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Results of the European field-test on the IASB's expected credit losses model for financial instruments

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

22 Jul 2013

EFRAG and the National Standard Setters of France, Germany, Italy and the United Kingdom have conducted a field-test designed to show whether the proposed new IASB impairment model addresses the weaknesses of the old model, whether the new model is operational and what costs and impacts will come with the new model.

Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses proposes a model according to which credit losses are no longer recognised if incurred; rather, entities would recognise expected credit losses on financial assets and on commitments to extend credit based upon current estimates of expected shortfalls in contractual cash flows as at the reporting date.

The field-test, conducted through a questionnaire developed by EFRAG and National Standard Setters, was focused on the practical application of the new requirements and was intended to gather solely facts and objective data, rather than views and opinions.

The main findings of the survey are reproduced below from the press release published on the EFRAG website:

The proposed model would be more responsive to changes in credit quality compared to the incurred loss model in IAS 39.

Many participants were concerned that the proposals in the ED did not allow them to sufficiently rely on their existing credit risk management and regulatory practices; and that not all necessary data are available.

While overall the requirements were found to be clear, they were rated operationally difficult to apply. As a consequence further guidance was considered necessary by participants.

Tracking credit quality, assessing the significance of credit deterioration, having access to sufficient data, discounting expected credit losses and fulfilling the disclosures would be operationally difficult.

Participants were divided as to whether the proposals in the Exposure Draft reflected the manner in which they assessed credit deterioration.

Participants would incur significant implementation costs to apply the requirements in the ED.

Please click for access to the full field-test results on the EFRAG website.

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