The purpose of the session was to obtain IFRS IC members’ input to the IASB’s PIR of expected credit loss (ECL) impairment requirements in IFRS 9. The questions to the IFRS IC members for each of the five topics identified are as follows:

1. Whether the matters are pervasive
2. Whether the matter has substantial consequences; and
3. What is the root cause for the matter.

The following is a summary of the PIR feedback, staff notes and additional input required, when applicable, on each topic:

Topic 1: Intragroup financial instruments

Some stakeholders said that applying the general approach to recognise ECL for intragroup financial instruments, results in undue costs. A few stakeholders said that applying the general approach might also lead to counterintuitive outcomes. The stakeholders consider that there is low risk of credit losses from intragroup instruments and therefore, ECL does not necessarily provide useful information to users of financial statements. To reduce these operational costs, some stakeholders suggested the IASB considers extending the scope of the simplified approach in IFRS 9 to these instruments or add more application guidance or removing intragroup instruments from the scope of IFRS 9, similar to the exemption in US GAAP. The staff would like to seek additional input from the IFRS IC members on the following questions:

• If this matter is pervasive, is it limited to intragroup financial instruments only or is the matter part of a broader underlying question?
• In the light of the IASB’s tentative decision to take no standard-setting action in response to the PIR feedback on this matter, do IFRS IC members have any views about other actions the IASB could take that might reduce the application challenges for intragroup instruments?

Topic 2: Loan commitments

There are two aspects to this topic. The first one is a lack of definition for loan commitments. Currently, there is only a description of loan commitments in IFRS 9:BCZ2.2 but no explicit definition in IFRS 9. This gives rise to application questions to some scenarios. Therefore, some stakeholders suggested that the IASB defines “loan commitment”. The staff acknowledged that there is no specific definition for a loan commitment but the PIR feedback does not provide evidence that substantial consequences arise in practice. They also noted that IFRS 9:2.3 requires loan commitments that can be settled by delivering or issuing another financial instrument to be accounted as derivatives. The staff would therefore like to seek additional input on the following question:

• Is the root cause for this matter related to enforceability/accessibility of the existing description for loan commitments or that such a description is inadequate?

The other aspect of the topic is the period over which to estimate ECL for individually managed instruments. Some stakeholders suggested that the IASB clarifies the scope of the exception in IFRS 9:5.5.20—specifically, whether facilities, such as corporate overdrafts, that are managed on an individual basis are outside the scope of this exception and, thus, their ECL is required to be measured over the maximum contractual period. The staff noted that under IFRS 9: BC5.255 the exception was designed to address specific concerns—that, for loan commitments managed on a collective basis, an entity usually has no practical ability to withdraw the commitment before a loss event occurs and to limit the exposure to credit losses to the contractual period over which it is committed to extend the credit. Moreover, PIR feedback did not indicate whether stakeholders are unclear about the accounting outcome or whether they consider that outcome to be inadequate.

Topic 3: Financial guarantee contracts

The first aspect of this topic is about credit enhancement in the measurement of ECL. Some stakeholders suggested that the IASB should add application guidance for determining the credit enhancements that are considered “part of”/”integral to” the contractual terms for the purposes of measuring ECL applying IFRS 9:B5.5.55. The staff was of the view that entities still need to apply judgement relevant to specific facts and circumstances even there is an application guidance. The IASB will need evidence that the incremental benefits of any action would outweigh those costs for such potential application guidance, which is a standard-setting activity. The staff would therefore like to seek additional input on the following questions:

• What would be the incremental benefits of any standard-setting?
• In practice, is the matter limited to financial guarantees or does it extend to other credit enhancements too?

The other aspect is about accounting for premiums received over time for financial guarantees issued. Respondents to the PIR said IFRS 9:4.2.1(c) or the related requirements are not sufficiently clear for entities to determine the accounting outcome for financial guarantee contracts for which the premiums are received over time, rather than upfront. Although accounting firms have developed guidance, it varies among firms and this results in diversity in practice. The staff acknowledged this but is of the view that the IASB will need to consider evidence whether such diversity results in substantial consequences and the reasons for it.

Topic 4: Purchased or originated credit-impaired (POCI) financial assets

From the PIR feedback, it is noted that there is diversity in practice on the accounting for decreases in credit risk since initial recognition—specifically, some entities adjust the gross carrying amount of a POCI financial asset, others recognise it as a negative entry to the ECL allowance. Although it is primarily a matter of presentation in the statement of financial position, it affects information such as coverage ratios. Hence, some stakeholders asked the IASB clarifies the requirements. However, the staff commented that it does not result in substantial consequences in practice.

IFRS IC discussion

IFRS IC members commented on each of the topic raised by the staff.

For Topic 1, a number of IFRS IC members said that intragroup financial instruments are very common and the matter could be pervasive in some jurisdictions. They believed that the root cause of the problem is due to an operational issue. Given the amounts are eliminated in consolidated financial statement, entities do not bother to recognise ECL. Also, there is not as much risk management when arranging such intragroup loans compared with other loans and there is not such detailed level of credit information. Many of the IFRS IC members expressed sympathy for the difficulties faced when doing the ECL measurement of intragroup loans and understood that such arrangements are unique. However, IFRS 9 is principles-based and it is clear that requirements and guidance are available for entities to determine whether there is a significant increase in credit risk and for the measurement. Most of them agreed not to introduce the simplified approach. One of the IFRS IC members said that further research is required to determine whether it is helpful if the simplified approach is allowed. Only one IFRS IC member supported the simplified approach. Some of those not recommending the simplified approach preferred to have illustrative examples or educational guidance on it, for example giving guidance on another approach rather than using the mechanical or statistical data for the calculation. Nonetheless, some of them said that IFRS 9 does not mandate the use of the mechanical calculation of ECL, it could be qualitative assessment as long as it is based on reasonable supportable information. A few of them said that entities may even have more credit worthiness information than third parties on their group companies and it is instead easier to do ECL measurement.

For Topic 2, one IFRS IC member said it would be good to have the definition of loan commitment when IFRS 9 was developed. However, this issue has been addressed by practice as of now. A few IFRS IC members said that as IFRS 9:BCZ2.2 already defines it, there is general understanding and it is applied. One of them said that he did not encounter an enforceability issue in his jurisdiction for the application of the BC of IFRS 9. They said tidying up IFRS 9 by moving this from the BC to the main paragraphs does not help to solve the real difficulties and diversity, e.g. the accounting for collective loan commitments. On the other hand, one IFRS IC member preferred not to have a definition in IFRS 9 because it would result in entities not being able to apply judgement on contracts that do not meet the definition but have the economic substance of a loan commitment. Overall, IFRS IC members seemed to think that standard-setting to add the definition of a loan commitment in the main paragraphs of IFRS 9 is not required.

For Topic 3, one of the IFRS IC members said that the Transition Resource Group for Impairment of Financial Instruments had addressed this topic and there is an enforceable decision in Europe. He preferred not to refer to the guidance from the accounting firms. He said that when the IAS 8 hierarchy is applied, entities could refer to US GAAP which has explicit guidance on the accounting of financial guarantee contracts and are accounted for gross for premium receivables and the corresponding liability. Alternatively, he said referring to IAS 32 could give the same answer. A number of IFRS IC members said that they did not encounter any issues on that topic. One of them said that he was surprised as to why there is diversity in practice given this issue existed in IAS 39 and the same accounting treatment just continued when IFRS 9 became effective (except for the ECL measurement). One IFRS IC member said that she acknowledged that there is diversity and a lack of clarity in IFRS 9 and it would require much time and work to address these issues, which might not provide useful information to the users of financial statements. She was of the view that the benefit of standard-setting would not outweigh its cost. In conclusion, most of the IFRS IC members considered that no work is required by the IASB.

For Topic 4, only two IFRS IC members commented on the POCI financial assets. Both of them said that IFRS 9 is clear as to where to present the decrease in credit risk. If the amount is material, it would warrant disclosure whether gross or net presentation is adopted. They did not think that the IASB should work on it. One of them suggested that this issue could be resolved by the IFRS IC by clarifying the application of IFRS 9 on this issue.