The IASB confirmed the previous direction provided to staff and discussed off balance sheet items, presentation and disclosures.
In the IASB meeting on 1 December, the Board had provided direction to staff on how to continue to develop the impairment model, but it had not made any tentative decisions on the issues. In this meeting the Board tentatively confirmed the previous direction provided as follows:
- short-term trade receivables should be excluded from the scope of the upcoming document;
- the scope of the upcoming document will focus on open portfolios of financial assets, but the document will include a question soliciting specific feedback on the applicability of the model to other instruments (including closed portfolios and single instruments);
- for the 'good' book the time-proportionate amount of the revised lifetime expected loss (EL) estimate will be allocated to the relevant period using either a straight-line approach (that could be applied to a discounted or undiscounted measurement of EL) or an annuity approach. The upcoming document will include a question as to whether a particular approach should be required. When discounting EL, entities may use a discount rate that lies between the risk-free rate and the effective interest rate as determined under IAS 39 Financial Instruments: Recognition and Measurement; and
- loans would be included in the 'good' book or the 'bad' book according to the entity's internal credit risk management criteria supplemented by an objective that if the uncertainty about collectability has taken precedence over the profitability from the interest margin the asset should be included in the 'bad' book.
The Board also discussed the scope of the upcoming document and tentatively decided to ask a question about whether loan commitments that are not measured at fair value should be included within the scope of the finalised impairment requirements. The Board also tentatively decided that the upcoming document should explain the effect of the proposal on financial guarantee contracts and provide the background, which consists of the related redeliberations as part of the Board's project on insurance contracts.
The Board tentatively decided on the following presentation and disclosure requirements based on the model developed for open portfolios:
- In the statement of comprehensive income, interest revenue will be presented based on the effective interest rate as determined under IAS 39 Financial Instruments: Recognition and Measurement and impairment expense will be a separate line item.
- Examples will be included in the upcoming document to provide additional guidance on the level of aggregation that can be considered appropriate for disclosures of credit risk within the principles set out in IFRS 7 Financial Instruments: Disclosures.
- The proposed disclosures can be incorporated by cross-reference to other statements that are publicly available to users on the same terms as the financial statements and at the same time.
- For the allowance account for credit losses, an entity should disclose
- separate reconciliations for the allowance accounts for the 'good' book and the 'bad' book;
- if losses expected to occur within the upcoming period are higher than the target allowance for the good book, the additional provision amount; and
- a reconciliation of the nominal amounts of loans in the 'bad' book.
- For the 'good' book, disclosure of the following information in tabular format for the past five years would be required:
- lifetime EL;
- balance of the outstanding nominal amount;
- target allowance balance; and
- additional provisions to reach the floor (if applicable).
- If a particular portfolio or geographical area has significant effects on the gains and losses, an entity shall disclose quantitative and qualitative analyses of the gains and losses.
- For credit risk management and the distinction between the 'good' book and 'bad' book, the following disclosures would be required:
- a qualitative analysis of how loans are managed in both books;
- inclusion of the criteria set for transferring loans from the 'good' book to the 'bad' book;
- if an entity uses an internal credit rating system, information about that system; and
- how the internal credit rating grades are assigned to both books.
- An entity would disclose the nominal amount and information about EL (both lifetime EL and credit losses expected to occur in the upcoming period) across a sufficient number (but not more than the number of grades used internally) of credit risk rating grades to allow meaningful differentiation of EL across the different credit grades. At a minimum, an entity would have to differentiate between a 'good' book and a 'bad' book.
- For both lifetime EL and credit losses expected to occur in the upcoming period, the following disclosures would be required:
- the basis of inputs and the estimation technique used to determine the credit losses;
- an explanation of any changes in estimates and the reason for the change; and
- an explanation of any changes in estimation technique and the reason for the change.
- In disclosing the comparison of EL with actual outcomes, if an entity performs back testing, it should provide quantitative analysis that compares the actual outcomes with the previous EL estimate. In some instances a qualitative explanation would be required. If an entity does not perform back testing, it should disclose a qualitative analysis of EL and the actual outcomes.
- For presentation of transfers from the 'good' book to the 'bad' book, a provision for credit losses reflecting the part attributable to the loan transferred to the 'bad' book would be transferred from the good book to the bad book.
- Disclosures regarding the sensitivity of assumptions would not be required.
The Board gave permission to the staff to begin drafting a document for exposure. There will be further discussions with the FASB on whether the disclosures discussed will be included within the main document or documented separately