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IFRS 9: Financial Instruments

IASB meeting summaries and observer notes


 IASB / FASB February 2012


 

 

In continuing to develop the 'three-bucket' impairment model, the FASB and IASB discussed whether financial assets categorised in Bucket 2 or Bucket 3 (either by deterioration or, in the case of purchased financial assets with an explicit expectation of loss, upon acquisition) would be required to be subsequently transferred to Bucket 1, and if so, under which circumstances. That is, the boards discussed whether the measurement of financial assets' expected credit losses should subsequently change from a lifetime expected loss (for financial assets in Bucket 2 or Bucket 3) to a 12 months' expected loss (for financial assets in Bucket 1). In addition, the boards discussed how the impairment model would be applied to trade receivables.

Direction of movement between buckets

Purchased financial assets with an explicit expectation of loss

The boards tentatively decided that purchased financial assets with an explicit expectation of loss would always be categorised outside Bucket 1, even if there are improvements in credit quality subsequent to purchase. As a result, the impairment allowance for such assets would always be based on changes in lifetime expected credit losses since initial recognition.

Fourteen IASB members and seven FASB members agreed.

Originated and other purchased financial assets

The scope of this part of the discussion included financial assets other than (a) purchased financial assets with an explicit expectation of loss, (b) trade receivables that use lifetime expected credit losses as the impairment measure upon initial recognition and (c) restructured debt.

The boards tentatively decided that these financial assets would subsequently transfer to Bucket 1(after previously deteriorating and transferring to Bucket 2 or Bucket 3) if the initial transfer notion from Bucket 1 is no longer met.

Thirteen IASB members and four FASB members agreed.

Trade receivables

In this session, the boards discussed whether an incurred loss impairment approach or an expected loss impairment approach should apply to trade receivables. Furthermore, they discussed whether, if any expected loss impairment approach were to be used, the 'three bucket' model or a simplified approach should be applied. The scope of the discussion was limited to trade receivables with (and without) a significant financing component that result from revenue transactions within the scope of the exposure draft ED/2011/6 Revenue from Contracts with Customers (the Revenue ED).

Trade receivables without a significant financing component

The boards asked the staff to further analyse whether an incurred loss impairment model or an expected loss impairment model should be applied to trade receivables without a significant financing component, in particular to assess the change in practice necessary to apply an expected loss impairment model.

Subject to that decision, the boards discussed how an expected loss approach would be applied to trade receivables without a significant financing component. In particular, the boards discussed whether the 'three-bucket' model or a simplified approach should be applied. This discussion was not joint because of the different initial measurement requirements for financial instruments in accordance with IFRSs and those in accordance with US GAAP´┐Żnevertheless the staff recommendations and the boards' decisions (as outlined below) were consistent.

The IASB tentatively decided that a simplified form of the three bucket model shall be applied. The approach for trade receivables accounted for as not having a significant financing component in accordance with the Revenue ED would be twofold (affecting both initial measurement of the receivable and the general three bucket model):

  • the receivable shall be measured at the transaction price as defined in the Revenue ED (ie the invoice amount in many cases) on initial recognition in IFRS 9 Financial Instruments; and
  • those receivables shall be included in Bucket 2 or 3 on initial recognition, thus recognising lifetime expected losses on initial recognition and throughout the life of the asset.

Nine IASB members agreed.

If an expected loss impairment model were to be applied, the FASB tentatively decided that the credit impairment measurement objective for all trade receivables that do not have a significant financing component should be lifetime expected losses throughout their life.

Seven FASB members agreed.

Trade receivables with a significant financing component

The boards tentatively decided that an expected loss impairment model would be applied to trade receivables with a significant financing component.

Fourteen IASB members and seven FASB members agreed.

The boards tentatively decided that an entity could apply a policy election to either fully apply the 'three-bucket' impairment model to trade receivables accounted for as having a significant financing component, or to apply a simplified model in which those trade receivables would have an allowance measurement objective of lifetime expected credit losses at initial recognition and throughout the trade receivables' life. The simplified model provides relief because an entity would not be required to track credit deterioration through the Buckets of the 'three-bucket' model for disclosure purposes.

Nine IASB members and four FASB members agreed.

Date: 2/28/2012