EFRAG published a comprehensive feedback statement on the results of its outreach activities carried out in the IASB's supplementary document on impairment of financial instruments. These activities took place in February and March 2011, in close cooperation with the IASB and FASB technical staff.
The objective of the outreach was to collect input from European constituents, mainly from preparers, regarding the relevance of the proposals, as well as practical and implementation challenges arising from the proposals included in the IASB’s supplementary document to the November 2009 Exposure Draft 'Financial Instruments: Amortised Cost and Impairment'. The input received during the outreach activities was considered in finalising EFRAG’s response to the IASB on the supplementary document.
EFRAG staff surveyed twenty preparers, including sixteen banks, two insurance companies, one corporate and one European industry organisation. The IASB and/or the FASB staff participated in the majority of the interviews.
The survey covered the following topics:
(a) characteristics of the portfolios and the scope of application;
(b) distinction between the good book and the bad book;
(c) proposed impairment model: time-proportional expected credit losses, floor, good/bad book classification;
(d) scope of application of the proposed model; and
(e) costs and benefits of the model.
The following key messages were received from European constituents that participated in the survey conducted as part of the outreach activities:
• General support for the proposals in the supplementary document – the proposals in the supplementary document received a broad support, in particular the proposed operational solutions based on decoupling of interest income and credit losses. The new concepts of ‘open portfolios’ and the distinction between the ‘good book’ and the ‘bad book’ were welcomed because they are aligned with the way in which loans are generally managed by commercial banks.
• Disagreement with the ‘higher of’ approach and the floor – the model with a floor does not retain the link between recognition of interest and credit losses. That link is lost when the allowance is based on the floor and a spike in the provisions might be recognised. Concerns were also raised about the concept of ‘foreseeable future’.
• Consistent accounting treatment for similar economic events – it was noted that the impairment model proposed in the supplementary document, which is based on decoupling of interest income and credit losses, should be applied consistently to all financial assets measured at amortised cost. However, concerns were expressed about the direct applicability of the model to individual assets, bonds and outside the banking sector.
• Testing the model – preparers that participated in the survey could not perform a detailed quantitative assessment of the expected impact of the proposed model on the existing portfolios, because of the time constraints and a number of uncertainties around the implementation of the model. Only preliminary qualitative assessment was available at this stage.
Press release
© EFRAG - European Financial Reporting Advisory Group
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