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Practical guide to IFRS
Exposure draft on impairment of
financial assets
In March 2013, the IASB issued an
exposure draft (ED), ‘Financial
instruments: Expected credit losses’.
This is a result of several years of
discussions and follows two previously
published impairment proposals.
Contents:
At a glance
Background
2
The proposed IASB
model
3
Next steps
12
Appendix –
Comparison between
the IASB’s and the
14
FASB’s proposals
The ED outlines an expected loss model
that will replace the current incurred loss
model of IAS 39, ‘Financial instruments:
Recognition and measurement’. It seeks to
address the criticisms of the incurred loss
model and, in particular, that it caused
impairment losses to be recognised ‘too
little and too late’. It is expected that
impairment losses will not only be larger
but will also be recognised earlier. This
practical guide summarises the key
proposals and their implications, including
a comparison with the FASB impairment
proposals and IAS 39.
weighted approach and they take into
account the time value of money. The
calculation is not a best-case or worstcase estimate. Rather, it should
incorporate at least the probability that
a credit loss occurs and the probability
that no credit loss occurs.

As an exception to the general model,
an entity does not recognise lifetime
expected credit losses for financial
instruments that are equivalent to
‘investment grade’.

Interest income is calculated using the
effective interest method on the gross
carrying amount of the asset. But, once
there is objective evidence of
impairment (that is, the asset is
impaired under the current rules of
IAS 39), interest is calculated on the
net carrying amount (that is, after
recognising any loss allowance).

The proposal includes a simplified
approach for trade and lease
receivables. An entity should
measure the loss allowance at an
amount equal to the lifetime
expected credit losses for short-term
trade receivables. The same
measurement basis is available as an
alternative to the general model
(accounting policy choice) for longterm trade receivables and lease
receivables.

A different model is required for
purchased or originated creditimpaired assets.

The comment deadline is 5 July
2013. The IASB expects to finalise
the impairment requirements by the
end of 2013.
At a glance

Under the proposed model, an entity
should recognise a loss allowance on a
financial instrument equal to a 12month expected credit loss; or, if the
credit risk on the financial instrument
has increased significantly since initial
recognition, an entity should recognise
a lifetime expected credit loss.

12-month expected credit losses are all
cash flows not expected to be received
over the life of the financial instrument
(‘cash shortfalls’) that result from
default events that are possible within
12 months after the reporting date.


Lifetime expected credit losses are cash
shortfalls that result from all possible
default events over the life of the
financial instrument.
Expected credit losses are determined
using an unbiased and probability-
Background
During the financial crisis, the G20
tasked global accounting standard setters
to work intensively towards the objective
of creating a single high-quality global
standard. As a response to this request,
the IASB and the FASB began to work
together on the development of new
financial instruments standards. The
IASB decided to accelerate its project to
replace IAS 39, and sub-divided it into
three main phases: classification and
measurement; impairment; and hedging.
Macro hedging is being considered as a
separate project.
The IASB completed the first phase of
this project (classification and
measurement) for financial assets in
November 2009 and for financial
liabilities in November 2010. In late 2011,
the IASB decided to consider limited
amendments to the classification and
measurement model in IFRS 9, and
published the ED on these limited
amendments at the end of November
2012 (see straight away 101, ‘IASB
proposes limited modifications to IFRS
9’).
As part of this project, the IASB issued its
first impairment ED in 2009. At that
time, the IASB proposed that an entity
should measure amortised cost at the
expected cash flows discounted at the
original credit-adjusted effective interest
rate. As a result, interest revenue would
be recorded net of the initial expected
credit losses. Although constituents
supported the concept, they raised
serious concerns about its operationality.
The FASB published its proposed
Accounting Standard Update in 2010,
with the objective of ensuring that the
loss allowance balance reflected all
estimated credit losses for the remaining
lifetime of the asset.
Feedback received by the IASB and FASB
urged a converged model for impairment.
As a result, the boards jointly issued a
supplementary document to their
individual ED in 2011. This document
suggested that an entity should divide its
financial assets into two subgroups: a
good book and a bad book. The loss
allowance for the good book would be
calculated at the greater of:
 a time-proportionate loss allowance;
and
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
expected credit losses for the
foreseeable future.
The loss allowance for the bad book
would be determined based on full
lifetime expected credit losses.
Respondents did not support the model
set out in the supplementary document.
They did not see the conceptual merit in
requiring two different impairment
calculations for the good book and they
found it operationally complex.
After receiving these responses, the
boards continued to work together on the
development of a new model (the ‘threebucket’ model) that reflects the general
pattern of deterioration in credit quality
of a financial instrument.
During the summer of 2012, the FASB
decided to develop a different model to
the three-bucket model. This decision
was taken as a result of feedback received
by the FASB that raised concerns about
the lack of clarity around the key terms of
the three-bucket model. The FASB has
now developed a single measurement
model that recognises a loss allowance
for all expected credit losses on financial
instruments. The FASB issued its ED on
the Current Expected Credit Loss (CECL)
model in December 2012. Comments on
this ED are due by 31 May 2013.
The IASB also performed outreach while
developing the three-bucket model and
the feedback supported a model that
differentiates between financial
instruments that have suffered a
significant deterioration in credit quality
since initial recognition and financial
instruments that have not. But
participants emphasised that benefits of
the information provided should
outweigh the cost of determining which
financial instruments have deteriorated
in credit quality.
Based on the feedback received, the IASB
modified the three-bucket model
proposals, in particular, the requirements
as to when a financial instrument’s loss
allowance should be measured at an
amount equal to lifetime expected credit
losses.
The IASB issued its ED in early March
2013. Comments on the ED are due to the
IASB by 5 July 2013. The IASB aims to
finalise the impairment standard by the
end of 2013.
Practical guide to IFRS – Exposure draft on impairment of financial assets
2
The proposal does not specify its effective
date, but is seeking comments on the
appropriate mandatory effective date for
all phases of IFRS 9.
PwC observation: Currently we do not
have a converged model with each board
exposing different models.
The FASB’s ED was issued in December
2012, with a recently extended comment
period to 31 May 2013, and the IASB's ED
was published in March 2013 with a
comment period to 5 July 2013. These
timing differences could present
challenges for those who plan on
responding to both proposals. As a result,
constituents that are expected to be
significantly affected by the proposed
changes should start evaluating them
now.
Convergence is one of the principal
objectives of a wide range of interested
parties and, as a result, both boards have
been urged to work together to develop a
converged impairment model. Our
expectation is that the boards will jointly
discuss the comments received on their
respective proposals after the comment
periods end.
The proposed IASB model
Scope
The proposed model should be applied
to:
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
financial assets measured at
amortised cost under IFRS 9;

financial assets measured at fair
value through other comprehensive
income under the ED ‘Classification
and measurement: Limited
amendments to IFRS 9’;

loan commitments when there is a
present legal obligation to extend
credit, except for loan commitments
accounted for at fair value through
profit or loss under IFRS 9,

financial guarantee contracts within
the scope of IFRS 9 and that are not
accounted for at fair value through
profit or loss; and

lease receivables within the scope of
IAS 17, ‘Leases’.
PwC observation: The proposed
impairment model is applicable not only
for financial assets (currently accounted
for under IAS 39) but also for certain
loan commitments and financial
guarantees that are currently accounted
for under IAS 37, ‘Provisions, contingent
liabilities and contingent assets’. The
board included these in the scope of the
ED because entities manage credit risk
for all these financial instruments in the
same way.
General model
Under the ED, an entity should measure
the expected credit losses for a financial
instrument at an amount equal to 12month expected credit losses if the credit
risk of the financial instrument has not
increased significantly since initial
recognition. However, lifetime expected
credit losses are required to be provided
for if, at the reporting date, the credit risk
of the financial instrument has increased
significantly since initial recognition.
Twelve-month expected credit losses do
not represent the cash shortfalls only
expected to occur in the 12-month period
after the reporting date. Rather, they
equate to the present value of all cash
shortfalls expected to occur over the
remaining life of the instrument resulting
from default events on the financial
instrument that are possible within the
12-month period after the reporting date.
PwC observation: The IASB has not
defined the term ‘default event’. This is a
critical term for the measurement of
expected credit losses. Although
illustrative examples are provided in the
ED, judgement will be required when
applying the model.
This measure of 12-month expected
credit losses in the ED is not identical to
12-month expected credit losses as
defined in regulatory (such as Basel)
calculations. Both the probability of a
default and the loss given default are
calculated differently. Entities might
want to use the systems they have
developed for regulatory purposes and
make appropriate adjustments to arrive
at the IFRS figure. See further discussion
later.
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3
In contrast, the lifetime expected credit
loss represents the present value of all
cash shortfalls expected to occur over the
remaining life of the asset, regardless of
when the default event is expected to
occur.
Cash shortfalls (the credit loss), referred
to in the previous two paragraphs, are
defined as the present value of the
difference between all contractual cash
flows that are due to an entity and cash
flows that the entity expects to receive.
PwC observation: The ED proposes a
model that reflects the general pattern of
deterioration in credit quality of a
financial instrument. As a result, the
recognition of full lifetime expected
credit losses does not occur on initial
recognition. The loss allowance is
recorded at the 12-month expected credit
loss at initial recognition and continues
to be measured on this basis until a
trigger is met (that is, a significant
increase in credit risk). Once the trigger
is met, the loss allowance is measured
based on lifetime expected credit losses.
A different model is applied to purchased
or originated credit-impaired assets (see
further discussion below).
The most significant difference between
the IASB’s proposed model and the
FASB’s CECL model relates to the timing
of when an entity recognises a lifetime
expected credit loss. The CECL model
requires an entity to provide for the full
lifetime expected credit losses on initial
recognition of a financial instrument.
This measurement basis does not change
throughout the life of the instrument. The
IASB’s model is a dual measurement
model and the FASB’s model is a single
measurement model.
PwC observation: Both the IASB’s
model and the FASB’s CECL model
represent a significant change from
current practice. Both boards have
moved away from an incurred loss model
and adopted an expected loss model.
Both the FASB and IASB models require
the recognition of a ‘day one’ impairment
loss in the profit or loss account. This loss
will be lower under the IASB’s model (12-
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month expected credit losses) than the
FASB’s model (full lifetime expected
credit losses). Some might argue that the
recognition of any ‘day one’ loss does not
reflect the economics of the transaction if
financial assets have been priced on
origination at current market interest
rates that appropriately reflect the risk of
loss. Also, it means that financial assets
are initially recorded at an amount which
is lower than fair value.
Assessment of change in credit risk
The IASB’s dual measurement model
requires an entity to assess the point at
which it is required to transfer a financial
instrument from the 12-month expected
credit loss measurement to the lifetime
expected credit loss measurement. Under
the ED proposals, this transfer point is
met when the credit risk of a financial
instrument has increased significantly
since initial recognition. Where credit
risk subsequently reduces to a point
where there is no longer a significant
increase in credit risk since initial
recognition an entity should transfer
from the lifetime expected credit loss
measurement to the 12-month expected
credit loss measurement.
PwC observation: The IASB has not
defined the term ‘significant’ when
assessing the change in credit risk or
specified the amount of change in
probability of a default that would
require the recognition of lifetime
expected credit losses. Although
illustrative examples are provided in the
ED, judgement will be required when
applying the model.
When considering the magnitude of a
change in credit risk, entities should use
probabilities of a default rather than the
change in expected credit losses. When
performing this assessment, an entity
should compare the probability of a
default on the instrument as at the
reporting date with the probability of a
default on the instrument as at initial
recognition. Generally speaking, the
lifetime probability of a default (over the
remaining life of the instrument) should
be used. But, as a practical expedient, in
order to use other information used by an
entity (that is, for regulatory purposes), a
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4
12-month probability of a default can be
used if it would not lead to a different
assessment.
PwC observation: The ED allows
entities to make the assessment of change
in credit risk by using a 12-month
probability of a default, but this does not
mean that the 12-month probability of a
default used for regulatory purposes can
be used without any adjustment.
Twelve-month regulatory expected credit
losses are normally based on ‘through the
cycle’ probabilities of a default and can
include an adjustment for prudence. But
probabilities of a default used for the ED
should be ‘point in time’ probabilities of a
default and the IASB favours the
principle of neutrality over the regulatory
principle of prudence. However,
regulatory probabilities of a default are a
good starting point, provided they can be
reconciled to IFRS probabilities of a
default.
Entities should be aware that a simple or
absolute comparison of probabilities of a
default at initial recognition and at the
reporting date is not appropriate. All
other things staying constant, the
probability of a default of a financial
instrument should reduce with the
passage of time. So, an entity needs to
consider the relative maturities of a
financial instrument at inception and at
the reporting date when comparing
probabilities of a default. In other words,
the probability of a default for the
remaining life of the financial asset at the
reporting date (for example, two years if
three years have already passed on a fiveyear instrument) should be compared to
the probability of a default expected at
initial recognition for the last two years of
its maturity (that is, for years 4 and 5).
Entities might find this requirement
operationally challenging.
When determining whether the credit
risk on an instrument has increased
significantly, an entity should consider
the best information available, including
actual and expected changes in external
market indicators, internal factors and
borrower-specific information. The
factors to be considered are listed in the
ED’s application guidance (paragraph
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B20) and include: changes in external
market indicators (such as credit
spreads); changes in current and
expected external and internal credit
ratings; changes in internal price
indicators for credit; existing or forecast
changes in business, financial or
economic conditions that are expected to
cause a change in a borrower’s ability to
meet its debt obligations; and changes in
operating results of the borrower. The
information used should not only reflect
past events and current conditions, but
should also include reasonable and
supportable forecasts of future events
and economic conditions.
The ED expects that most entities should
be able to use more forward-looking
information (rather than past-due
information) when determining whether
there has been a significant increase in
credit risk since initial recognition. But it
accepts that, in certain circumstances,
entities could consider past-due
information. The ED includes a rebuttable
presumption that a significant increase in
credit risk has occurred if contractual
payments are more than 30 days past due.
This presumption can be rebutted if there
is persuasive evidence that, regardless of
the past-due status, there has been no
significant increase in the credit risk. For
example, an entity has a history that its
borrowers pay regularly, but generally on
day 45 after the due date. In such a case, an
entity would be able to continue to
measure impairment at 12-month expected
credit losses until payments are more than
45 days past due. Another situation where
an entity could rebut the presumption
would be where, based on experience, it
can demonstrate that its customers miss
their due date at the start of their loan
agreement due to delays in setting up their
direct debit arrangements and such delays
are not a sign of an increase in credit risk.
PwC observation: Past-due status is
seen by the board as the last sign of an
increase in credit risk. So it is expected
that, by using more forward-looking
information, entities would move earlier
to lifetime expected credit losses.
As an exception to the general model, if the
credit risk of a financial instrument is low
at the reporting date, irrespective of the
Practical guide to IFRS – Exposure draft on impairment of financial assets
5
change in credit risk, the entity should not
transfer from 12-month expected credit
losses to full lifetime expected credit losses.
We understand that the IASB’s intention
here was to capture instruments with a
credit risk equivalent to ‘investment grade’.
PwC observation: The ED refers to
‘investment grade’ as an example. But
this should not prevent entities from
defining financial assets which do not
have an external credit rating as low
credit risk (such as assets in retail
portfolios), provided they conclude that
the financial asset has low credit risk at
the reporting date. Credit risk is
considered to be low if a default is not
imminent and any adverse economic
conditions or changing circumstances
could lead to, at most, weakened capacity
of the borrower to meet its contractual
cash flow obligations on the financial
instrument.
This exception to the general model was
introduced to make the model more cost
effective. This eliminates the need for
tracking the change in credit quality for an
instrument with low credit risk.
PwC observation: With the exception
of financial instruments with low credit
risk at the reporting date, an entity needs
to track credit quality at inception and
compare it to the credit quality at the
reporting date. This is likely to require
changes to existing systems, but entities
might be able to use their current risk
management practices.
Measurement of impairment
Expected credit losses should be
determined using an unbiased,
probability-weighted approach and take
into account the time value of money. An
entity should use the best available
information. The calculation is not a
best-case or worst-case estimate. The
IASB has made it clear that relatively
simple modelling might satisfy the
requirement and it is not always
necessary to develop a large number of
detailed scenarios. But the calculation
should incorporate at least both the
probability that a credit loss occurs and
the probability that no credit loss occurs.
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PwC observation: The FASB’s
proposal includes the same principles for
measuring expected credit losses.
In other words, all financial instruments
will have some (albeit, in some
circumstances, very small) probability of
a default and this will drive the amount of
credit loss to be recognised. For example,
consider a CU1,000 loan which was
originated by an entity where there has
been no significant increase in the credit
risk since initial recognition and there is
a 1% probability of default in the next 12
months with an assumption that, if the
default occurs, the loss will be 20% of the
gross carrying amount. For this loan, the
loss allowance recognised for the 12month expected loss recognised should
be CU1,000*0.2*0.01=CU2.
However, for highly collaterised financial
instruments, the loss given default might
be zero and so, notwithstanding the fact
that the instrument has a probability of a
default, the amount to be recognised as
loss allowance in such a case will be nil.
PwC observation: As previously
mentioned, an entity should use unbiased
assumptions when calculating expected
credit losses. This might require
adjustments to regulatory data that is
already used by the entity (such as for
Basel).
Unit of account
An entity should generally assess, on an
individual instrument basis, whether a
loss allowance equal to an amount of 12month or lifetime expected credit losses
should be recognised. But an entity can
perform this assessment on a collective
basis (for example, on a group or
portfolio basis) if the financial
instruments have shared risk
characteristics. Examples of risk
characteristics can be type of instrument,
credit risk rating, type of collateral, date
or origination, remaining term to
maturity, industry, geographical location
of borrower, and relative value of
collateral.
Financial instruments should not be
grouped and assessed on a collective
basis if the measurement of lifetime
Practical guide to IFRS – Exposure draft on impairment of financial assets
6
expected credit losses is appropriate for
only some of the financial instruments in
the group. An entity should re-assess its
aggregation whenever new information
becomes available.
In addition, an entity should measure the
loss allowance by estimating expected
credit losses on an individual basis, or on
a collective basis if the financial
instruments have shared risk
characteristics.
PwC observation: The IASB’s ED is
applicable to individual instruments, but
it allows the impairment assessment and
measurement to be made on a portfolio
basis (if the instruments have shared risk
characteristics). Entities will need to
ensure that such a collective assessment
would not lead to a different result from
an individual assessment. The ED
explicitly requires that aggregation
should be re-assessed whenever new
information becomes available, which
can increase operational complexities.
PwC observation: The FASB’s
proposal does not address explicitly the
unit of account. However, we understand
that the FASB intends that the CECL
model could be applied to either
portfolios of assets or individual assets.
Some aspects of the model require
consideration at an individual asset level.
For example, when evaluating whether
an asset carried at fair value through
other comprehensive income (FV-OCI) is
eligible for a practical expedient available
in the FASB’s proposal (that is, not to
recognise credit losses when specified
conditions are met), the evaluation of
whether significant credit losses exist is
carried out at the individual asset level.
Discount rate
When calculating the expected credit loss
(regardless of whether it is the 12-month
or the lifetime expected credit loss), the
time value of money must be considered.
The ED requires an entity to determine
the appropriate discount rate, which
could be any discount rate between the
risk-free rate and the effective interest
rate. This rate can be a current rate (for
example, the prevailing risk-free rate at
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each reporting period). But, once there is
objective evidence of impairment (that is,
the asset is impaired under the current
rules of IAS 39) at reporting date, an
entity shall measure the expected credit
losses as the difference between the
asset’s amortised cost and the present
value of estimated future cash flows
discounted at the financial asset’s
original effective interest rate.
One of the exceptions to the rule is for
undrawn loan commitments and
financial guarantees. For loan
commitments and financial guarantees,
the discount rate should reflect the
current market assessment of the time
value of money and the risks that are
specific to the cash flows.
Another exception is for purchased or
originated credit-impaired assets, where
expected credit losses should be
discounted using their specific creditadjusted effective interest rate.
PwC observation: Under the FASB’s
CECL model, an estimate of expected
credit losses should reflect the time value
of money, either explicitly or implicitly. If
an entity chooses to use a discounted
cash flow approach, which would
explicitly consider the time value of
money, cash flows should be discounted
at the effective interest rate.
PwC observation: The IASB’s ED
provides entities with a choice of
discount rate to be applied. This
contrasts with IAS 39, which requires the
use of the original effective interest rate.
Entities need to ensure that expected
credit losses are discounted to the
reporting date and not to the default date
(which is used by some credit
management systems).
Interest revenue
Interest revenue is calculated using the
effective interest method on an asset’s
gross carrying amount. Similar to today,
it should be presented as a separate line
item in the statement of profit or loss and
other comprehensive income. But, once
there is objective evidence of impairment
(that is, the asset is impaired under the
Practical guide to IFRS – Exposure draft on impairment of financial assets
7
current rules of IAS 39), interest is
calculated on the carrying amount, net of
the expected credit loss allowance.
The IASB believes that the basis for
interest calculation needs to be changed
at this point to avoid increasing the gross
carrying amount above the amount that
will be collected by the entity.
PwC observation: The requirement to
differentiate between assets which have a
lifetime expected loss measure (and no
objective evidence of impairment) and
those for which there is objective
evidence of impairment will place an
additional burden on entities. The IASB
argues that a similar interest calculation
is currently required for impaired assets
under IAS 39.
PwC observation: The FASB’s interest
recognition proposal is different. The
CECL model requires entities to
recognise contractual interest income
unless it is not probable that the entity
will collect all contractual cash flows. An
entity will cease its accrual of interest
income when it is not probable that the
entity will receive substantially all of the
principal or substantially all of the
interest.
PwC observation: Both the IASB and
the FASB require a different treatment
for interest recognition for financial
assets. Whilst the IASB still expects the
recognition of interest (calculated based
on the net amount) for assets where there
is objective evidence of impairment, the
FASB requires entities to cease the
accrual of interest (where it is not
probable that an entity will receive
substantially all of the principal or
substantially all of the interest). The
IASB’s proposal is in line with current
accounting under IFRS. The FASB
intended its proposal to reflect current
industry practice.
Loan commitments and financial
guarantees
For loan commitments and financial
guarantees that are in scope, the expected
drawdown for provisioning purposes
should be determined over the period
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that an entity has a contractual obligation
to extend credit. This means that, if an
undrawn facility is immediately
revocable, no provision for expected
credit losses will be recognised, even if an
entity expects that the facility will not be
revoked in time to prevent a credit loss.
As mentioned previously, when
calculating the expected credit losses, an
entity does not have the same choice over
selecting the discount rate. The discount
rate for assessing the expected credit
losses on loan commitments and
financial guarantees should reflect the
current market assessment of the time
value of money and the risks that are
specific to the cash flows.
PwC observation: Loan commitments
are in the scope of the FASB’s proposed
model. Financial guarantees are currently
outside its scope.
PwC observation: The IASB’s
proposed model for loan commitments is
different from current practice under
IFRS. Currently, entities assess
impairment for credit risk management
purposes based on the behavioural
expectations of an entity (which can
extend beyond the contractual period).
So, the IASB ED’s requirements for
measurement to reflect the contractual
obligation could require entities to
change their current assessment, which
might result in a decrease in the level of
provisions (as compared to current
practice).
Purchased or originated creditimpaired assets
The general impairment model does not
apply for purchased or originated creditimpaired assets. An asset is considered
credit-impaired on purchase or
origination if there is objective evidence
of impairment (as set out in IAS 39) at
the point of initial recognition of the
asset (for instance, if it is acquired at a
deep discount).
For such assets, impairment is
determined based on full lifetime
expected credit losses on initial
recognition. But the lifetime expected
credit losses are included in the
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8
estimated cash flows when calculating
the effective interest rate on initial
recognition. The effective interest rate for
interest recognition throughout the life of
the asset is a credit-adjusted effective
interest rate. As a result, no loss
allowance is recognised on initial
recognition.
Any subsequent changes in lifetime
expected credit losses, both positive and
negative, will be recognised immediately
in profit or loss.
PwC observation: Under IAS 39, the
effective interest rate used for assets
acquired at a deep discount is a credit
adjusted discount rate which is the same
under the ED.
PwC observation: The FASB’s ED also
includes specific guidance on purchased
credit-impaired (PCI) assets. PCI assets
are defined as acquired individual
financial assets (or acquired groups of
financial assets with shared risk
characteristics at the date of acquisition)
that have experienced a significant
deterioration in credit quality since
origination, based on the assessment of
the acquirer.
For PCI assets, the FASB’s proposal
requires buyers to assess the discount
embedded in the purchase price that is
attributable to expected credit losses at
the date of acquisition. This amount is
not recognised as interest income. On
acquisition the entity will be required to
record an allowance to represent the
amount of contractual cash flows not
expected to be collected. Each component
of the original purchase price will be
‘grossed up’ to reflect the ‘day one’
allowance.
On day two, the allowance for expected
credit losses for PCI assets will follow the
same approach as other debt instruments
in the scope of the FASB’s model. In
other words, changes in the allowance for
expected credit losses will be recognised
as an adjustment to the provision for
credit losses in the current period.
PwC
PwC observation: The IASB’s model
for purchased or originated creditimpaired assets differs from the FASB’s
PCI model. Under the IASB’s proposal,
there is no concept of ‘grossing up’ the
basis of the loan to reflect the embedded
loss allowance. The IASB does not
require an expected credit loss allowance
to be recorded on day one, but instead
limits the accrual of interest income to
the expected cash flows (including initial
expected credit losses) as opposed to the
contractual cash flows, which is similar to
the current practice of applying AG5 in
IAS 39.
Trade and lease receivables
The proposal includes a simplified
approach for trade and lease receivables.
An entity should measure the loss
allowance at an amount equal to the
lifetime expected credit losses for shortterm trade receivables resulting from
transactions within the scope of IAS 18,
‘Revenue’. The ED also proposes to
amend IFRS 9 to initially measure trade
receivables that have no significant
financing component at their transaction
price (rather than at fair value, as
currently required) when the new
Revenue Standard is published.
For long-term trade receivables and for
lease receivables under IAS 17, an entity
has an accounting policy choice between
the general model and the model
applicable for short-term trade
receivables.
PwC observation: The simplified
model for short-term trade receivables
(and, if chosen, for long-term trade
receivables and lease receivables) would
give rise to the same measurement basis
under the IASB’s and the FASB’s
proposals.
The use of a provision matrix is allowed if
it is appropriately adjusted to reflect
current conditions and forecasts of future
conditions.
PwC observation: The simplified
model for short-term trade receivables
represents a change from the current
practice under IAS 39 where an
impairment loss is frequently recognised
Practical guide to IFRS – Exposure draft on impairment of financial assets
9
when the trade receivable becomes past
due. The IASB included the simplified
model of the recognition of the lifetime
expected credit loss allowance on day one
to reduce the cost of implementation for
short-term trade receivables.
Modifications
Where an entity modifies the contractual
cash flows of a financial asset, and the
modification does not result in its
derecognition, an entity should adjust the
gross carrying amount of the asset to
reflect the revised contractual cash flows.
The new gross carrying amount should be
determined as the present value of the
estimated future contractual cash flows
discounted at the asset’s original effective
interest rate. The resulting adjustment
should be charged to profit or loss as a
gain or loss on modification.
Modified assets should be assessed, to
determine whether a significant increase
in credit risk has occurred, in the same
way as any other financial instrument. An
entity should consider the credit risk at
the reporting date under the modified
contractual terms of the asset. This is
compared to the credit risk at initial
recognition under the original
unmodified contractual terms of the
financial asset. If this comparison does
not show a significant increase in credit
risk, the loss allowance should be
measured at 12-month expected credit
losses.
PwC observation: The IASB’s ED
includes guidance on determining the
gross carrying amount of a modified asset
as well as assessing modified assets for
changes in credit risk. But it does not
provide any guidance on when
modification of a financial asset would
result in a derecognition. This is an area
where judgement will continue to be
required.
PwC observation: Under the FASB’s
proposal for modifications other than
troubled debt restructuring (TDR), there
is no change to current guidance with
respect to evaluating whether the
modification results in a new loan or a
continuation of the old loan.
PwC
For TDRs, the CECL model requires an
adjustment to the cost basis of the
modified asset, so that the effective
interest rate on the modified asset
continues to be the original effective
interest rate. The basis adjustment will be
calculated as the amortised cost basis
before modification less the present value
of the new series of cash flows
(discounted at the original effective
interest rate).
Write-offs
The ED proposes that the gross carrying
amount of a financial asset should be
directly reduced where there is no
reasonable expectation of recovery.
PwC observation: The write-off
principles are consistent between the
FASB and IASB models. This is expected
to help comparability. But judgement will
still be needed in assessing when there is
no reasonable expectation of recovery, so
an entity should disclose its write-off
policy (including the indicators for writeoff) and whether there are assets that
have been written off which are still
subject to enforcement activity.
Presentation
An entity should present interest revenue
in the statement of profit or loss and
other comprehensive income as a
separate line item. Impairment losses
(including reversals of impairment losses
or impairment gains) should also be
presented as a separate line item in profit
or loss and other comprehensive income
statement.
An entity should recognise expected
credit losses in the statement of financial
position as follows: as an expected credit
loss allowance if those expected credit
losses relate to a financial asset measured
at amortised cost or a lease receivable;
and as a provision (that is, a liability) if
they relate to a loan commitment or
financial guarantee contract. For
financial assets that are mandatorily
measured at fair value through other
comprehensive income in accordance
with the ‘Classification and
measurement’ ED, the accumulated
Practical guide to IFRS – Exposure draft on impairment of financial assets
10
impairment amount is not separately
presented in the statement of financial
position.
PwC observation: The FASB’s
proposed CECL model requires similar
presentation, except for requiring a
separate line presentation of expected
credit losses on the statement of financial
position as an allowance that reduces the
amortised cost of the asset. As discussed
earlier, purchased credit-impaired assets
are subject to different presentation
requirements under both models.
The IASB’s proposed presentation does
not represent a change from current
IFRS practice.
Disclosures
Extensive disclosures are proposed to
identify and explain the amounts in the
financial statements that arise from
expected credit losses and the effect of
deterioration and improvement in credit
risk. Sufficient information should be
provided to allow users to reconcile line
items that are presented in the statement
of financial position. For disclosure
purposes, financial instruments should
be grouped into classes that facilitate the
understanding for users.
The ED requires reconciliations of
opening to closing amounts separately for
gross amounts and for the associated loss
allowance for each of the following
measurement categories:

financial assets with a 12-month
expected credit loss allowance;

financial assets with a lifetime
expected credit loss allowance;

financial assets with objective
evidence of impairment;

purchased or originated creditimpaired assets;

loan commitments; and

financial guarantees.
Inputs, assumptions and estimation
techniques that are used when estimating
12-month or lifetime expected credit
losses are required to be disclosed. This
includes information about the discount
rate – that is, the discount rate selected,
the actual rate (namely, its absolute
PwC
figure), and significant assumptions that
have been made to determine the
discount rate.
Disclosure will be required for
modifications, including any
modification gain or loss, together with
the amortised cost of financial assets that
have been modified while their loss
allowance was measured at an amount
equal to lifetime expected credit losses.
In later periods, an entity should disclose
the gross carrying amount of previously
modified assets where the loss allowance
measurement has switched from lifetime
to 12-month expected credit losses and
also re-default rates (if assets were
modified while in default).
The following detailed information
should also be provided about collateral:

description of the collateral;

information about the quality of the
collateral and explanation of any
changes in its quality;

how the collateral reduces the
severity of expected credit losses in
case of financial instruments with an
objective evidence of impairment;
and

the gross amount of financial assets
that have an expected credit loss of
zero because of collateral; and
details of portfolio or geographical
concentrations should also be given.

An entity should explain the inputs,
assumptions and estimation techniques
that are used when determining whether
the credit risk of a financial instrument
has increased significantly, as well as any
change in the estimates or techniques.
If an entity rebutted the presumption
that financial assets more than 30 days
past due have a significant increase in
credit risk, the entity should disclose how
it has rebutted that presumption.
The gross carrying amount of financial
assets, and the amount recognised as
provision for loan commitments and
financial guarantee contracts, should be
disclosed by credit risk rating grades.
PwC observation: The FASB’s
proposal also requires extensive
disclosures to enable users of the
Practical guide to IFRS – Exposure draft on impairment of financial assets
11
financial statements to understand: (1)
the credit risk inherent in the portfolio
and how management monitors the
credit quality of the portfolio; (2)
management’s estimate of expected
credit losses; and (3) changes in the
estimate of expected credit losses that
have taken place during the period.
Given the judgemental nature of the new
impairment models, both boards require
considerable additional disclosure in
addition to that which is currently
required by either IFRS or US GAAP to
provide greater comparability of financial
statements.
Transition
The ED is to be applied retrospectively,
but restatement of comparatives is not
required. But entities are permitted to
restate comparatives if they can do so
without the use of hindsight. If an entity
does not restate comparatives, it should
adjust the opening balance of its retained
earnings for the effect of applying the
proposals in the year of initial
application.
PwC observation: The FASB’s
proposed transition guidance requires
the recording a cumulative-effect
adjustment to the statement of financial
position as of the beginning of the first
reporting period in which the guidance is
effective. This is similar to the IASB’s
proposal for those entities that do not
restate comparatives but adjust the
opening balance of the retained earnings.
loss allowance should be determined by
considering whether or not the credit risk
is low (‘investment grade’) at each
reporting period until that financial
instrument is derecognised.
PwC observation: The IASB’s proposal
does not require the restatement of
comparatives because it can be very
difficult to do so without the use of
hindsight. On the other hand, the
proposal ensures that users of the
financial statements can assess the
impact of the move to the new model by
requiring a reconciliation from the
closing impairment under IAS 39 or
IAS 37 to the opening expected credit
losses.
The ED offers a practical expedient for
entities that historically did not track
credit risk data from initial recognition
and are not able to obtain the data
without undue cost or effort. In this case,
entities are allowed to determine the loss
allowance based only on absolute credit
risk at the reporting date. This
requirement means that loss allowance
for assets that are below investment
grade will be measured at an amount
equal to the lifetime expected credit
losses, whether or not credit risk has
increased significantly since initial
recognition. Entities will need to consider
the cost/benefit aspects of this practical
expedient.
Next steps
However, a reconciliation of the closing
impairment loss allowances under IAS 39
and the loan commitment and financial
guarantee provisions under IAS 37 to the
opening loss allowances or provisions
under the ED should be disclosed.
Comments are due to the IASB on the ED
by 5 July 2013. All constituents are
encouraged to provide feedback to the
board, particularly those in the banking
and insurance industries, who will be
most significantly affected by the
proposals.
If, at the date of initial application, the
determination of the credit risk at initial
recognition of a financial instrument
would require undue cost or effort, the
The proposal does not specify its effective
date, but is seeking comments on the
appropriate mandatory effective date for
all phases of IFRS 9.
PwC observation: The FASB’s ED was
issued in December 2012, with a recently
extended comment period to 31 May
2013.
PwC
Practical guide to IFRS – Exposure draft on impairment of financial assets
12
Convergence is one of the principal
objectives of a wide range of interested
parties and, as a result, both boards have
been urged to work together to develop a
converged impairment model. Our
expectation is that the boards will jointly
discuss the comments received on their
respective proposals after the comment
periods end.
PwC observation: The IASB previously
decided that the requirements of IFRS 9
would be effective from the start of 2015.
But the ED contains a consequential
amendment to IFRS 9 that removes the
effective date of 1 January 2015. The
board is seeking views on the lead time
that entities would need to implement
the impairment proposals.
In addition, the EU has not yet endorsed
IFRS 9, thereby precluding IFRS
reporting entities within the EU from
adopting the standard early. The EU has
indicated that it will only make a decision
on endorsement once the entire financial
instruments guidance has been finalised,
excluding macro hedging.
If you have questions about the proposals
in the ED or require further information,
speak to your regular PwC contact.
PwC
Practical guide to IFRS – Exposure draft on impairment of financial assets
13
Appendix
Comparison between the IASB’s proposals on ‘Financial Instruments:
Expected Credit Losses’ and the FASB’s proposals on ‘Current Expected
Credit Loss’
Description
IASB
FASB
Scope

Applies to loans, debt securities,
loan commitments, trade
receivables, reinsurance
receivables, and lease receivables
that are not measured at fair
value through net income.




Information
considered
when
estimating
credit losses
Financial assets measured at
amortised cost under IFRS 9.
Financial assets measured at
fair value through other
comprehensive income
under the draft
‘Classification and
Measurement: Limited
Amendments to IFRS 9’.
Loan commitments when
there is a present legal
obligation to extend credit,
except for loan commitments
accounted for at fair value
through profit or loss under
IFRS 9.
Financial guarantee
contracts within the scope of
IFRS 9 and that are not
accounted for at fair value
through profit or loss.
Lease receivables within the
scope of IAS 17, ‘Leases’.
Entities should consider
information that is reasonably
available (including information
about past events, current
conditions, and reasonable and
supportable forecasts of future
events and economic
conditions).
Financial guarantees are
currently outside the scope of the
FASB’s proposals.
Same.
Definition of
The weighted average of credit
Same.
expected credit losses with the respective
losses
probabilities of default as
weights. Credit loss is defined as
the present value of the
difference between all principal
and interest cash flows that are
due to an entity in accordance
with the contract and all the cash
flows that the entity expects to
receive.
PwC
Practical guide to IFRS – Exposure draft on impairment of financial assets
14
PwC
Description
IASB
FASB
Measurement
objective for
the allowance
for credit
losses
An entity recognises lifetime
expected credit losses only when
there has been a significant
increase in credit risk since
initial recognition. Otherwise,
the loss allowance is measured at
an amount equal to 12-month
expected credit losses.
An entity recognises an
allowance for all expected credit
losses for all debt instruments at
each reporting date.
Recognition of
changes in the
allowance for
credit losses
The profit or loss account reflects Changes in the allowance for
the changes in 12-month
credit losses are recognised
expected credit losses for
immediately in net income.
instruments without significant
deterioration in credit risk, and it
reflects the changes in lifetime
credit losses for all other
instruments. The profit or loss
account also includes: (1) the
effect of a change in the credit
loss measurement objective from
‘12-month expected credit losses’
to ‘lifetime expected credit
losses’ for instruments that have
experienced significant increase
in credit risk; and (2) the effect
of a change in the credit loss
measurement objective from
‘lifetime expected credit losses’
to ‘12-month expected credit
losses’ for instruments that have
no longer experienced a
significant increase in credit risk.
Interest
recognition
Interest revenue is calculated
using the effective interest
method on the gross carrying
amount of the asset. But, once
there is objective evidence of
impairment (that is, the asset is
impaired under the current rules
of IAS 39), interest is calculated
on the net carrying amount after
loss allowance.
An entity recognises contractual
interest income unless it is not
probable that it will collect all
contractual cash flows.
Purchased
creditimpaired
financial
assets
The asset is recorded at its initial
fair value, and its effective
interest rate includes the
estimate of lifetime credit losses
at initial recognition.
The basis of the asset is ‘grossed
up’ to reflect the embedded
allowance. The remaining
portion of the original purchase
discount, that is not attributed to
credit, is accreted in interest
income over the life of the asset.
Practical guide to IFRS – Exposure draft on impairment of financial assets
15
Description
IASB
FASB
Originated
creditimpaired
financial
assets
Follows the purchased creditimpaired financial assets model.
Follows the general CECL model.
Principles for
measuring
expected credit
losses
The estimate of expected credit
Same.
losses reflects the time value of
money and, at a minimum,
reflects both the possibility that a
credit loss results and the
possibility that no credit loss
results. An entity is prohibited
from estimating expected credit
losses based solely on the most
likely outcome.
Write-offs
An entity will write off a financial Same.
asset in the period in which it
has no reasonable expectation of
recovery.
Discount rate
The discount rate can be any rate If using a discounted cash flow
between the risk-free rate and
approach, the effective interest
the effective interest rate.
rate should be used.
Unit of account An entity should generally
assess, on an individual
instrument basis, whether an
expected credit loss allowance
equal to an amount of 12-month
or lifetime expected credit losses
should be recognised. But an
entity can perform this
assessment on a collective basis
(for example, on a group or
portfolio basis) if the financial
instruments have shared risk
characteristics.
It does not address explicitly the
unit of account. The model is
intended to be able to be applied
to individual assets or portfolios
of assets.
An entity should measure the
expected credit loss allowance by
estimating expected credit losses
on an individual basis, or on a
collective basis if the financial
instruments have shared risk
characteristics.
Loan
commitments
and financial
guarantees
PwC
Follows the general model,
except for no choice over the
selection of the discount rate.
Loan commitments follow the
CECL model.
Financial guarantees are
currently outside the scope of the
FASB’s proposals.
Practical guide to IFRS – Exposure draft on impairment of financial assets
16
Description
IASB
FASB
Trade and
lease
receivables
Simplified approach for trade
Trade and lease receivables
follow the CECL model.
Modifications
and lease receivables.
Where an entity modifies the
contractual cash flows of a
financial asset, and the
modification does not result in
its derecognition, an entity
should adjust the gross carrying
amount of the asset to reflect the
revised contractual cash flows.
The resulting adjustment should
be charged to profit or loss as a
gain or loss on modification.
For other than troubled debt
restructuring (TDR), there is no
change to current guidance with
respect to evaluating whether the
modification results in a new
loan or a continuation of the old
loan.
An entity should present interest
revenue and impairment losses
in the statement of profit or loss
and other comprehensive income
as separate line items.
Similar presentation is
required, except for requiring a
separate line presentation of
expected credit losses on the
statement of financial position
as an allowance that reduces
the amortised cost of the asset.
For TDRs, an adjustment to the
cost basis of the modified asset
should be made, so that the
effective interest rate on the
Modified assets should be
assessed, to determine whether a modified asset continues to be
significant increase in credit risk the original effective interest
has occurred, in the same way as rate. The basis adjustment will
be calculated as the amortised
any other financial instrument.
cost basis before modification
less the present value of the new
series of cash flows (discounted
at the original effective interest
rate).
Presentation
An entity should recognise
expected credit losses in the
statement of financial position as
follows: as a loss allowance if
those expected credit losses
relate to a financial asset
measured at amortised cost or a
lease receivable; and as a
provision (that is, a liability) if
they relate to a loan commitment
or financial guarantee contract.
For financial assets that are
mandatorily measured at fair
value through other
comprehensive income in
accordance with the
‘Classification and Measurement’
Exposure Draft, the accumulated
impairment amount is not
separately presented in the
statement of financial position.
PwC
Practical guide to IFRS – Exposure draft on impairment of financial assets
17
Description
Disclosure
Transition
IASB
FASB
Extensive disclosures.
Extensive disclosures.
Retrospective application, but
restatement of comparatives is
not required. However, entities
are permitted to restate
comparatives if they can do so
without the use of hindsight. If
the entity does not restate
comparatives, it should adjust
the opening balance of its
retained earnings for the effect of
applying the proposals in the
year of initial application.
A cumulative-effect adjustment
to the statement of financial
position should be recorded as
of the beginning of the first
reporting period in which the
guidance is effective.
This publication has been prepared for general guidance on matters of interest only, and does not constitute
professional advice. It does not take into account any objectives, financial situation or needs of any recipient;
any recipient should not act upon the information contained in this publication without obtaining independent
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Practical guide to IFRS – Exposure draft on impairment of financial assets
18