Welcome to the website of the IFRS Foundation and the IASB

Tuesday 02 September 2014

Banner graphic

IASB meeting summaries and observer notes


 IASB October 2013


 

The IASB met on 31 October 2013 to continue its redeliberations on the clarifications and enhancements to the proposals in the Exposure Draft Financial Instruments: Expected Credit Losses (the Exposure Draft). Whether the IASB will proceed to finalise its Exposure Draft will be decided at a future meeting.


At this meeting, the IASB considered the following clarifications and enhancements to the proposals in the Exposure Draft: 

    •     assessing when to recognise lifetime expected credit losses;
    •     the rebuttable presumption when financial assets are more than 30 days past due;
    •     the 'low credit risk' operational simplification;
    •     measurement of expected credit losses (including the discount rate); and
    •     modifications.

In its discussions, the IASB noted that not all the clarifications will warrant inclusion in the body of the Standard because many are designed as practical implementation suggestions. These clarifications may therefore be better addressed in examples, application guidance and in the Basis for Conclusions.


Agenda Paper 5A Assessing when to recognise lifetime expected credit losses


The IASB tentatively decided to confirm that lifetime expected credit losses shall be recognised when there is a significant increase in credit risk since initial recognition. The IASB also tentatively decided to clarify (potentially through examples) that: 

    a.     the assessment of significant increases in credit risk could be implemented more simply by establishing the initial maximum credit risk for a particular portfolio (by product type and/or region) (the 'origination' credit risk) and then comparing the credit risk of financial instruments in that portfolio at the reporting date with that origination credit risk. This would be possible for portfolios of financial instruments with similar credit risk on initial recognition;
    b.     the assessment of significant increases in credit risk could be implemented through a counterparty assessment as long as such assessment achieves the objectives of the proposed model; 
    c.     the assessment of when to recognise lifetime expected credit losses should consider only changes in the risk of a default occurring, rather than changes in the amount of expected credit losses (or the credit loss given default (LGD));
    d.     an assessment based on the change in the risk of a default occurring in the next 12 months is permitted unless circumstances indicate that a lifetime assessment is necessary. Examples will be provided of when a 12-month assessment would not be appropriate and a lifetime assessment would be necessary; and
    e.     a loss allowance measured at an amount equal to 12-month expected credit losses shall be re-established for financial instruments for which the criteria for the recognition of lifetime expected credit losses are no longer met.

Fourteen IASB members agreed with this decision. Two IASB members were not present.


Agenda Paper 5B Operational simplifications—more than 30 days past due rebuttable presumption and low credit risk


More than 30 days past due rebuttable presumption

The IASB tentatively confirmed the rebuttable presumption that there is a significant increase in credit risk when contractual payments are more than 30 days past due.


Twelve IASB members agreed with this decision. Two IASB members were not present. In addition, the IASB tentatively decided to clarify that: 

    a.     The objective of the rebuttable presumption is to serve as a backstop or latest point at which to identify financial instruments that have experienced a significant increase in credit risk.


            Fourteen IASB members agreed with this decision. Two IASB members were not present.

    b.     The presumption is rebuttable.


            Fourteen IASB members agreed with this decision. Two IASB members were not present.
    c.     The application of the rebuttable presumption is to identify significant increases in credit risk before default or objective evidence of impairment.

            Thirteen IASB members agreed with this decision. Two IASB members were not present.

Low credit risk operational simplification


The IASB tentatively decided that an entity can assume that a financial instrument has not significantly increased in credit risk if it is low credit risk at the reporting date.


Twelve IASB members agreed with this decision. Two IASB members were not present.


The IASB also tentatively decided to: 

    a.     modify the proposed description of low credit risk to better reflect the characteristics, namely that: 
            i. the instrument has a low risk of default;
            ii. the borrower is considered, in the near term, to have a strong capacity to meet its obligations; and
            iii. the lender expects for the longer term that adverse changes in economic and business conditions may, but not necessarily, reduce the ability of the borrower to fulfil its obligations;
    b.     clarify that the low credit risk notion is not meant to be a bright-line trigger for the recognition of lifetime expected credit losses. Instead, when an instrument is no longer low credit risk, an entity would assess whether there has been a significant increase in credit risk to determine whether lifetime expected credit losses should be recognised; and
    c.     clarify that financial instruments are not required to be externally rated; but that low credit risk equates to a global credit rating definition of 'investment grade'.

Ten IASB members agreed with this decision. Two IASB members were not present.


Agenda Paper 5C Measurement of expected credit losses


The IASB tentatively decided to require that expected credit losses should be discounted at the effective interest rate or an approximation thereof.


Fourteen IASB members agreed with this decision. Two IASB members were not present.


Furthermore, in measuring expected credit losses, the IASB tentatively confirmed that: 

    a.     The measurement of expected credit losses should incorporate the best available information that is reasonably available, including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. For periods beyond 'reasonable and supportable forecasts' an entity should consider how best to reflect its expectations by considering information at the reporting date about the current conditions, as well as forecasts of future events and economic conditions.
    b.     Regulatory expected credit loss models may form a basis for expected credit loss calculations, but the measurement may need to be adjusted to meet the objectives of the proposed model.

The IASB tentatively decided to clarify the measurement of 12-month expected credit losses by incorporating the discussion in paragraph BC63 of the Exposure Draft as part of the application guidance, namely that 12-month expected credit losses are a portion of the lifetime expected credit losses. Thus, 12-month expected credit losses are neither the lifetime expected credit losses that an entity will incur on financial instruments that it predicts will default in the next 12 months, nor the cash shortfalls that are predicted over the next 12 months.


Fourteen IASB members agreed with this decision. Two IASB members were not present.

Agenda Paper 5D Modifications


The IASB tentatively decided to confirm the proposals that: 

    a.     the modification requirements apply to all modifications or renegotiations of contractual cash flows, regardless of the reason for the modification;
    b.     the modification gain or loss should be recognised in profit or loss; and
    c.     modified financial assets are subject to the same 'symmetrical' treatment (ie a modified asset can revert back to Stage 1, with a 12-month expected credit losses allowance) as other financial instruments.

In addition, the IASB tentatively decided to clarify the application guidance to emphasise that the credit risk on a financial asset will not automatically improve merely because the contractual cash flows have been modified.


Fourteen IASB members agreed with this decision. Two IASB members were not present.


Next steps


Discussions on the Impairment project will continue at the November IASB meeting.

 

Date: 10/28/2013