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In response to concerns that IAS 39 Financial Instruments: Recognition and Measurement (‘IAS 39’) is “difficult to understand, apply and interpret” the IASB has set about replacing IAS 39. To ensure a timely response to calls to address concerns with IAS 39, the IASB has taken a phased approach to the development of the Standard.
The first part of Phase 1 (that resulted in the publication of IFRS 9 by the IASB in November 2009) deals with the classification and measurement of financial assets. The second part of Phase 1 will deal with the classification and measurement of financial liabilities; the related requirements were added to IFRS 9 in October 2010 .
Phase 2, considered here, deals with impairment of financial assets carried at amortised cost and Phase 3 will address hedge accounting.
The first phase, dealing with classification and measurement of financial assets instruments, replaces the classification categories in IAS 39 with two primary measurement categories for financial instruments - fair value and amortised cost. Therefore, given the characteristics of the instruments that will be carried at amortised cost there would be one single impairment model for such financial assets as opposed to the different impairment models relating to three of the four categories of financial instruments in IAS 39.
The Exposure Draft Financial Instruments: Amortised Cost and Impairment (ED), published in November 2009, proposes to clearly set out the objective of amortised cost measurement and how it should be calculated. Impairment of financial assets is an integral component of the amortised cost measurement model. The proposals would also result in consequential amendments to other IFRSs and to the guidance on those IFRSs.
The objective of the proposals is to establish principles for the measurement of financial assets and financial liabilities at amortised cost to provide useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of future cash flows. This includes the allocation of expected cash flows over the expected life of financial instruments based on conditions existing at initial recognition as well as subsequent impairment of the financial instruments. The key issues therefore relate to:
(a) The effective interest method; and
(b) The expected cash flow approach (including future credit losses).
The ED also includes guidance on presentation and disclosure that aim to support the measurement objective.
An Impairment Expert Advisory Panel (EAP) has been set to advise the board on operational issues arising from the model proposed in the exposure draft.
In March and April 2010, in order to assess the implications of the proposals in the ED from an implementation perspective and as part of its due process on the exposure draft, EFRAG concluded 18 consultations with entities from the banking, insurance, audit and industrial sector, representing seven countries across Europe.
EFRAG issued its comment letter in June 2010.
The feedback received by the IASB on the exposure draft confirmed significant operational issues.
While starting from different objectives in their respective projects, the FASB and the IASB started in October 2010 to jointly redeliberate the impairment model, with the common primary objective of reaching a converged solution for impairment of financial assets. This work resulted in the joint publication of the Supplementary Document Financial Instruments: Impairment on 31 January 2011.
Click here to access the related project page.
Before this FEE and EFRAG ran a pro-active work to provide European stakeholders with a perspective on the proposals by the IASB for the impairment of financial assets. Please click here to access the related project page.
The IASB and FASB changed the direction of their impairment project in June 2011. They are now discussing and developing a 'three-bucket' expected loss impairment approach for the impairment. This approach intends to make maximum use of existing credit risk management systems and reflect the general pattern of deterioration of the credit quality of financial assets. The Boards intend to re-expose the proposals on impairment for public consultation by mid-2012.
Click here
to access the IASB project page.
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