4 February 2011 International Accounting Standards Board Financial Accounting Standards Board Impairment of Financial Assets This presentation has been prepared by the staff of the IASB and the FASB to help constituents understand the proposals in the Supplementary Document Financial Instruments: Impairment. The views expressed in this presentation are those of the presenters, not necessarily those of the IFRS Foundation, the IASB, the Financial Accounting Foundation, or the FASB. Official positions of the IASB and the FASB are reached only after extensive due process and deliberations. 2011 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. www.ifrs.org
Impairment timeline 2 2009 2010 2011 December 2009 June 2010 EAP meetings and outreach Nov IASB ED published Dec Expert Advisory Panel (EAP) formed May FASB ED published Jun IASB ED comment period ends Sep FASB comment period ends and joint redeliberations begin Jan Joint supplementary document published Jun Target completion
Proposals in original EDs 3 Component Initial loss expectations Subsequent changes in estimates IASB Expected cash flow (ECF) Allocate over life (integrated effective interest rate) Immediate FASB immediate recognition Immediate Immediate Information set Forward-looking Hold constant The BIG question. How to converge and create a more operational model, especially for open portfolios?
Feedback on IASB original ED 4 Overall support for an expected loss approach Operational difficulties with specific proposals Major operational issues: Open portfolios Integrated effective interest rate
Main operational issues with IASB original ED 5 Open portfolios: Separate treatment for initial expected loss (EL) estimates and effects of subsequent changes Not operational to separately track estimates for old and new loans
Main operational issues with IASB original ED 6 Integrated interest rates: Initial loss estimates in the calculation of interest rates to allocate losses over life Accounting Systems (interest rate) IASB Expected EIR Credit risk systems
Feedback on FASB original ED 7 Should not limit use of forward-looking information in developing expected loss estimates Concerns with combining credit losses with interest revenue recognition
Redeliberations 8 IASB perspective: Objective: Replicate as closely as possible the outcomes of the original ED in an operational manner for open portfolios Utilise EAP feedback Maintain link between expected losses and pricing
Redeliberations 9 FASB perspective: Objective: Deal with too little, too late criticism Focus on adequacy of allowance balance Utilise user feedback Ensure allowance balance always covers expected losses for the foreseeable future period
Credit risk management objective Overview of new proposals 10 Receive regular payments Recovery A B C D E Bad book Loan loss allowance Higher of: (a) Time-proportional amount of losses for the remaining life; and (b) Expected losses in foreseeable future (no less than 12 months) All expected credit losses (a) IASB component (b) FASB component
Choice Mechanics of time-proportional approach 11 Approach Straight-line (undiscounted or discounted) Annuity Allowance balance time-proportional calculation = Expected loss for remaining life x (Weighted Average Age / Weighted Average Life) = Annuity (given expected loss for remaining life and weighted average life) x Weighted Average Age Components of the calculations T 0 End of current reporting period T n Portfolio age Expected losses for remaining life Portfolio life
Other aspects of proposals 12 Use all reasonable and supportable information (including forward-looking) EIR per IAS 39. Separately allocate expected loss (decoupled approach) Good book / bad book differentiation based on credit risk management policies Presentation and disclosure requirements (IASB only)
Scope of supplementary document 13 IASB: financial assets at amortised cost in open portfolios; excludes short-term trade receivables FASB: open portfolios of loans and debt instruments not measured at fair value with changes in value recognized in net income Main focus timing of recognition of credit losses IASB-only appendix is an integral part of the document for IASB constituents
Next steps 14 2011 January Supplementary document published 1 April Comment period ends June Target completion Continue discussions on aspects of the original ED not affected by the supplementary document Outreach activities
Questions or comments? 15 Expressions of individual views by members of the IASB and FASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB and FASB on accounting matters are determined only after extensive due process and deliberation.
Questions or comments? 16 what does foreseeable future period mean
Questions or comments? 17 how does this model differ from the separate models the boards were preparing
Questions or comments? 18 can foreseeable future period change each reporting date?
Questions or comments? 19 How does the straight-line approach address loan portfolio (such as residential mortgages) where loan losses generally peak at year 2-3 of the loan? That is, losses are not expected to arise in a straight-line manner over the life of the loan.
Questions or comments? 20 To clarify, the EIR is not affected by the impairment loss (as a difference from previous ED). And, you consider expected losses as a difference from IAS 39.
Questions or comments? 21 How will proposals in the supplementary document and those in the initial ED (IASB) interract?
Questions or comments? 22 Do you intend developing guidance on how to determine expected losses on the good book?
Questions or comments? 23 a)what is 'open' portfolio? It's meaning is not clear? b)what is the meaning of 'expected loss' and how should it be measured?
Questions or comments? 24 Why is an unexpected loss not considered?
Questions or comments? 25 When calculating the expected loss amount is there a free choice to use either a discounted or undiscounted loss number, irrespective of whether you use a straight line or annuity approach to spread the expected loss number that is arrived at?
Questions or comments? 26 When are you realistically expecting organisations to adopt the final proposal?