We comment on the IASB's financial asset impairment proposals

  • Deloitte Comment Letter Image

07 Jul 2013

We have published our comment letter on the International Accounting Standards Board’s Exposure Draft, ED/2013/3 'Financial Instruments: Expected Credit Losses'. We support the Board's efforts to improve the accounting for recognition of credit losses on financial assets by addressing the weaknesses in the existing incurred loss model that were observed during the global financial crisis. We agree with the Board’s objective of recognising and measuring credit losses of financial assets on the basis of an entity’s current expectations about the collectability of contractual cash flows. However, we have a number of concerns about the proposed impairment model and suggest an alternate approach using an absolute assessment of credit quality which would avoid accounting anomalies when similar economics of financial assets are measured differently.

The comment letter makes the following points:

  • We support the Board’s decision to develop a single impairment objective for all types of financial assets within the scope of the exposure draft
  • We are concerned that the approaches taken by the Board and by the Financial Accounting Standards Board (FASB) in Accounting Standards Update, Financial Instruments – Credit Losses are significantly different and believe that converged guidance on this topic is critical to supporting well-functioning global capital markets
  • We are supportive of the basic elements of the IASB’s proposed impairment model such as differentiating financial assets on the basis of credit quality and basing the impairment measurement on expected losses. However, we have concerns about certain aspects of the model, e.g. requiring entities to use a relative credit quality assessment
  • In measuring the allowance for cash flows not expected to be received, we agree with use of the effective interest rate but are concerned with the proposed approach to allow the use of a reasonable discount rate within a range
  • With respect to measuring interest revenue, we disagree with the proposal to measure interest revenue on originated credit-impaired financial assets based on the net carrying amount
  • For purchased credit-impaired assets, we recommend recognising an allowance both at initial recognition and subsequently that includes those contractual cash flows not expected to be collected
  • We have concerns about the FASB proposed impairment approach, including that the FASB proposed impairment model requires recognition of full lifetime expected credit losses for all financial assets, particularly at inception of these financial assets.

In light of our concerns with both the IASB’s and FASB’s proposed models, we propose another approach that we believe retains many aspects of both boards’ proposals and remains faithful to their objectives. The comment letter summarises are recommended approach as follows:

Under our recommended approach, an entity would continue to monitor the credit quality of its financial assets during the reporting period. We believe that when it becomes apparent for a financial asset or assets that, on the basis of credit indicators and other relevant factors, it is not highly probable that the entity will collect all contractual cash flows when due, the entity should immediately recognise all expected credit losses (i.e., those estimated credit losses for the remaining life of the asset or for the average remaining life for the portfolio of assets). Generally, entities would assess whether such indicators and relevant factors exist at the most granular level reasonable without undue cost and effort, which in some cases may result in their making such assessments on a portfolio basis (i.e., portfolio of similar assets).

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