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Impairment of financial assets. Tentative decisions and Issues for discussion. Outline of presentation. Overview – replacement of IAS 39 Impairment framework Background – why change? Tentative IASB decisions FASB convergence Discussion points. Overview – replacement of IAS 39. - PowerPoint PPT Presentation
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Impairment of financial assets
Tentative decisionsand
Issues for discussion
Outline of presentation
• 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 models
Available for sale
Impairment framework
Amortised cost At cost
Expected loss model
Incurred loss model
ProposedCurrent
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 decisionsObjective of impairment model
• effective return on a financial asset
• current cash flow information + cash flows on initial recognition
Expected loss model Incurred loss model• actual return on a financial
asset (objective evidence of a loss event)
• actual cash flow information
Tentative IASB decisionsComparison 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
Expected loss model• Expected cash flows,
discounted by the effective interest rate(s)
• Only test for impairment if there is an indicator
• Only reverse impairment if there is a reversal of the indicator
• Impairment indicators not used• No reference to change in
indicators for impairment reversal
Tentative IASB decisionsMeasurement 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
expected cash flowseffective interest rate
Tentative IASB decisions Application to variable rate instruments
• Catch-up adjustment – adjustment to profit or loss that changes the carrying amount Consistent measurement principles – EIR is
constant Consistent application to fixed rate instrument
Issue: unwinding of amortised cost
Tentative IASB decisions Practical guidance
Treatment of trade receivables
Collective (portfolio)
assessment
Forecasting cash flows – what is expected loss
• conventional provisioning
methods
• best estimate • prevent double
counting
• data source• adjusting
historical data
Tentative guidanceConcerns
Tentative IASB decisionsPresentation
$
Interest revenue based on contractual cash flows XXX
Less Allocation of initial expected losses X
Net interest revenue XX
Changes in expectations (i.e. additional impairment charges or reversals) Y
• Statement of comprehensive income
• Statement of financial position – net carrying amount
Tentative IASB decisionsDisclosure
• Notes to the financial statement 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 decisionsExpected timeline and transitions
• Available for early application• Application to existing financial assets at initial recognition
2013?June 2010
End 2010?
Jun 2009
Nov 2009
RFI EDComments
due Effective3 yrsIFRS
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?
(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 (3)
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?
Transitional arrangements – assuming the proposals proceed, what should be the
basis for transition: retrospective, prospective or some combination
approach?
Discussion points (6)