Exposure Draft: Financial Instruments: Expected Credit Losses

Transcription

1 International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Stockholm 5 July 2013 Exposure Draft: Financial Instruments: Expected Credit Losses FAR, the Institute for the Accountancy Profession in Sweden, is responding to your invitation to comment on the exposure draft ED/2013/3 Financial Instruments: Expected Credit Losses. FAR did agree, from a conceptual perspective, with the model originally proposed in the exposure draft from When granting credits either in the form of a loan or investing in a debt instrument the lender expects that credit losses will arise on some, but not on most loans/debt instruments. Consideration for that risk is included in the price of a debt instrument/interest rate for issued loans. The initial expected loss is therefore arguably linked to the excess interest payments included in the price/interest rate of the instruments. The original exposure draft from 2009 reflected this economical link, but was operationally challenging as it required entities to forecast cash flows over the entire life of all assets. The impairment model proposed in the current exposure draft seeks to address some of the operational issues in the 2009 exposure draft by using a model that reflects the deterioration of credit over time. FAR agrees that a credit deterioration model would reflect the underlying economic phenomenon of impairment. FAR thus generally agrees with the concept of recognising provisions when there is a significant increase in credit risk. In the current exposure draft, a provision equivalent to a 12-month expected loss is recorded at initial recognition. From an economical point of view no loss should arise simply by issuing loans in the ordinary course of business. FAR therefore disagrees conceptually with recognising a loss at initial recognition for a financial instrument issued at market price/loan granted at a market rate. Furthermore, recognising a provision for 12-month expected losses is equivalent to recording at initial recognition the financial assets at an amount less than its fair value. At initial recognition the model proposed in the exposure draft thus result in a misrepresentation of the profit or loss as well as the financial position. The proposed model will, within certain boundaries, reflect changes in credit quality. Even though the proposed model uses two different valuation bases (12-month expected losses for stage 1 assets, and full lifetime losses for stage 2 and 3 assets) it may have operational

2 advantages as the complexities of estimating the full lifetime losses will not have to be applied to all assets. On balance, FAR supports the idea that when a (significant) increase in credit risk has occurred, future cash short falls should be recognised as provisions with a fully future oriented cash-flow approach i.e. life time expected losses should be recognised. FAR proposes however that the requirement to recognize a provision equal to 12-month expected losses for portfolios of loans where there has not been any significant increase in credit risk should be removed from the model. Even though this means less provisions FAR is of the opinion that this is preferable to the recognition of losses that are not the result of at least an increase of credit risk in the portfolio. FAR believes that the IASB may instead consider giving guidance on whether some provisions should be required for the delays that exists in discovering that the credit quality has occurred, similar to the loss incurment period used by many banks under IAS 39. Another alternative may be to allow provisions on the good book to the extent that 12-month probability of default (PD) for the portfolio has increased during the period. The proposed model still includes a number of operational challenges, for example for all assets originated (or purchased) below investment grade, the proposed model still requires that the original estimated remaining full life time probability of default is identified at inception for each point in time the entities will prepare a financial report in order to decide whether a significant deterioration of credit quality has occurred. FAR is of the opinion that these operational aspects should be subject to field testing. Furthermore, FAR feels that some areas would need further guidance or clarification of the proposed guidance. These areas include whether time lags in internal credit rating systems and changes in general economic conditions should be part of the provision under stage 1 or 2, what point in time initial credit risk is determined for revolving credits, and when a modification of terms should lead to derecognition of the asset and thus resetting the initial credit risk of the instrument. FAR's specific comments to the questions in the exposure draft are attached in appendix to this letter. FAR Göran Arnell Chairman FAR Accounting Policy Group 2(2)

3 Appendix Question 1 Objective of an expected loss model (a) Do you agree that an approach that recognises a loss allowance (or provision) at an amount equal to a portion of expected credit losses initially, and lifetime expected credit losses only after significant deterioration in credit quality, will reflect: (i) the economic link between the pricing of financial instruments and the credit quality at initial recognition; and (ii) the effects of changes in the credit quality subsequent to initial recognition? If not, why not and how do you believe the proposed model should be revised? FAR conceptually agreed with the model that was proposed in the original exposure draft from When granting credits either in the form of a loan or investing in a debt instrument the lender expects that credit losses will arise on some, but not on most loans/ debt instruments. Consideration for that risk is included in the price of a debt instrument/ interest rate for issued loans. The initial expected loss therefore arguably is linked to the excess interest payments included in the price/interest rate of the instruments. The original exposure draft from 2009 reflected this economical link, but was operationally challenging as it required entities to forecast cash flows over the entire life of all assets. In the current exposure draft, a provision equivalent to a 12-month expected loss is recorded at initial recognition. From an economical viewpoint no loss should arise simply by issuing loans in the ordinary course of business. FAR therefore disagrees conceptually with recognising a loss at initial recognition for a financial instrument issued at market price/loan granted at a market rate. Furthermore, recognising a provision for 12-month expected losses is equivalent to recording at initial recognition the financial assets at an amount less than its fair value. At initial recognition the model proposed in the exposure draft thus result in a misrepresentation of the profit or loss as well as the financial position. After initial recognition the model proposed in the exposure draft is a deterioration model, where the measurement basis is changed from 12-month expected losses to lifetime expected losses when a significant increase in credit risk has occurred. The proposed model will, with exception to the cliff effect when moving from stage 1 to stage 2, reflect the changes in credit quality. Even though the proposed model uses two different valuation basis (12-month expected losses for stage 1 assets, and full lifetime losses for stage 2 and 3 assets) it may have operational advantages as the complexities of estimating the full lifetime losses will not have to be applied to all assets. Furthermore, the ability to use PDs already used for regulatory purposes as a starting point for the accounting for credit losses should support the quality of the reported numbers. FAR thus agrees that the proposed model for subsequent measurement adequately reflects the deterioration of credit quality of financial assets. On balance, FAR supports the idea that when a (significant) increase in credit risk has occurred, future cash short falls should be recognised as provisions with a fully future oriented cash-flow approach i.e. life time expected losses should be recognised. FAR proposes however that the requirement to recognize a provision equal to 12-month

4 expected losses for portfolios of loans where there has not been any significant increase in credit risk is removed from the model. Even though this means less provisions FAR believes this is preferable to the recognition of losses that is not the result of at least an increase of credit risk in the portfolio. FAR is of the opinion that the IASB may instead consider giving guidance on whether some provisions should be required for the delays that exists in discovering that the change in credit quality has occurred, similar to the loss in current period used by many banks under IAS 39. Another alternative may be to allow provisions on the good book to the extent that 12-month PD for the portfolio has increased during the period. (b) Do you agree that recognising a loss allowance or provision from initial recognition at an amount equal to lifetime expected credit losses, discounted using the original effective interest rate, does not faithfully represent the underlying economics of financial instruments? If not, why not? As stated above, FAR does not believe that recognising a loss (12-months expected losses or full lifetime expected losses) on a transaction that were concluded on market conditions faithfully represents the underlying economics of that transaction. It would be a misleading presentation of both an entity's performance and assets to systematically measure them at lower value than their economical value with regards to credit risk. Furthermore, the practical difficulties of estimating the full lifetime losses of all loans will be burdensome as it requires more data and more judgement. Question 2 The main proposals (a) Do you agree that recognising a loss allowance (or provision) at an amount equal to 12-month expected credit losses and at an amount equal to lifetime expected credit losses after a significant deterioration in credit quality achieves an appropriate balance between the faithful representation of the underlying economics and the costs of implementation? If not, why not? What alternative would you prefer and why? FAR believes that the proposed model has the potential of striking an appropriate balance between faithful representation of the underlying economics of the transactions and the cost of implementation. This would however require some changes to the proposed model. As described in the response to question 1, the requirement to recognise a 12-month expected losses should be replaced with either a requirement to recognise provisions due to changes in the 12-month PD, or the requirement to recognise provisions for the time lag in identifying a significant deterioration of credit quality in the stage 1 portfolio. The proposed model still includes a number of operational challenges, for example for all assets originated (or purchased) below investment grade, the proposed model still requires that the original estimated remaining full life time probability of default is identified at inception for each point in time the entities will prepare a financial report in order to decide whether a significant deterioration of credit quality has occurred. FAR understands that some credit risk management systems do not track changes in the credit quality of a loan over time on an individual instrument level. FAR is of the opinion that the operational challenges of the proposed model should be subject to field testing before proceeding with the model. 2(11)

5 (b) Do you agree that the approach for accounting for expected credit losses proposed in this Exposure Draft achieves a better balance between the faithful representation of the underlying economics and the cost of the implementation than the approaches in the 2009 exposure draft and the SD (without the foreseeable future s floor). FAR believes that the exposure draft strikes a better balance between faithful representation of the underlying economics and the cost of implementation than the original exposure draft and the SD. Compared to the original model and the model in the supplemental document the primary benefits of the proposed model is that entities do not have to assess lifetime expected losses on all assets. As mentioned above, there are some aspects of the ED that would require some "fine tuning". (c) Do you think that recognising a loss allowance at an amount equal to the lifetime expected losses from initial recognition, discounted using the original effective interest rates, achieves a better balance between the faithful representation of the underlying economics and the cost of implementation than this Exposure Draft? As described under 1b above, FAR is of the opinion that recognising a full lifetime loss at initial recognition does not faithfully represent the underlying economics. The day one loss will give the impression that any bank expanding their business is doing worse than a bank that is contracting its business. Furthermore the level of losses will not portray a change in credit quality, nor the risk versus yield. Recognition of lifetime expected loss on "day one" requires significant efforts for preparers as it is necessary to determine life time expected losses for all assets within the scope of the impairment requirements and not only for those where significant credit deterioration to a level where credit risk is no longer low. A life time expected loss measure would therefore require significantly more efforts and judgement than model proposed in the exposure draft. Operationally there are three main additional challenges that the exposure draft imposes in comparison to the approach of recognising life-time expected losses on initial recognition: These are (i) the tracking of original rating/credit quality, (ii) the identification of loans with a current credit quality that is significantly lower than at origination and (iii) the decision and tracking of loans that apart from (ii) also have "low credit quality". On balance FAR believes the cost of implementation of the model in the exposure draft may be lower than implementing the full lifetime expected loss model of the FASB. In addition the FASB model has fewer benefits for users as the recognition of day one losses does not reflect the underlying economics of a lending business. 3(11)

6 Question 3 Scope (a) Do you agree with the proposed scope of this Exposure Draft? If not, why not? FAR agrees with the proposed scope. (b) Do you agree that, for financial assets that are mandatorily measured at FVOCI in accordance with the classification and measurement exposure draft, the accounting for expected credit losses should be as proposed in this Exposure Draft? Why or why not? FAR agrees in principle that applying the same impairment model to all debt instruments where interest rate is recognised using the effective interest rate method in profit or loss, regardless of their valuation in the balance sheet. However for financial assets that are mandatorily measured at FVOCI, FAR supports the practical expedient as proposed by the FASB in the PASU under which expected credit losses would not be required to be recognised if certain conditions are met (i.e. the fair value of the financial asset is greater than or equal to the amortised cost and the expected credit losses are insignificant). Example 10 illustrates the accounting effects of recognising a 12-month expected loss on initial recognition. As the fair value of the FVOCI asset cannot be changed the day 1 loss recognised in profit or loss will result in a gain in OCI. FAR finds this accounting outcome to be counterintuitive and misleading. To avoid this FAR is of the opinion that the impairment model for FVOCI instruments should not include any provisions for stage 1. Question 4 12-month expected credit losses Is measuring the loss allowance (or a provision) at an amount equal to 12-month expected credit losses operational? If not, why not and how do you believe the portion recognised from initial recognition should be determined? As pointed out in the answer to question 1b above FAR does not conceptually agree that a portion of the credit losses should be recognised from initial recognition, as economically no loss has occurred. FAR believes that the IASB should seek feedback from preparers on whether measuring the loss allowance (or a provision) at an amount equal to 12-month expected credit losses is operational. However, FAR does not see any reasons for why measuring the loss allowance (or a provision) at an amount equal to 12-month expected credit losses should not be operational. Question 5 Assessing when an entity shall recognise lifetime expected credit losses (a) Do you agree with the proposed requirement to recognise a loss allowance (or a provision) at an amount equal to lifetime expected credit losses on the basis of a significant increase in credit risk since initial recognition? If not, why not and what alternative would you prefer? As stated in the covering letter, FAR found the model in the original exposure draft conceptually preferable, but given the operational complexities of that model FAR believes the model in the current exposure draft is an acceptable compromise if the requirement to recognise day one losses is removed. In a model based on credit 4(11)

7 deterioration it seems necessary from a practical perspective to use a significance threshold. FAR thus agrees that where there is a significant increase in credit risk since initial recognition a loss allowance equal to lifetime expected credit losses should be recognised. (b) Do the proposals provide sufficient guidance on when to recognise lifetime expected credit losses? If not, what additional guidance would you suggest? FAR believes that in all essential the guidance on what is a significant increase in credit risk is sufficient. However, FAR finds that some aspects of the guidance of when and how to reflect the change need some further work. Time lags in detecting significant increases on individual loans Many banks use internal credit rating systems where loans are subject to a periodic review, for example on a yearly basis. The internal credit rating system will thus have a time lag of up to a year before a significant increase in credit risk is detected in the system. Under IAS 39 this was generally covered by provisions for the loss incurment period in the collective assessment for impairment. It is not clear whether the intention is that this time lag should be covered by the 12-month reserve in stage 1 as it has not yet affected the internal credit rating system or whether it should be incorporated in stage 2 as there is an increase in credit risk. The effect of general factors suggesting an increase in credit risk Example IE51 suggests that information on the economic conditions in an industry may lead to a bank making a segmentation of a loan portfolio to separate loans with a connection to that industry. The identified portion is then moved to life-time expected losses (stage 2) and full life time economic losses are recognised on that portion. FAR suggests that such a model is field tested to ensure that such sub segmentation of portfolios is operational. Furthermore, this example may also suggest that if there is information suggesting a general deterioration of the economic conditions in the country, then all loans should move into stage 2. Alternatively the information on general economic conditions in a country could be incorporated in a change of the 12-month PD for stage 1, as no specific subset of loans have been identified as having a significant increase in credit risk. How to assess significant increases on revolving facilities/credit cards FAR also has some concerns with regards to assessing the significance of increases in credit risk for revolving facilities such as credit cards. Certain credit facilities such as credit cards can have a life of many years with balances being drawn daily and repaid (fully or partially) at monthly or other intervals. Such facilities could be viewed as a combination of two instruments: a loan commitment; and a loan balance. For such instruments, it is not clear what would be the starting point for assessing the significance of increases in credit risk. For example, the assessment could be based on a comparison to the credit risk when a contract is signed, or to the credit risk when each draw-down takes place, although the latter approach would be very complex as draw- 5(11)

8 downs could take place daily. For drawn balances in respect of which more forward looking information on the borrower is not available, entities may be able to use the 30- day rebuttable presumption to determine when recognition of lifetime expected losses is appropriate. Additionally, the issue will not be relevant for facilities that can be cancelled without notice as there would be no present obligation to extend credit. FAR suggests that the IASB consider developing guidance in this area. (c) Do you agree that the assessment of when to recognise lifetime expected credit losses should consider only changes in the probability of a default occurring, rather than changes in expected credit losses (or credit loss given default ('LGD'))? If not, why not and what would you prefer? FAR believes that considering only changes in the probability of default to assess when to recognise lifetime losses is (i) consistent with a model based on credit deterioration as it focuses only on whether the debtor will be able to pay in accordance with the original terms of the debt and (ii) probably not as operationally challenging as to calculate significant increases in expected losses. (d) Do you agree with the proposed operational simplifications, and do they contribute to an appropriate balance between faithful representation and the cost of implementation? No provisions when significant increase in credit risk, but credit risk is still low The threshold "low" credit risk give from one perspective relief from calculating lifetime expected loss for those loans that have experienced significant increase in credit risk since origination. On the other hand, that threshold actually introduces an additional operational challenge; the need for preparers to keep track of original credit risk/rating and current credit risk/rating. FAR is not convinced that the achieved operational relief is larger than the operational challenges that have been induced by this additional threshold. Therefore this aspect of the proposals in this exposure draft should be included for field testing with regards to their operationality. 30 days rebuttable assumption of significant increase in credit risk FAR agrees that a rebuttable presumption, that there is a significant increase in credit risk if payments are past due for more than a certain period, may be a simplification at least for smaller banks. FAR is of the opinion that even if there is no clear conceptual basis for a 30 days period, it appears to be a level at credit risk of a portfolio is not any longer low. It may however help if it is clearly stated that the presumption can be rebutted using historical statistical information. Choice between risk-free rate and effective interest rate (and anything in-between) According to B29 (a) in the ED an entity shall, at initial recognition of a financial asset, determine as the discount rate for that asset any reasonable rate that is between (and including) the risk-free rate and the effective interest rate. FAR does not believe that an unlimited free choice of discount rate is appropriate given the inherent and unavoidable level of subjective choices of methods, information, future forecasting etc. FAR believes that it is important not to create sources of differences between preparers unless absolutely necessary. FAR therefore supports the FASB proposals that would require the use of the effective interest rate (EIR) of a financial asset as the discount rate in measuring the expected credit losses. In the basis for conclusions, note that the EIR is conceptually appropriate for calculations of amortised cost. FAR agrees with this assessment and also 6(11)

9 agrees that calculation of a precise EIR, particularly where an impairment loss is measured on a portfolio basis, may be operationally challenging. Accordingly, FAR suggests that the Boards clarify that use of an approximate EIR when measuring expected losses on a portfolio basis would be acceptable. Only if it would be an undue burden to approximate the EIR on a portfolio basis it should be appropriate to use as an alternative a risk free interest rate. FAR does not understand the rationale for using a discount rate in-between those two rates. It is unclear in the exposure draft if the chosen discount rate is the interest rate at origination of the asset or a current interest rate at the measurement date. FAR believes that it would be inconsistent with the principle of amortised cost measurement to use a current rate at the measurement date since this would deviate from amortised cost measurement and introduce partial fair value measurement. (e) Do you agree with the proposal that the model shall allow the re-establishment of a loss allowance (or a provision) at an amount equal to 12-month expected credit losses if the criteria for the recognition of lifetime expected credit losses are no longer met? If not, why not, and what would you prefer? FAR agrees that the accounts should also reflect when previously impaired assets recover. It is therefore necessary to allow re-establishment of the 12-month provision if there is no longer a significant increase in credit risk. Question 6 Interest revenue (a) Do you agree that there are circumstances when interest revenue calculated on a net carrying amount (amortised cost) rather than on a gross carrying amount can provide more useful information? If not, why not, and what would you prefer? On a conceptual level FAR agrees that calculating interest revenue on a net carrying amount for an asset where there is objective evidence of impairment is preferable to calculating it on a gross carrying amount, which would overstate interest revenue. (b) Do you agree with the proposal to change how interest revenue is calculated for assets that have objective evidence of impairment subsequent to initial recognition? Why, or why not? If not, for what population of assets should the interest revenue calculation change? FAR agrees that the interest revenue should be changed for assets that have objective evidence of impairment. This would be consistent with the effective interest rate method to recognise the same yield (as percentage of the carrying amount) of an asset for all loans regardless if they are considered as individually impaired or not. (c) Do you agree with the proposal that the interest revenue approach shall be symmetrical (i.e. that the calculation can revert back to a calculation on the gross carrying amount)? Why or why not? If not, what approach would you prefer? FAR agrees that the interest revenue approach shall be symmetrical since that as mentioned under 6(b) in FAR's view is consistent with the principle of amortised cost and the effective interest rate method. 7(11)

10 Question 7 Disclosure (a) Do you agree with the proposed disclosure requirements? Why or why not? If not, what changes do you recommend and why? FAR agrees with the proposed disclosure requirements. Due to the subjective nature in several aspects of the expected loss model proposed in the ED there is a need for high transparency especially with regards to the characteristics of the choices made by the preparer when interpreting the meaning of "significant" increase of credit risk and "low" credit risk as well in preparing its estimates of probabilities of default and expected shortfalls of cash-flows. These demands are generally met by the proposed disclosure requirements. FAR would however recommend some additional disclosure requirements, which are described further under 7 (c). (b) Do you foresee any specific operational challenges when implementing the proposed disclosure requirements? If so, please explain. FAR foresees operational challenges when implementing the proposed disclosure requirements and believes that the IASB should seek feedback from preparers regarding specific operational challenges when implementing the proposed disclosure requirements. However, FAR is very concerned that the proposed disclosures in paragraph 38 on modification of terms goes far beyond the disclosure requirements in previous versions of IFRS 7 (paragraph 36(d)) that was deleted in an improvement project due to the complexity of generating this information. (c) What other disclosures do you believe would provide useful information (whether in addition to, or instead of, the proposed disclosures) and why? In addition to the proposed disclosures in the exposure draft FAR would also see merit if the following information was provided to the users of the financial statements with regard to some critical judgments that need to be applied when implementing and applying the proposed model; the entity's accounting policy for modification of terms, derecognition and the link to establish the original credit quality of the asset the entity's definition of when credit risk is not low whether the entity uses individual or collective basis of evaluation of credit quality Question 8 Application of the model to assets that have been modified but not derecognised Do you agree with the proposed treatment of financial assets on which contractual cash flows are modified, and do you believe that it provides useful information? If not, why not and what alternative would you prefer? FAR agrees that there is a need for clarification of some aspects of modifications of terms. There is a need for clarification as per what date the "original" credit quality should be assessed. For this the exposure draft presents a satisfactory clarification that this date is the 8(11)

11 initial date of recognition which would be a new date if the initial assets would be derecognised. FAR notes however that there is no explicit guidance on when a modification of an asset should lead to derecognition of the original asset and the recognition of a new asset. FAR's experience is that there is divergence in current practise how to treat modification of terms in financial assets. IAS 39 and IFRS 9 are explicit with regards to financial liabilities, where there is a qualitative and quantitative test. In practise these principles and rules are applied in analogy to various extents to financial assets. Under the proposals of this exposure draft, the assessment of when a modification of terms leads to the establishment of a new loan and when it doesn't, and what is considered as modification of terms in the first place will have a large impact to the calculation of expected losses since the starting point for assessing the significant increase of credit risk will depend on this. In FAR's view there is need for guidance on these matters. FAR also sees a need for clarification of how the effects of modification of terms should be treated when the asset is not derecognised. There is relevance for such a clarification for loans that due to declines in credit quality has been modified or renegotiated. For loans where the terms are modified for other reasons than declines in credit quality the proposals creates unclarities in the application for loans with long maturities but where the bank has a possibility to change the spread component of the interest rate in connection when resets of interests are made. Since the term "modification" is not defined or illustrated in application it is difficult to assess whether these modifications are made within the original terms of the loans or are modifications of the terms of the loans. Question 9 Application of the model to loan commitments and financial guarantee contracts (a) Do you agree with the proposals on the application of the general model to loan commitment and financial guarantee contracts? Why or why not? If not, what approach would you prefer? FAR generally agrees that the general model should be applied to loan commitments and financial guarantee contracts as the credit risk of these are not different than the credit risk on financial assets. With regard to financial guarantees there is however a critical issue with regards to what is the unit of account. According to B27 in the exposure draft cash short falls on financial guarantees should be calculated as the expected payments to reimburse the holder for a credit loss that it incurs less any amounts that the entity expects to receive from the holder, the debtor or any other party. At origination; regardless whether the unit of account is the individual guarantee or a portfolio of guarantees, there will in general be no cash short fall at inception since the cash inflows generally are in excess of the expected loss of the individual guarantee and the portfolio. This, however, raises the question whether this is the intended effect by the exposure draft. In FAR's view this would be a desirable outcome on "day one" for an issued financial guarantee within the scope of the exposure draft (unless the contract already at outset is an onerous contract). 9(11)

12 (i) Subsequent measurement; subsequent measurement for financial guarantees will be different from loans and loan commitments since it appears that no provisions should be recognised on "day one" since the cash inflows from the guarantee generally will exceed the expected loss of the guarantee. The ED is unclear on whether a 12-month expected loss provision could/should be recognised upon subsequent measurement for financial guarantees in those cases when the cash outflows are expected to be larger than the inflows. This furthermore raises the following two issues; Whether the unit of account is the individual contract or the portfolio will be critical for the calculation of whether there is a cash-short fall or not. Can surpluses from contracts where there still is a positive cash inflow be used and offset against cash shortfalls on contract where the EL is > than cash inflows? (ii) In relation to the assessment of cash inflows; how should received upfront payments be regarded in this context? Are they included or excluded from the calculation of cash short falls? (b) Do you foresee any significant operational challenges that may arise from the proposal to present expected credit losses on financial guarantee contracts or loan commitments as a provision in the statement of financial position? If yes, please explain. FAR believes that the IASB should seek feedback from preparers on whether there are any significant operational challenges that may arise from the proposal to present expected credit losses on financial guarantee contracts or loan commitments as a provision in the statement of financial position. Question 10 Exceptions to the general model trade receivables and lease receivables (a) Do you agree with the proposed simplified approach for trade receivables and lease receivables? Why or why not? If not, why not and what changes do you recommend and why? FAR agrees with the simplified approach for trade receivables and lease receivables. (b) Do you agree with the proposed amendments to the measurement on initial recognition of trade receivables with no significant financing component? If not, why not and what would you propose instead? FAR agrees with the proposed amendment. Question 11 Exceptions to the general model - Financial assets that are creditimpaired on initial recognition Do you agree with the proposals for financial assets that are credit-impaired on initial recognition? Why or why not? If not, what approach would you prefer? FAR agrees with the proposals for financial assets that are credit-impaired on initial recognition. 10(11)

13 Question 12 Effective date and transition (a) What lead time would you require to implement the proposed requirements? Please explain the assumption that you have used in making this assessment. As a consequence, what do you believe is an appropriate mandatory effective date for IFRS 9? Please explain. FAR has not made an assessment of the required time to implement the proposed requirements and is of the opinion that the IASB should seek feedback from preparers on the lead time to implement the proposed requirements. (b) Do you agree with the proposed transition requirement? Why or why not? If not, why what changes would you recommend and why? FAR agrees with the proposed transition requirements. Different entities will have different levels of access to historical data on original credit quality. For entities that do not have this information it will simply not be possible with mandatory full retrospective effect in this respect. For entities that have access to this information FAR is of the opinion that it would be consistent with the general concept of first adoption on most IFRSs with retrospective application as far as possible to allow these entities to use this information on original credit quality. (c) Do you agree with the proposed relief from restating comparative information on transition? If not, why? FAR agrees with the proposed relief from restating comparative information on transition. It would be necessary to have dual systems for assessing impairment during the year before implementing IFRS 9 impairment in order to restate comparative information. FAR believes that the exposure draft strikes a good balance between the application of retrospective application and the risk of entities using hindsight. This would further delay the mandatory implementation as well as cause excessive costs. Question 13 Effects analysis Do you agree with the IASB's assessment of the effects of the proposals? Why or why not? The analysis of the expected effects of the proposals in BC164-BC216 are in line with FAR's expectations, although FAR has not made an in-depth analysis of the expected consequences. Other issues Unclarities relating to measurement The exposure draft does not define what a collateralised asset is. This raises the question in what circumstances that financial guarantees purchased by the lender from third parties can be included in the measurement of the expected cash flows on the asset. FAR believes that as the economic outcome of from the loan and the financial guarantee is the same whether or not the financial guarantee was part of the original lending transaction, it should not be reported differently. 11(11)