In July 2012 the IASB and the FASB finished deliberating all joint matters in developing the general framework of a three bucket impairment model. (On completion of developing the impairment model the boards tentatively agreed that it was only necessary to distinguish between assets with a 12-month allowance balance and those with a life time expected loss balance. Thus, the impairment model is now essentially a ‘two-bucket model’. However, because of general familiarity with the ‘three-bucket’ description and because a third stage of deterioration (ie incurred losses) triggers a change in the way in which interest revenue is presented, the IASB staff will continue to use the term ‘three-bucket’ when discussing the IASB’s own proposed impairment model.)
In response to feedback received from US constituents about that model, in August 2012 the FASB directed their staff to explore an alternative expected loss model that:
- does not use a dual-measurement approach; and
- reflects all credit risk in the portfolio at each reporting date.
In the last few months the IASB staff have had detailed discussions with investors, analysts, regulators, auditors and preparers to better understand whether the three bucket impairment model would be operational and whether that model or the FASB’s alternative model would provide more useful information.
At this meeting, the IASB staff presented a summary of the feedback received. Overall the majority of outreach participants, including users of financial statements, support an impairment model that distinguishes assets that have deteriorated in credit quality from those that have not. However, additional clarification was requested for the criteria to be used in determining when a lifetime loss is measured and how to apply the criteria to retail loans. In addition, some participants noted that their support for the approach was dependent on whether the benefits of the information provided outweighed the costs of determining which assets have deteriorated. In particular, some noted that if assets were to move too readily to a lifetime loss measurement (for example, on the basis of minor credit deterioration) the costs of the model might not be justified. The IASB asked the staff to explore ways to address those concerns and to suggest clarifications to the criteria at a future meeting.
A few participants in the outreach questioned the conceptual merits of the model in the absence of convergence. They would prefer the IASB to reconsider the proposals in the 2011 Supplementary Document Financial Instruments: Impairment (but using the Time Proportional Allocation approach without the floor for the good book), or the expected cash flow model in the original IASB Exposure Draft Financial Instruments: Amortised Cost and Impairment. While the IASB indicated that they wish to pursue the three-bucket impairment model, they also asked the IASB staff to prepare a paper summarising the feedback on the Supplementary Document as a reminder of why the IASB rejected that approach in favour of the three-bucket impairment model.
At its November 2012 meeting, the IASB will discuss possible clarifications to the criteria for recognition of lifetime expected losses. A public IASB Education Session on the FASB’s alternative model is also planned for November 2012, and will be provided by the FASB.