Impairment of financial
assets
Tentative decisions
and
Issues for discussion
Outline of presentation
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•
•
•
•
•
Overview – replacement of IAS 39
Impairment framework
Background – why change?
Tentative IASB decisions
FASB convergence
Discussion points
Overview – replacement of IAS 39
Financial
instruments:
IAS 39 replacement
project
Phase 1:
Classification and
measurement
Phase 2: Impairment
Phase 3: Hedging
Impairment framework
Impairment models

Available
for sale

Amortised
cost
Incurred
loss model
At cost
Expected
loss model
Background – why change?
• Perceived weaknesses in IAS 39
highlighted by financial crisis


be more forward-looking and have earlier
recognition of loan losses
complexities in multiple impairment models within
IAS 39
Tentative IASB decisions
Objective of impairment model
Expected loss model
•
•
effective return on a financial
asset
current cash flow information +
cash flows on initial recognition
Incurred loss model
•
•
actual return on a financial
asset (objective evidence of a
loss event)
actual cash flow information
Tentative IASB decisions
Comparison of impairment models
Recoverable amount – IAS 36
• Lower of:
• Fair value less costs to sell
and
• Value in use = present value
of expected future cash flows
• Only test for impairment if there
is an indicator
• Only reverse impairment if there
is a reversal of the indicator
Expected loss model
•
Expected cash flows,
discounted by the effective
interest rate(s)
• Impairment indicators not used
• No reference to change in
indicators for impairment
reversal
Tentative IASB decisions
Measurement principles
PV of expected cash flows over the remaining life
discounted at effective interest rate
Expected cash flows
• Inputs into cash flow expectations:
- contractual terms
- additional fees
- credit loss: application guidance
to be provided
• When to re-estimate cash flows?
Effective interest rate
• Fixed rate instruments:
- at inception
• Variable rate instruments:
- applicable spot rate + initial
effective spread
Tentative IASB decisions
Application to variable rate instruments
Issue: unwinding of amortised cost
•
Catch-up adjustment – adjustment to profit
or loss that changes the carrying amount
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Consistent measurement principles – EIR is
constant
Consistent application to fixed rate instrument
Tentative IASB decisions
Practical guidance
Concerns
Tentative guidance
Treatment of trade
receivables
• conventional
provisioning
methods
Collective
(portfolio)
assessment
• best estimate
• prevent double
counting
Forecasting cash
flows – what is
expected loss
• data source
• adjusting
historical data
Tentative IASB decisions
Presentation
• Statement of comprehensive income
$
Interest revenue based on contractual cash flows
XXX
Less Allocation of initial expected losses
Net interest revenue
X
XX
Changes in expectations (i.e. additional impairment
charges or reversals)
• Statement of financial position – net carrying
amount
Y
Tentative IASB decisions
Disclosure
•
Notes to the financial statement


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mandatory use of allowance account (includes movements
within the account)
comparison between development of credit loss allowance
over time and cumulative write-offs
details that distinguish changes that are credit-related from
those that are not credit-related
management’s assumptions and methodology on the
expected cash flow approach
explanation of sensitivities of key assumptions and stress
testing
Tentative IASB decisions
Expected timeline and transitions
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•
RFI
ED
Comments
due
Jun
2009
Nov
2009
June
2010
IFRS
End
2010?
3 yrs
Effective
2013?
Available for early application
Application to existing financial assets at initial recognition
FASB convergence
Liaising with IASB, but on a different timeline
Key measurement bases effectively the same
– amortised cost and fair value
Some differences remain
Discussion points (1)
Would an expected loss model necessarily
lead to an overall earlier recognition of
impairments?
Discussion points (2)
Is there a need for more consideration to be
given to financial assets that are not loan
receivables?
Discussion points (3)
(3A) Is there a case for using impairment
indicators under an expected loss model?
(3B) Is there a case for using indicators of
impairment reversals?
Discussion points (4)
Would ‘probability of default’ based on a
probability-weighted calculation be
appropriate?
Discussion points (5)
An expected cash flow approach means that
interest income is generated through the
effective interest method – is this application
practical?
Discussion points (6)
Transitional arrangements – assuming the
proposals proceed, what should be the
basis for transition: retrospective,
prospective or some combination
approach?