Financial Instruments: Impairment of Financial Assets
The Board is addressing the impairment of financial assets as part of its project to replace IAS 39 Financial Instruments: Recognition and Measurement.
What happens next?
The staff will continue its outreach efforts to seek broad input from its constituents.
Where are we in the project?
16 March 2010
A summary of the 25 - 26 February Expert Advisory Panel meeting was made available - click here.
25-26 February 2010
The second EAP meeting was held in London on 25 – 26 February 2010. For more information click here.
3 December 2009
An audio recording and text document have been prepared to explain the third staff example provided with the exposure draft. To view these files, click here.
27 November 2009
The first Expert Advisory Panel meeting was held in London on 8 December 2009. For more information click here.
5 November 2009
On 5 November 2009, the Board published for public comment the exposure draft Financial Instruments: Amortised Cost and Impairment. For more information on this publication click here. To view the exposure draft and submit a comment letter, click here.
An IASB ‘Snapshot’, a high level summary of the proposals, is also available to download free of charge - click here.
On the date of publication the staff of the IASB presented a webcast introducing this exposure draft. A recording of that webcast is now available by clicking here.
A recording of answers to frequently asked questions about the exposure draft, focusing particularly on more technical questions is available, click here. The objective of the recording is to facilitate understanding of the exposure draft and to assist interested parties to provide comments on the exposure draft.
Numerical examples of the calculation mechanics of an expected loss impairment model prepared by IASB staff are available. For more information, click here.
Click here to go to the Financial Instruments: Replacement of IAS 39 project page.
15-16 October 2009
At the 15-16 October 2009 meeting, the Board directed the staff to proceed with the drafting of an ED to replace sections of IAS 39 relating to impairment. Click here to see this ED.
6 October 2009
At the 6 October 2009 meeting, the Board discussed the application of the expected cash flow (ECF) approach to variable interest rate financial assets. The Board tentatively decided to include application guidance that requires using 'catch-up' adjustments to ensure that the carrying amount of variable rate financial assets unwinds to the remaining expected cash flows.
The Board also discussed presentation and disclosure requirements to accompany the proposed ECF approach in the ED. The Board also considered ways to enhance decision-usefulness for users of financial statements regarding the credit quality of financial assets.
The Board discussed the consequences of replacing the incurred loss model with the ECF approach for the requirements in IAS 28 Investment in Associates and IFRS 4 Insurance Contracts. The Board tentatively decided to use the impairment indicators in IAS 36 Impairment of Assets to determine whether additional impairment losses have to be recognised for investments in associates. The Board did not believe that eliminating the impairment guidance in IAS 39 would affect entities' impairment accounting policy for reinsurance assets.
22 September 2009
At the 22 September meeting the Board continued its discussions on impairment of financial instruments.
Regarding the drafting of the ED on impairment the Board tentatively decided:
- that the ED should provide principle-based guidance regarding cash flow estimates on a collective (portfolio) and an individual basis (including the interplay between those bases) that focuses on two aspects:
- using the approach that provides the best estimate; and
- ensuring that if entities switch between approaches that does not result in double counting;
- that the ED includes concise application guidance for forecasting cash flows and the treatment of trade receivables;
- to use the Expert Advisory Panel (EAP) as a forum to explore further some other issues (determination of the initial expected spread, practical aspects of applying the effective interest method and interaction with Basel II requirements); and
- that the ED clarifies aspects in relation to the measurement objective (point-in-time versus through-the-cycle-estimates, expected value versus most probable value and the use of entity specific versus market data).
Regarding transition proposals the Board tentatively decided not to propose either full retrospective or full prospective application. The Board asked the staff to explore further an alternative transition approach for financial instruments that were recognised before the date of transition. This approach would involve determining on transition a new effective interest rate on the basis of the expected cash flows over the remaining life of the financial instrument that would be subject to a floor (the risk-free interest rate) and a ceiling (the contractual interest rate).
16-18 September 2009
At the 16-18 September 2009 meeting, the Board considered feedback received on the Request for Information, with the aim of developing an exposure draft (ED) for publication in October. The Board tentatively decided:
- to set up an expert advisory panel to provide further input and advice to the Board on operational aspects of applying the expected cash flow approach;
- to use a drafting design for the ED that articulates a clear objective and emphasises principles reinforced by concise application guidance;
- to include in the scope of the ED trade receivables, instruments quoted in active markets and individually significant assets;
- to prohibit the recognition of a loss on initial recognition of a loan (or similar financial asset) that bears interest sufficient to cover the credit losses expected at initial recognition; and
- to seek the expert advisory panel's input on possible ways to simplify application of the effective interest method.
August 2009
On 5 August 2009 IASB staff added examples illustrating possible applications of an expected loss approach to variable rate instruments to the request for information on the feasibility of an expected cash flow approach to impairment. For more information click here.
June 2009
In June 2009 the Board published a Request for Information. This followed the Board’s direction to the staff to obtain additional information about the feasibility of an expected cash flow approach.
The request seeked information on the following matters:
- whether the approach is clearly defined and operational;
- the magnitude of costs that would be incurred in applying the approach, both for initial implementation and on an ongoing basis;
- the extent of system and other procedural changes that would be required to apply the approach;
- how to apply the approach to a variable rate instrument and to an instrument individually identified as being impaired that was previously assessed for impairment on a collective basis (eg as part of a portfolio of financial assets) ; and
- potential simplifications to the approach.
May 2009
The Board considered several approaches to improve the accounting for impaired financial assets measured at amortised cost. They included a fair value approach, modification of an incurred loss approach and the features of an expected cash flow approach. The Board directed the staff to obtain additional information about the feasibility of an expected cash flow approach.
The Board also held two education sessions on impairment of financial assets:
- Provisioning proposal (Expected Risk Adjusted Amortised Cost) presented by representatives from BNP Paribas
- Statistical provisioning presented by representatives from the Bank of Spain.
No decisions were made at these education sessions.