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IFRS 9: Financial Instruments

IASB meeting summaries and observer notes

 IASB / FASB April 2012



Expected credit loss estimates

At this meeting, the IASB and FASB clarified the attributes of an expected credit loss estimate to address concerns raised regarding the use of the term 'expected value'.

The boards clarified that an estimate of expected credit losses shall reflect the following:

  1. all reasonable and supportable information considered relevant in making the forward-looking estimate;
  2. a range of possible outcomes and the likelihood and reasonableness of those outcomes (that is, not merely an estimate of the 'most likely outcome'); and
  3. the time value of money.

The boards clarified that an entity shall consider information that is reasonably available without undue cost and effort in estimating expected credit losses.

Thirteen IASB members and seven FASB members agreed. One IASB member was absent.

Bucket 1 measurement approach

The boards also clarified that the Bucket 1 measurement approach would be defined as 'expected losses for those financial assets on which a loss event is expected in the next twelve months'.

In further explaining the Bucket 1 approach, the boards indicated that:

  1. Expected losses are cash shortfalls expected over the lifetime of the financial asset (ie the full loss content) that are associated with the likelihood of a loss event in the next twelve months. That is, the losses being measured are not only the cash shortfalls over the next 12 months.
  2. Estimating lifetime losses should not require a detailed estimate for periods far in the future, but the degree of detail necessary in forecasting estimated losses decreases as the forecast period increases.
  3. Various approaches can be used to estimate the expected losses, including approaches that do not include an explicit '12 month probability of a loss event' as an input.

Thirteen IASB members and five FASB members agreed. One IASB member was absent.

Trade receivables

In February 2012 and at this meeting, the boards discussed whether an expected credit loss model should be applied to trade receivables that do not have a significant financing component (as defined in the revenue exposure draft).

In the February meeting, subject to deciding whether an expected loss model should be applied to these trade receivables, the boards had tentatively decided how an expected loss approach in general would be applied and requested the staff to evaluate whether an expected loss model would be operational for these trade receivables. The evaluation was the basis for the discussions at this April meeting. On the basis of discussions at both meetings, the boards tentatively agreed that an expected loss model should be applied to trade receivables that do not have a significant financing component, including a practical expedient that a provision matrix can be used.

Twelve IASB members and seven FASB members agreed. One IASB member was absent.

Next steps

At the end of the meeting, the boards asked the staff for an update on the project, including what topics still needed to be addressed jointly. The staff noted that the general framework of the model was now complete as a result of the decisions reached at this meeting. However, the staff will prepare joint papers for discussions related to off balance sheet items, disclosures, transition and any knock on effects resulting from future decisions in the classification and measurement project. Each board may also have separate issues to individually consider in order to address their respective stakeholders' concerns.

Date: 4/18/2012