Newsletter on financial asset impairment ED

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23 Nov 2009

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – Financial Instruments: Amortised Cost and Impairment.

On 5 November 2009 the IASB issued an exposure draft (ED) proposing to modify the way impairment losses are recognised on financial assets measured at amortised cost from an 'incurred loss model' to an 'expected loss model'. This is one of the phases of the IASB's comprehensive project to replace IAS 39. The newsletter summarises the IASB's proposed expected loss model, identifies a number of operational issues, and contrasts the IASB's proposal to the US FASB's proposed 'incurred loss model'. An appendix to the newsletter sets out a comprehensive numerical example of the calculation mechanics of the expected loss approach for fixed-rate financial instruments. Another appendix provides a detailed comparison of IAS 39's incurred loss approach and the proposed expected loss approach.

The existing incurred loss model IAS 39's incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.

IASB's proposed expected loss model Under the model proposed in the ED, expected losses are recognised throughout the life of a loan or other financial asset measured at amortised cost, not just after a loss event has been identified. The expected loss model avoids what many see as a mismatch under the incurred loss model – front-loading of interest revenue (which includes an amount to cover the lender's expected loan loss) while the impairment loss is recognised only after a loss event occurs. Proponents of the expected loss model believe it better reflects the lending decision. Under the IASB's proposed expected loss model, a provision against credit losses would be built up over the life of the financial asset based on the expected cash flows of the instrument (including expected credit losses), not market values. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.

Click to view IAS Plus Update Newsletter – Financial Instruments: Amortised Cost and Impairment (PDF 90k).
Links to all past IAS Plus newsletters are Here.


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