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EFRAG draft comment letter on the proposed impairment model

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

16 Apr 2013

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB's Exposure Draft ED/2013/3 'Financial Instruments: Expected Credit Losses' which was published on 7 March 2013.

EFRAG supported the 2009 exposure draft proposal for the integrated effective interest rate approach and the time proportionate approach indicated in the Supplementary Document. However, the EFRAG recognises that there were operational concerns by constituents when implementing those approaches.

Regarding the current exposure draft (ED/2013/3), the EFRAG preliminary position is that it:

  • "accepts the proposed approach that requires recognition of a 12-month expected credit loss at initial recognition and lifetime expected credit losses when there is a significant increase in credit risk,"
  • "the proposed approach strikes an acceptable balance between the cost of implementation and the underlying economics, while meeting the need to provide earlier for expected credit losses as expressed by financial regulators and other constituents, and"
  • "supports the proposed credit deterioration approach as it distinguishes between financial assets that have deteriorated in credit quality and those that have not because it provides relevant and useful information about the likelihood of the collection of future contractual cash flows and the effect of changes in the credit quality of an entity’s financial assets."

However, the EFRAG does not believe the recognition of a portion of expected credit losses at initial recognition is conceptual sound but due to the lack of a better approach, the IASB should use the approach developed in the exposure draft as a basis when finalising its impairment requirements.

In addition, EFRAG states:

[A]ny impairment model – such as the model proposed by the FASB – that uses a single measurement approach that recognises lifetime expected credit losses from initial recognition will inevitably remove the need to track any changes in credit quality to determine when lifetime expected credit losses should be recognised as a result of significant credit deterioration. Nevertheless, in our view, such a model would not be less subjective and not necessarily operationally simpler compared to the proposed approach in the ED. EFRAG believes that such an approach would provide less relevant information about the effects of changes in the credit quality subsequent to initial recognition, and does not result in an appropriate balance between the representation of the underlying economics and the cost of implementation as the double counting effect of expected loss recognition at inception is aggravated by the consideration at once of life time expected losses.

In an effort to gather more information, the EFRAG, along with other European National Standard Setters, are currently conducting a field-test designed to show whether it improves on the old model, whether its operational and determine the costs and impacts that will come with the new model.

Click for (links to EFRAG website):

    Our previous story on the Exposure Draft ED/2012/3 Financial Instruments: Expected Credit Losses offers a summary of the key proposals of the ED.

      Comments on the letter are invited by 17 June 2013.

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