impairment of financial assets
DESCRIPTION
Impairment of financial assets. Tentative decisions and Issues for discussion. Outline of presentation. Overview – replacement of IAS 39 Impairment framework Background – why change? Tentative IASB decisions FASB convergence Discussion points. Overview – replacement of IAS 39. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/1.jpg)
Impairment of financial assets
Tentative decisionsand
Issues for discussion
![Page 2: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/2.jpg)
Outline of presentation
• Overview – replacement of IAS 39• Impairment framework• Background – why change?• Tentative IASB decisions• FASB convergence• Discussion points
![Page 3: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/3.jpg)
Overview – replacement of IAS 39
Financial instruments:
IAS 39 replacement project
Phase 1: Classification and
measurement
Phase 2: Impairment
Phase 3: Hedging
![Page 4: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/4.jpg)
Impairment models
Available for sale
Impairment framework
Amortised cost At cost
Expected loss model
Incurred loss model
ProposedCurrent
![Page 5: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/5.jpg)
Background – why change?
• Perceived weaknesses in IAS 39 highlighted by financial crisis be more forward-looking and have earlier
recognition of loan losses complexities in multiple impairment models within
IAS 39
![Page 6: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/6.jpg)
Tentative IASB decisionsObjective of impairment model
• effective return on a financial asset
• current cash flow information + cash flows on initial recognition
Expected loss model Incurred loss model• actual return on a financial
asset (objective evidence of a loss event)
• actual cash flow information
![Page 7: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/7.jpg)
Tentative IASB decisionsComparison of impairment models
Recoverable amount – IAS 36
• Lower of:• Fair value less costs to sell
and• Value in use = present value
of expected future cash flows
Expected loss model• Expected cash flows,
discounted by the effective interest rate(s)
• Only test for impairment if there is an indicator
• Only reverse impairment if there is a reversal of the indicator
• Impairment indicators not used• No reference to change in
indicators for impairment reversal
![Page 8: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/8.jpg)
Tentative IASB decisionsMeasurement principles
PV of expected cash flows over the remaining life discounted at effective interest rate
Expected cash flows• Inputs into cash flow expectations:
- contractual terms- additional fees- credit loss: application guidance to be provided
• When to re-estimate cash flows?
Effective interest rate• Fixed rate instruments:
- at inception• Variable rate instruments:
- applicable spot rate + initial effective spread
expected cash flowseffective interest rate
![Page 9: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/9.jpg)
Tentative IASB decisions Application to variable rate instruments
• Catch-up adjustment – adjustment to profit or loss that changes the carrying amount Consistent measurement principles – EIR is
constant Consistent application to fixed rate instrument
Issue: unwinding of amortised cost
![Page 10: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/10.jpg)
Tentative IASB decisions Practical guidance
Treatment of trade receivables
Collective (portfolio)
assessment
Forecasting cash flows – what is expected loss
• conventional provisioning
methods
• best estimate • prevent double
counting
• data source• adjusting
historical data
Tentative guidanceConcerns
![Page 11: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/11.jpg)
Tentative IASB decisionsPresentation
$
Interest revenue based on contractual cash flows XXX
Less Allocation of initial expected losses X
Net interest revenue XX
Changes in expectations (i.e. additional impairment charges or reversals) Y
• Statement of comprehensive income
• Statement of financial position – net carrying amount
![Page 12: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/12.jpg)
Tentative IASB decisionsDisclosure
• Notes to the financial statement mandatory use of allowance account (includes movements
within the account) comparison between development of credit loss allowance
over time and cumulative write-offs details that distinguish changes that are credit-related from
those that are not credit-related management’s assumptions and methodology on the
expected cash flow approach explanation of sensitivities of key assumptions and stress
testing
![Page 13: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/13.jpg)
Tentative IASB decisionsExpected timeline and transitions
• Available for early application• Application to existing financial assets at initial recognition
2013?June 2010
End 2010?
Jun 2009
Nov 2009
RFI EDComments
due Effective3 yrsIFRS
![Page 14: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/14.jpg)
FASB convergence
Liaising with IASB, but on a different timeline
Key measurement bases effectively the same – amortised cost and fair value
Some differences remain
![Page 15: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/15.jpg)
Discussion points (1)
Would an expected loss model necessarily lead to an overall earlier recognition of
impairments?
![Page 16: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/16.jpg)
Discussion points (2)
Is there a need for more consideration to be given to financial assets that are not loan
receivables?
![Page 17: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/17.jpg)
(3A) Is there a case for using impairment indicators under an expected loss model?
(3B) Is there a case for using indicators of impairment reversals?
Discussion points (3)
![Page 18: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/18.jpg)
Discussion points (4)
Would ‘probability of default’ based on a probability-weighted calculation be
appropriate?
![Page 19: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/19.jpg)
Discussion points (5)
An expected cash flow approach means that interest income is generated through the
effective interest method – is this application practical?
![Page 20: Impairment of financial assets](https://reader035.vdocument.in/reader035/viewer/2022082207/56815cc5550346895dcac859/html5/thumbnails/20.jpg)
Transitional arrangements – assuming the proposals proceed, what should be the
basis for transition: retrospective, prospective or some combination
approach?
Discussion points (6)