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Saturday 20 December 2014

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IFRS 9: Financial Instruments

IASB meeting summaries and observer notes


 IASB / FASB January 2012


 

 

The boards discussed how the three-category (or 'bucket') impairment model should be applied to purchased financial assets with an explicit expectation of credit losses at acquisition. In addition, the boards discussed other aspects of the accounting for such purchased financial assets.

Application of the impairment model

Unlike the approach for all other originated and purchased financial assets, purchased financial assets with an explicit expectation of credit losses at acquisition would not be included in Bucket 1 at acquisition. That is, purchased financial assets with an explicit expectation of credit losses at acquisition would be included initially in Bucket 2 or 3.

For these purchased financial assets, no impairment loss would be recognised on acquisition. The purchase discount would be accreted from the purchase price to the expected cash flows. Any subsequent unfavourable change in expected cash flows would be recognised as an impairment loss on the basis of changes in expected lifetime loss from period to period.

All IASB members and FASB members agreed.

Scope

The boards discussed the scope of purchased financial assets that would be initially included in Bucket 2 or Bucket 3 and for which accretion from the purchase price to the expected cash flows would be required. The staff asked the boards for direction on whether 'purchased financial assets with an explicit expectation of credit losses at acquisition' was intended to capture the same population of purchased financial assets within the scope of existing IFRSs and/or U.S. GAAP standards under which accretion to expected cash flows is currently required.

The IASB asked the IASB staff to proceed with keeping the scope similar to the scope of existing IFRSs. However, the FASB requested the FASB staff to also explore an approach whereby the scope of purchased financial assets would include assets that, since origination, have experienced a more than insignificant deterioration in credit quality and for which it is at least reasonably possible that all or some of the contractual cash flows may not be collected.

Favourable changes in expectations subsequent to acquisition

The boards discussed the accounting for favourable changes in expectations regarding collectibility of cash flows subsequent to acquisition. The boards tentatively decided that, for purchased financial assets with an explicit expectation of credit losses, favourable changes in cash flows expected to be collected would be recognised immediately in profit or loss as an adjustment to the impairment expense. This is the case even if such changes exceeded the amount of impairment losses recognised by the acquiring entity in previous periods or the amount of the allowance for credit losses.

Nine IASB members and seven FASB members agreed.

Presentation in the statement of financial position of purchased financial assets with an explicit expectation of credit losses at acquisition

The boards tentatively decided that purchased financial assets with an explicit expectation of credit losses would be presented in the statement of financial position at the transaction price without presentation of an allowance for expected contractual cash shortfalls that are implicit in the purchase price. However, disclosure would be required of the expected contractual cash shortfalls that are implicit in the purchase price. The boards instructed the staff to design and evaluate appropriate types of disclosure to facilitate analysis and comparability of originated and acquired portfolios. This disclosure might include discrete information for acquired portfolios that allows users to reconcile from the 'gross' amounts of contractual cash flows, excluding the discount not attributable to credit, to the net carrying amount.

All IASB members and FASB members agreed.

Date: 1/27/2012