Comment letter on Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses

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Loreen Taylor
5 years ago
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1 Mr. Hans Hoogervorst Chairman International Accounting Standards Board (IASB) 30 Cannon Street London EC4M 6XH UK IBA/C&I/2013/ August 2013 Dear Sir, Comment letter on Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses We refer to the ED released by you on 7 March 2013 relating to Financial Instruments: Expected Credit Losses. We are grateful for the opportunity to respond to the ED issued by the IASB. We have consulted within the members of the Indian Banks Association in respect of this ED. We append our response to the matters on which specific comment is requested. The comments represent the views of our members. Question 1 (a) Do you agree that an approach that recognizes 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? (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? We agree that the approach specified in question 1(a) will achieve the desired results.

2 We also agree that recognizing a loss allowance at initial recognition at an amount equal to lifetime expected credit losses, discounted by using the original effective interest rate does not faithfully represent the underlying economics of financial instruments. Question 2 (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 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? (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 implementation than the approaches in the 2009 ED and the SD (without the foreseeable future floor)? (c) Do you think that recognising a loss allowance at an amount equal to the lifetime expected credit losses from initial recognition, discounted using the original effective interest rate, achieves a better balance between the faithful representation of the underlying economics and the cost of implementation than this Exposure Draft? We agree that the approach specified in 2(a) achieves an appropriate balance between the faithful representation of the underlying economics and the costs of implementation. However, we propose that the ED should permit the use industry benchmarks / benchmarks set by the prudential regulators of respective jurisdictions as the estimate of expected credit losses where banks are unable to reliably devise their own estimates. In emerging market economies, where the information systems are not robust enough to meet the requirements of a reliable estimate, a prudential regulator may be in a position to ensure that the estimate represents the expected credit losses and the appropriate threshold for an asset to be classified as an asset with significant deterioration in credit quality. We agree with the approach specified in 2(b). However, we are of the view that the related costs are expected to be high. We do not believe that recognizing a loss allowance at an amount equal to the lifetime expected credit losses from initial recognition; discounted using the original effective interest rate achieves a better balance between faithful representation of the underlying economics and the cost of implementation than this Exposure Draft. Question 3 (a) Do you agree with the proposed scope of this Exposure Draft? If not, why not? (b) Do you agree that, for financial assets that are mandatorily measured at FVOCI in accordance with the Classification and Measurement ED, the accounting for expected credit losses should be as proposed in this Exposure Draft? Why or why not? We agree with the proposed scope of the Exposure Draft. However, we would like to seek clarity whether letters of credit are included within the scope of the ED and more detailed application guidance on this area.

3 We agree with the proposal that for financial assets that are mandatorily measured at FVOCI in accordance with the Classification and Measurement ED, the accounting for expected credit losses should be as proposed in this ED. We do not see reason in having a separate impairment model for such instruments. Question 4 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 recognized from initial recognition should be determined? In emerging markets, sufficient data may not be available to estimate the Loss Given Default. We propose that individual jurisdictions should be permitted to follow the estimates proposed by the prudential regulator or some other independent industry body. The ED states that there is a rebuttable presumption that a significant increase in credit risk has occurred when payments are more than 30 days past due if no other borrower-specific information is available, without undue cost or effort, to decide whether a loss allowance (or a provision) at an amount equal to lifetime expected credit losses shall be recognized. We are of the view that the prudential regulator of each jurisdiction must be permitted to prescribe the threshold relevant to the respective jurisdiction. We are of the view that 30 days past due is not an indicator of a significant increase in credit risk in the banking context in the emerging market economies. Practical application of the ED is likely to result in significant cases of rebuttals of the presumption. There is also a risk that this rebuttable presumption becoming a prescriptive issue, which we presume will go against the very premise on which this ED is based. We do not believe this would achieve the purpose of the ED. The ED does not define default. Various entities/jurisdictions adopt different criteria of recognizing a default event. We also believe that it is not practical for the ED to define a single definition of default because different asset portfolios may indeed warrant different periods of past dues. In Indian context, under the regulatory guidelines, agricultural loans are treated as impaired if principal installment or interest remains past due for two crop seasons for short duration crops and one crop season for long duration crops. Therefore, we propose that the standard should allow geography-specific regulator defined periods of past dues and a 90-days past due period as a default event where no regulatory guidelines are prescribed. We are further of the view that in the case of investment grade assets in India e.g. Government of India securities, it would practically difficult to compute the 12-month expected credit losses. In most cases, the estimate of 12 month expected credit losses is likely to be Nil. Question 5 (a) Do you agree with the proposed requirement to recognize 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? (b) Do the proposals provide sufficient guidance on when to recognize lifetime expected credit losses? If not, what additional guidance would you suggest? (c) Do you agree that the assessment of when to recognize 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)? If not, why not and what would you prefer?

4 (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? (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? We agree with the proposal to recognize 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. However, we would like to point out that in certain cases, entities would find it difficult to estimate the loss allowance beyond a 5-7 year horizon. In such cases, we propose that the lifetime credit losses be restricted to losses that are expected to occur in the forseeable future. We are of the view that the proposals provide sufficient guidance on when to recognize lifetime expected credit losses. However, the cost of implementation to establish the necessary systems and processes in banks that do not have the requisite default history or have not seen a full economic cycle would be significant. We agree that the assessment of when to recognize 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. Once the probability of default has been established, the expected credit losses will naturally follow in the hierarchy of computation. We agree with the proposed operational simplifications contained in 2(e). We 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. However, we would like to submit that the cost for the maintenance of information systems to support the accounting information requirements is likely to be high. We see this as an impediment to the global implementation of IFRS. Question 6 (a) Do you agree that there are circumstances when interest revenue calculated on a net carrying amount (amortized cost) rather than on a gross carrying amount can provide more useful information? If not, why not, and what would you prefer? (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? (c) Do you agree with the proposal that the interest revenue approach shall be symmetrical (ie 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? We agree with the aforementioned proposals. Question 7 (a) Do you agree with the proposed disclosure requirements? Why or why not? If not, what changes do you recommend and why?

5 (b) Do you foresee any specific operational challenges when implementing the proposed disclosure requirements? If so, please explain. (c) What other disclosures do you believe would provide useful information (whether in addition to, or instead of, the proposed disclosures) and why? We agree with the aforementioned disclosure requirements. Question 8 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? We agree with the aforementioned proposal. Question 9 (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? (b) Do you foresee any significant operational challenges that may arize 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. We agree with the aforementioned proposal. Moreover, 100% of notional principal may not be the correct way of determining EAD of these instruments, a credit conversion factor may be used arrive at EAD. As stated in our response to question 3 above, we also seek a clarity on as to whether letters of credit will be included within the scope of the ED. Question 10 (a) Do you agree with the proposed simplified approach for trade receivables and lease receivables? Why or why not? If not, what changes do you recommend and why? (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? We agree with the aforementioned proposal. Question 11 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? We agree with the aforementioned proposal, however, we would prefer that the definition of credit impaired assets needs to be re-looked and allowed to be based on the facts and circumstances of the economic environment of the issuance of the financial instrument. For instance, in many developing economies, investment grade credit ratings may not be met on origination of financial instrument itself, but there may be no practical expectation of credit impairment. Further guidance and elaboration of this criterion is required.

6 Question 12 (a) What lead time would you require to implement the proposed requirements? Please explain the assumptions 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. (b) Do you agree with the proposed transition requirements? Why or why not? If not, what changes do you recommend and why? (c) Do you agree with the proposed relief from restating comparative information on transition? If not, why? We are of the view that a period of 4-5 years would be considered sufficient lead time to implement the proposed requirements. We are of the view that 1 January 2018 would be an appropriate mandatory effective date for IFRS 9. We agree with the proposed transition requirements and the proposed relief from restating comparative information. Question 13 Do you agree with the IASB s assessment of the effects of the proposals? Why or why not? We agree with the IASB s assessment of the proposals. If you have any questions regarding our submission, please do not hesitate to contact me at or me at sshukla@iba.org.in or mishra@iba.org.in. With kind regards Yours sincerely Sangeet Shukla Senior Advisor

Re: OIC response to the IASB Exposure Draft Financial Instruments: Impairment

Re: OIC response to the IASB Exposure Draft Financial Instruments: Impairment Organismo Italiano di Contabilità OIC (The Italian Standard Setter) Italy, 00187 Roma, Via Poli 29 Tel. 0039/06/6976681 fax 0039/06/69766830 e-mail: presidenza@fondazioneoic.it Mr Hans HOOGERVORST Chairman