s capital transitional arrangements.

The results indicate that IASB acted as an independent standard-setter in developing IFRS 9. Also, the IASB developed the ECL model by balancing the objective of faithfully reflecting economic reality with being operationally feasible for its stakeholders.

IASB discussion

IASB members comments on the academic literature summary were overall supportive. A few members raised questions about the earnings management. The staff clarified that earnings management as mentioned in the academic literature reviewed relates to choices made within a range of possibilities allowed by the Standard, rather than in a sense of earning manipulation. One member commented that the summary should have comprised more content about disclosure requirements.