On 31 January 2011, the IASB published the Supplementary Document Financial Instruments: Impairment. These proposals will be combined with the proposals on amortised cost measurement that were included in the IASB’s original Exposure Draft (November 2009) after redeliberations are completed.

EFRAG welcomes the IASB’s efforts to find operational solutions for the difficulties identified in respect of the model exposed in the November 2009 proposals. EFRAG also welcomes the IASB's and the FASB's efforts to develop a common approach to accounting for the impairment of financial assets.

EFRAG supports the development of an approach based on the separate allocation (decoupling) of interest income and expected credit losses.  EFRAG believes that the decoupling of interest income and credit losses should be applied consistently to all financial assets measured at amortised cost. EFRAG would consider it inappropriate to permit entities a free choice between the proposed model and the original expected cash flow model. The model proposed in the SD has been designed primarily for the loan portfolios of lending businesses, and EFRAG believes that the IASB should further develop the guidance and the model to make it more suitable to non-lending businesses, closed portfolios and individual items (e.g. listed bonds).

The IASB has made significant changes to the November 2009 impairment model and should therefore clarify the objectives of the model. In particular, the IASB should be more explicit as to the extent the proposals represent a revenue recognition and/or impairment model. Furthermore, the board should clarify that all the incurred losses should be provided for in full.

EFRAG believes that an impairment model should reflect the link between the pricing of the asset and the expected credit losses, and therefore disagrees with the proposals to set a floor at a level to reflect credit losses expected to occur within the foreseeable future. Instead, an entity should be required to accelerate the build-up of the allowance balance if it expects losses to materialise in the near future. EFRAG recommends that the IASB conduct field-testing, prior to issuing the final standard, to confirm that the guidance is robust and that the model is operational and overcomes the weaknesses of IAS 39.  Furthermore, EFRAG urges the IASB to consider the proposals in the SD in the context of the existing disclosure requirements in IFRS 7.

Press release