New on the Horizon : Impairment of financial assets managed in an open portfolio
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New on the Horizon : Impairment of financial assets managed in an open portfolio

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New on the Horizon: Impairment of financial assets in an open portfolio considers the proposals of, and details our observations on, the Supplement to ED/2009/12 Financial Instruments : Amortized Cost and Impairment, which was published on 31 January 2011. The IASB’s and FASB’s efforts to develop a single common impairment model will result in significant changes – in particular for banks applying the proposals to their open portfolios, given the change from recognizing incurred credit losses to estimating future losses separately for the ‘good book’ and the ‘bad book’ within a portfolio.

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Publié le 07 juin 2011
Nombre de lectures 192
Langue English
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IFRS New on the Horizon: Impairment of financial assets managed in an open portfolio February 2011 kpmg.com/ifrs Contents 1. Highlights 2 2. Background 4 2.1 Overview of the IAS 39-replacement project 4 2.2 Summary of the Boards’ original impairment proposals 4 2.3 Reasons for publishing the supplement 5 3. Scope 6 3.1 Joint supplementary document 6 3.2 IASB‘s Appendix Z 7 4. Impairment in open portfolios 8 4.1 Overview 8 4.2 Expected credit losses 8 4.3 The good book and the bad book 9 4.4 Allowance for the good book 10 4.5 Allowance for the bad book 16 4.6 Discount rate 16 4.7 Transfer of the allowance between the two books 16 4.8 Effective interest rate 18 5. Scope of IAS 39 and IFRS 9 (IASB only) 19 6. Presentation (IASB only) 20 7. Disclosure (IASB only) 21 7.1 Overview 21 7.2 Allowance account 21 7.3 Expected credit loss estimates 22 7.4 Credit risk management 22 About this publication 24 New on the Horizon: Impairment of financial assets managed in an open portfolio | 1 Limited re-exposure of proposed financial instruments impairment model We welcome the IASB’s and FASB’s (the Boards) efforts to develop a single proposal on one of the key elements of a future impairment model for financial instruments. It is particularly encouraging to see the Boards consulting jointly, although it has meant significant changes to the two separate models that they had each previously developed. This combined approach acknowledges the huge importance of trying to achieve a converged solution, particularly for banks. However, the new proposals would require entities to make loss estimates across a number of different time periods, including both the foreseeable future and the life of a portfolio. The proposed changes are intended to respond to the concerns about operationality and complexity of the previous IASB impairment proposals issued in November 2009, for example by removing expected losses from the calculation of interest income. They also respond to concerns from non-financial sector entities by scoping out trade receivables from the project until the revenue recognition exposure draft is re-deliberated. While it is encouraging to see these important aspects of the impairment model re-exposed for comment, there are many other elements of the project that are still to be deliberated by the Boards and will need to be included in their final standards. These include impairment for assets that are not part of an open portfolio, measurement of impairment and interest recognition. There is still a great deal to do; the IASB faces a significant challenge to finalise the standard by 30 June 2011. Andrew Vials KPMG’s global IFRS Financial Instruments leader KPMG International Standards Group © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | New on the Horizon: Impairment of financial assets managed in an open portfolio 1. Highlights The Boards published a Supplement to ED/2009/12 Financial Instruments: Amortised Cost and Impairment (the supplement) on 31 January 2011. The supplement sets out common proposals for accounting for impairment of financial assets managed on an open portfolio basis. The supplement retains the expected loss concept proposed in Exposure Draft ED/2009/12 Financial Instruments: Amortised Cost and Impairment (the exposure draft) while aiming to address operational concerns that were raised. The supplement also incorporates additional changes enabling the Boards to satisfy, in part, their objectives for this project. An IASB-only appendix requests comments relating to three areas: ●● the scope of IAS 39 Financial Instruments: Classification and Measurement and IFRS 9 Financial Instruments; ●● presentation of interest and impairment in the statement of comprehensive income; and ●● disclosures relating to open portfolios of financial assets. The impact of the supplement is limited to financial assets measured at amortised cost and managed on an open portfolio basis. Overview of the proposals Ov Joint IASB/FASB proposals ●● Expected credit losses would be estimated separately for the ‘good book’ and the ‘bad book’. ●● The differentiation between the books would be based generally on internal credit risk management, subject to a principle that financial assets should be transferred to the bad book if their collectibility becomes so uncertain that the entity’s credit risk management objective changes from receipt of contractual payments to maximising recovery. ●● The impairment allowance at each reporting date would be the sum of the good book and the bad book allowances. ●● The good book impairment allowance would be the higher of: – the time-proportional expected credit losses; and – the credit losses expected to occur within the foreseeable future, which should be no less than 12 months. ●● The bad book impairment allowance would be the entire amount of expected credit losses over the remaining life of the portfolio. ●● Expected loss estimates would be based on all available information, including expectations of future changes in economic and market conditions based on reasonable and supportable information. ●● Under the time-proportional method, expected loss estimates can be undiscounted or discounted. If discounted estimates are used, then the rate can be any reasonable rate between the risk-free rate and the effective interest rate (EIR), as used for the effective interest method in IAS 39. ●● ‘Foreseeable future’ is the period over which specific projections of events and conditions are possible and credit losses can be reasonably estimated on these bases. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. New on the Horizon: Impairment of financial assets managed in an open portfolio | 3 Overview of the proposals Ov IASB-only proposals ●● Extensive disclosure requirements, which include: – separate reconciliations for loss allowance accounts; – disclosures to enable understanding of the estimates made in determining the impairment allowance; and – explanation of how internal credit risk management impacts the estimation of expected losses. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | New on the Horizon: Impairment of financial assets managed in an open portfolio 2. Background 2.1 Overview of the IAS 39-replacement project The IASB is revising its accounting requirements for financial instruments. The objectives of the project include improving the decision-usefulness of financial statements for users by simplifying the classification and measurement requirements fuments. This project aims to replace the existing standard, IAS 39. The IAS 39-replacement project, and in particular its timeline, is driven in part by requests for reform from the G20 and other constituents. Following the G20 summit in April 2009, the Leaders’ Statement called on accounting standard setters, including the IASB and the FASB, to work urgently with supervisors and regulators to improve standards on valuation guidance and loan loss provisioning and achieve a single set of high-quality global accounting standards. Following the conclusion of their September 2009 summit, the G20 leaders reiterated this message and called on the international accounting standard setters to complete their convergence project by June 2011. The IAS 39-replacement project has three main phases: ●● Classification and measurement of financial instruments – the first chapters of IFRS 9 (IFRS 9 (2009)) were published on 12 November 2009 and addressed financial assets. On 28 October 2010 the IASB updated IFRS 9, through publication of IFRS 9 (2010), to address financial liabilities. See our publications Insights into IFRS, chapter 3.6A, and First Impressions: Additions to IFRS 9 Financial Instruments (published in December 2010) for further information on this section of the standard. ●● Amortised cost and impairment of financial assets – the exposure draft was published on 5 November 2009. See our publication New on the Horizon: ED/2009/12 Financial Instruments: Amortised Cost and Impairment for further information on the exposure draft. The supplement was issued on 31 January 2011 and is the subject of this publication. It is a result of deliberating jointly with the FASB the responses received on the exposure draft related to impairment in open portfolios. The IASB plans to finalise this second phase by June 2011. ●● Hedge accounting – Exposure Draft ED/2010/13 Hedge Accounting was published in December 2010. It proposed significant changes to the current general hedge accounting requirements, but would retain some of the existing guidance in IAS 39. See our publication New on the Horizon: Hedge Accounting issued in January 2011 for further information on this exposure draft. The IASB plans to issue a standard covering this area by June 2011. The IASB’s proposals on portfolio or macro hedging are expected during the second quarter of 2011 with a final standard on this topic expected during 2011. The IASB has adopted a phased approach to this project in order to accelerate the replacement of IAS 39 and address the consequences of the financial crisis as speedily as possible, while giving interested parties an opportunity to comment on the proposals in accordance with the IASB’s commitment to due process. 2.2 Summary of the Boards’ original impairment proposals The exposure draft proposed changes to accounting for impairment of financial assets, which included: ●● Replacement of the IAS 39 incurred loss model for the assessment of impairment of financial assets measured at amortised cost with an expected cash flow approach (ECF approach). ●● Under the ECF approach, recognition of a credit-related loss would not require an entity to identify any specific loss event(s) or impairment triggers. Rather, an entity would estimate the expected credit losses initially at inception of the asset and then re-estimate the losses at each measurement date. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. New on the Horizon: Impairment of financial assets managed in an open portfolio | 5 No gain or loss would be recognised at inception, and the initially expected losses would reduce the EIR. Any gain or loss on a subsequent re-estimation would be recognised immediately in profit or loss. ●● The effect would have been that the allowance for credit losses was built up and recognised over the expected life of the assets. However, any revisions to the initial estimates would have been recognised immediately. SD IN5 The IASB’s primary objective of the exposure draft was to reflect the initial expected credit losses as part of determining the EIR as this was considered more reflective of the economic substance of lending transactions. The IASB believed the amounts recognised in the financial statements should reflect the pricing of the asset applied when an entity makes lending decisions, i.e. the interest rate charged, which considers expected credit losses. SD BC30, BC31 The feedback received by the IASB on the exposure draft indicated overall support for the expected loss model. However, constituents were concerned about the operationality of the proposals, particularly as they related to financial assets managed on an open portfolio basis. The FASB published its proposals for impairment accounting as part of the Proposed Accounting Standards Update Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities issued in May 2010. The proposals followed the FASB’s primary objective to ensure that the allowance balance was sufficient to cover all estimated credit losses over the remaining life of an instrument. Accordingly, an entity would estimate cash flows not expected to be collected from a financial asset and recognise related losses immediately. The cash flows would be estimated on an assumption that the economic conditions existing at the end of the reporting period would remain unchanged for the remaining life of the financial asset. The FASB considered that its objective for this project would address the concern related to current impairment guidance that loss reserves tend to be at their lowest level when they are most needed at the beginning of a downward economic cycle – ‘too little, too late’. SD BC25-BC27 The FASB received mixed comments on its proposals for immediate recognition of expected credit losses. While many respondents opposed the approach, users generally supported it. The vast majority of respondents did not agree with the proposals to preclude entities from including in their expected loss calculations consideration of changes to economic conditions beyond the reporting date. However, most investors thought that it was very difficult, if not impossible, to forecast credit losses over a long period of time and they supported limiting the period of predictions to, for example, two to three years, which they thought would result in more reliable information. 2.3 Reasons for publishing the supplement SD IN3, IN14 The Boards have published the joint proposals as part of their commitment to enhancing international comparability in the accounting for financial instruments. The joint model presented is a variant of the Boards’ original proposals and has features that partly satisfy each of the Boards’ primary objectives outlined above. SD IN3, BC12 The proposals in the supplement deal with one of the most challenging aspects of accounting for impairment of financial assets and the feedback received will form the basis for deliberating the remaining areas of the project. SD INZ29 The supplement also contains an IASB-only part, which seeks feedback on the scope of IAS 39 and IFRS 9 and presentation and disclosure requirements relating to the jointly proposed model. The IASB has published this separate appendix as it facilitates understanding of the proposals as a whole. As the proposals allow entities flexibility in linking recognition of impairment to their internal credit risk management processes, adequate disclosures of how this flexibility has been applied is an essential part of the proposals. Comments on the revised proposals are due to the IASB by 1 April 2011. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 6 | New on the Horizon: Impairment of financial assets managed in an open portfolio 3. Scope 3.1 Joint supplementary document SD 1, B1 The scope of the joint document is limited to recognition of impairment of financial assets managed on an open portfolio basis. In an open portfolio assets are added and removed on an on-going basis through origination, purchase, sale, transfer, repayment or write-off. For the IASB, these proposals would apply to such financial assets only if they are measured at amortised cost. There are many aspects of the impairment project that are not included in the supplement and that have yet to be deliberated by the Boards. These include: ●● impairment of financial assets not managed in an open portfolio, assets evaluated individually, debt securities, purchased loans and short-term receivables; ●● measurement of credit losses, for example, whether it should be based on discounted cash flows and whether the loss estimate should be an expected value; ●● the objective of amortised cost accounting and its interface with the measurement of impairment; ●● recognition of interest income; ●● wider disclosure requirements; and ●● the effective date of the impairment proposals and whether early application would be available. Observations – Scope of joint proposals While it is welcomed that the Boards have decided to allow interested parties to comment on these important aspects of accounting for impairment, the lack of a wider context for this limited re-exposure means that it may be challenging for the respondents to assess the full implications of the proposals in providing their feedback. Such wider context includes measurement of expected losses and recognition of interest income. Observations – Definition of credit loss One of the areas that is still to be deliberated is the measurement of credit losses, including whether measurement should be based on discounted or undiscounted cash flows. Any decision in this area is likely to impact on what cash flows are to be included in the estimation of losses, e.g. whether they are to include both interest and principal or principal only. In addition, if expected losses were to be calculated on a discounted cash flows basis, then it is unclear how such measurement would relate to discounting discussed in section 4.6. SD 1 Excluded from the scope of the IASB’s proposals are short-term trade receivables without a stated interest rate that are so short-term that the effect of discounting is immaterial. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. New on the Horizon: Impairment of financial assets managed in an open portfolio | 7 Observations – Exclusion of short-term receivablest-ter SD BC13 As a consequence of the proposals in the exposure draft, which included the initial recognition of trade receivables within its scope, related revenue would have been recognised net of expected losses. However, short-term receivables have been excluded from the scope of the supplement and the impairment project as a whole until the issues related to their initial recognition have been re- deliberated as part of the revenue recognition project. This is likely to be welcome by many entities, particularly those outside of the financial sector. SD 1, IN20, BC33 However, it is unclear whether all short-term receivables or just short-term trade receivables would be excluded from the supplement’s scope. In paragraph 1, short-term receivables without a stated interest rate that are so short-term that the effect of the time value of money is immaterial, are excluded. This may indicate that the exception would be wider than just short-term trade receivables. Whereas, for example, paragraphs IN20 and BC33 refer to short-term trade receivables and, in particular, paragraph BC33 states that the reason for the exclusion is that the relevant revenue recognition proposals have not yet been deliberated. Observations – Effective date and early applicationf The supplement does not include information on when the impairment proposals for financial instruments would become effective or whether early application would be permitted. The effective date for IFRS 9 is currently 1 January 2013 and early is permitted. The Boards have recently requested views on the effective dates for a number of standards that are due for completion in 2011. The comment period for the consultation ended on 31 January 2011. The Boards were seeking views on how to sequence the effective dates in order to reduce the burden of change for interested parties. Allowing entities to phase in implementation of different standards and/ or permitting early application would help to ease the operational burden but may also lead to reduced comparability between entities and for the same entities from year to year. The operational burden would be particularly heavy for first-time adopters of IFRS as they would have to implement successive changes in a short period of time. 3.2 IASB‘s Appendix Z SD INZ28, INZ29 The IASB has issued Appendix Z (the appendix) in order to facilitate understanding of the proposals as a whole. The appendix seeks feedback on the scope of IAS 39 and IFRS 9 and on presentation and disclosure requirements related to items within the scope of the joint part of the supplement. The FASB has not yet deliberated the issues contained in the appendix. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 8 | New on the Horizon: Impairment of financial assets managed in an open portfolio 4. Impairment in open portfolios 4.1 Overview SD 2, 3 The Boards propose that for the purpose of determining the impairment allowance, financial assets that are managed on an open portfolio basis would be split into two groups: the good book and the bad book. The split would be based on the degree of uncertainty about collectibility of cash flows from the assets. SD 2 Under the proposals, the impairment allowance at each reporting date would be made up of the following two components: (1) for financial assets in the good book, the higher of the following: ●● the time-proportional amount of the total expected lifetime credit losses for the portfolio; and ●● a loss estimate based on the amount of credit losses expected to occur within the foreseeable future, being no less than 12 months; and (2) for financial assets in the bad book, the total amount of lifetime expected losses. Observations – Overview of the proposalsoposals SD BC8 Some aspects of the proposals in the exposure draft were criticised for representing a significant operational challenge and entailing substantial implementation costs. The IASB worked together with an Expert Advisory Panel (the EAP) of credit specialists from a range of financial institutions to find a solution to these issues, and the model currently proposed is a result of these efforts. The FASB also participated in this process and the meetings of the IASB and the EAP were observed by regulators. The proposed model and in particular the concepts of good book and bad book groups, aims to capture the way many entities manage credit risk. The model therefore links financial reporting to the way credit risk is managed. The IASB observed that this approach was directionally consistent with the other phases of the project to replace IAS 39, for example, classification of financial assets and hedge accounting, which are, or are proposed to be, reflective of an entity’s business model and risk management. As the proposals aim to link recognition of impairment to entities’ internal credit risk management, the proposed model offers scope for significant judgement on how it is implemented. As a result, this may lead to a reduction in comparability between different entities. However, in responding to these proposals, interested parties need to carefully weigh-up the advantages of linking the impairment model to internal risk management processes against the disadvantage of a potential reduction in comparability between different reporters. Interested parties should take into consideration that the determination of impairment through the estimation of future cash flows is an inherently subjective area that often requires a high degree of judgement, particularly for larger wholesale assets. 4.2 Expected credit losses SD B5 Under the proposals, expected credit loss estimates would reflect all available information, both internal and external. They would include: ●● historical data; ●● data on current economic conditions; and ●● reasonable and supportable information relating to forecasts of future events and economic conditions that is consistent with currently available information. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
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