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EFRAG believes that the recognition of a portion of expected credit losses at initial recognition is not conceptually sound. Nevertheless, in EFRAG's view the proposed approach represents a reasonable proxy for reflecting the performance of an entity by adjusting the interest income earned in a period that is more operational and less costly compared to the 2009 ED.
EFRAG accepts the proposed approach because EFRAG expects it will result in an earlier recognition of expected credit losses and hence addresses the weakness of an incurred loss model. However, EFRAG notes that the proposals would require significant implementation and ongoing costs. EFRAG is more particularly concerned that its field test has clearly highlighted that the current proposals do not allow entities to leverage existing risk management and regulatory practices and that not all necessary data are available. Therefore, EFRAG suggests the IASB reconsiders how the model could be implemented in such a way that entities are able to leverage their existing practices and hence limit the costs and increase the reliability of their estimates. EFRAG also notes that many constituents indicated that the operational difficulty to comply with the proposed disclosure requirements would be high. Consequently, EFRAG encourages the IASB to review the level of proposed disclosures in order to balance appropriately the cost for preparers and benefits for users. More generally, EFRAG believes that the results of its field-test provide valuable information about the operability and the clarity of the proposals, therefore EFRAG encourages the IASB to consider that work in finalising its proposals.
EFRAG’s assessment is that the proposed approach could strike an acceptable balance between the cost of implementation (provided the IASB addresses the operational difficulties referred to above) and the underlying economics, while meeting the need to provide earlier for expected credit losses as expressed by financial regulators and other constituents.
EFRAG understands that any impairment model that uses a single measurement approach under which lifetime expected credit losses are recognised at initial recognition – such as the model proposed by the FASB – will remove the need to reclassify financial assets from one stage to another. Nevertheless, in EFRAG's view, such a model would not be less subjective and not necessarily operationally simpler compared to the proposed approach in the ED. EFRAG believes that such an approach would provide less relevant information about the effects of changes in the credit quality subsequent to initial recognition, and would not result in an appropriate balance between the representation of the underlying economics and the cost of implementation as the double counting effect of expected loss recognition at inception is aggravated by the consideration at once of life time expected losses and the resulting distortion of interest income.
EFRAG notes – and shares - the concerns of many constituents in Europe on the lack of convergence and the implications for preparers and users. Therefore, EFRAG urges the Boards to try where possible to align their proposals. EFRAG offers a few suggestions in the remainder of the letter where EFRAG sees potential for better alignment. That being said, EFRAG strongly believes that the two fundamental objectives of depicting credit deterioration over the life of an instrument (or a portfolio of instruments) and presenting an interest income amount that reflects faithfully the performance of the debtor should not be compromised, not even for the sake of convergence.
EFRAG believes that in setting the standard’s effective date, the IASB should carefully assess the time entities need to implement the new requirements with the required degree of reliability, so that improvements materialise in practice. To implement the proposed requirements, entities would need a full three years after publication. This period could be reduced only if substantial changes are made along the lines of EFRAG´s recommendations to make the standard more operational and less costly to implement. This assessment should be made taking into consideration the capabilities of entities in general and not focus exclusively on large banks with sophisticated systems and practices.