Global Standards for the world economy

Friday 20 January 2017

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IFRS 9: Financial Instruments

IASB meeting summaries and observer notes

 IASB / FASB 29 March 2011



The IASB and the FASB discussed impairment accounting for purchased financial assets, including whether an impairment allowance should be established upon acquisition and the subsequent interest income recognition for purchased financial assets.

At the 22 March meeting, the boards discussed whether or not originated instruments and purchased instruments subject to impairment accounting should have consistent accounting models for interest income recognition and impairment. The boards did not reach a decision on this question and asked the staff to prepare examples for further discussion.

The boards continued their discussion on these issues using examples provided by the staff. The boards tentatively decided that for purchased financial assets that do not have an explicit expectation of losses (that is, loans recognised in the 'good book' upon acquisition) when analysed at the individual asset level, even when acquired as part of a portfolio, an entity should account for impairment in the same way as for originated loans. Interest income for these assets would be recognised on the basis of contractual cash flows. This decision effectively aligns impairment accounting and interest income recognition for originated loans and 'good' purchased financial assets (those that do not have an explicit expectation of losses at the individual asset level at acquisition). The boards will determine the appropriate impairment accounting model for these loans in redeliberating the Supplementary Document, which is currently open for comment.

The boards also discussed impairment accounting, including interest income recognition, for financial assets purchased where an explicit expectation of loss exists at the individual financial asset level (that is, where the loan goes into a 'bad book' at acquisition). The boards tentatively decided that interest income recognised should be based on expected collectible cash flows estimated at the date of acquisition (that is, to accrete purchase price to expected cash flows). As a result of limiting the recognition of interest income for these credit-deteriorated assets, a separate impairment expense would not be recognised at the date of acquisition.

The boards noted that their decisions at this meeting were subject to future discussions on pending issues. These issues include (1) determining how to differentiate purchased portfolios of financial assets into 'good books' and 'bad books' and what the underlying accounting should be and (2) whether 'nonaccrual' guidance is necessary, and, if so, how to apply it.

Date: 3/29/2011