fasb fin instruments credit lossess the iasb proposes a new expected credit loss model (1)

7/30/2019 Fasb Fin Instruments Credit Lossess the Iasb Proposes a New Expected Credit Loss Model (1)

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The IASB proposes a new expected credit loss model:

what to expect?Page 1 2013 EYGM Limited.

All Rights Reserved.

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International Accounting Standards Board(IASB) disclaimer

Expressions of individual views by members of the IASBand its staff are encouraged. The views expressed in this

webcast are those of the presenter. Official positions of

the IASB on accounting matters are determined only after

extensive due process and deliberation.


3/41

The IASB proposes a new

expected credit loss model

What to expect?30 April 2013


4/41




Todays moderator

Wei Li Chan

Ernst & YoungGlobal IFRS Financial

Instruments Working Group


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Todays agenda

Current status of the IFRS 9 FinancialInstruments project

Key requirements of the IASBs expected

credit loss model

A comparison with the FASBs proposals

Business impacts and implications


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Todays presenters

Sue Lloyd

IASBSenior Director

Technical Activities

Steven Robb

Ernst & Young LLP(UK)

Financial

Accounting and

Advisory Services

Robert Wadley

Ernst & Young LLP(US)

US National

Professional Practice

Group


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Current status of the IFRS 9 FinancialInst rumentsproject


credit loss model



Todays agenda


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Timeline for financial instruments projects

2009

20102011 2012 2013

Q1

2013

Q2

2013

Q3

2013

Q4

Effective

date

IFRS 9 Financia l instrum ents

(replacement of IAS 39)

Classification and measurement IFRS 2015?

Mandatory effective date and transition

disclosuresIFRS 2015?

Classification and measurement

(limited amendments)ED R ?

Impairment

Comments due 5 JulyED SD ED R ?

General hedge accounting ED RD Target IFRS ?

Macro hedging

Accounting for macro hedging Target DP ?

Note: DP:

discussion

paper

SD:

supplementary

document

ED: exposure

draft

RD: review

draft

IFRS: final

standard

R: Re-

deliberations


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Update on IFRS 9 classification andmeasurement limited amendments

Application issues raised by constituents Interaction with the insurance contracts project

Convergence with US GAAP

Primaryobjectives

The introduction of a mandatory fair value through

other comprehensive income (FVOCI) category

Minor amendments to the contractual cash flow

characteristics assessment

Clarification of the amortised cost business model

assessment

Early adoption only if the entire IFRS 9 package is

applied

But, early adoption of own credit provisions allowed

Key

proposals


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Overview and timeline of IFRS 9 impairmentproject

IASB FASBIASB/

FASB

IASB/

FASBFASB IASB

November 2009

ED

Lifetime losses

built into the

effective interest

rate

April 2011

Three-bucket

expected loss

model

March 2013

ED

Expected credit

loss model

(comments

due 5 July)

January 2011

SD

Good book and

bad book

May 2010

ED

Lifetime expected

losses on

origination

December 2012

ED

Current expected

credit loss model

(comments due

31 May)


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Polling question 1

How much time will your entity require to

implement the IASBs proposals?

A. 01 year

B. 12 years

C. 23 years

D. More than 3 years

E. Does not apply

F. I do not know


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The IASB proposes a new expected credit loss model:what to expect?

Page 12 2013 EYGM Limited.


Todays agenda



credit loss model




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Scope of IASBs Expected Credi t LossesED

Debt instruments measured at amortised cost Debt instruments mandatorily measured at

FVOCI

Trade receivables and lease receivables Irrevocable loan commitments and financial

guarantee contracts not measured at fair value

through profit or loss


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Summary of the expected credit loss model:general model

Initial recognition(with exceptions)

Allowance:

Criterion:

Interest

revenue

based on:

12-month expected

credit losses

Gross carryingamount

Performing Under-performing Non-performing

Gross carryingamount

Change in credit quality since initial recognition

improvement deterioration

Lifetime expected credit losses

The credit risk has increased significantly since

initial recognition+

Objective evidence

of impairment

Net carryingamount


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Exceptions to the general model: simplifiedapproach

Simplified approach for trade and lease

receivables

Recognise lifetime expected credit losses on

initial recognition and subsequent reporting

periods

Required for short-term trade receivables

Policy election for long-term trade receivablesand lease receivables


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Low vs. high credit risk financialinstruments: how would the model work?

* Probabilities of default are based on S&P Global Corporate Average Cumulative Default Rates By Rating Modifier (1981-2011)

Threshold Investment grade Non-investment grade

S&P AA+ A BBB+ BBB- BB B+ B B- CCC/C D

12-mth PD* 0% 0.08% 0.15% 0.37% 0.76% 2.50% 5.46% 8.64% 26.82% 100%

Allowance 12-month 12-month or lifetime

Implementation challenges

Tracking credit risk measures from origination

Developing practical absolute credit risk thresholds

Mapping internal grading to external rating and/or

probabilities of default (PD) Using delinquency-based approaches and the more than

30 days past due rebuttable presumption

Segmenting the portfolios by shared risk characteristics


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Polling question 2

Does your entity support the operational

simplification of 'investment/non-investmentgrade' and the rebuttable presumption of 'more

than 30 days past due'?

A. Yes to bothB. Yes to only 'investment/non-investment

grade'

C. Yes to only 'more than 30 days past due'D. No to both

E. Does not apply


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Exceptions to the general model: credit-impaired assets

Financial assets that are credit-impaired on initialrecognition

Originated or purchased financial assets

Objective evidence of impairment on initial recognition

Credit-adjusted effective interest rate (EIR)

No Day 1 allowance or credit losses

Allowance based on subsequent changes in lifetime

expected losses


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Estimating expected credit losses (ECL)

Lifetime ECL = present value of all cash shortfalls over the

remaining life of the financial instrument 12-month ECL = a portion of the lifetime ECL that is

associated with the probability of a default occurring in the next

12 months after the reporting date

The time value of money

A probability-weighted outcome

Best available information

Information

about pastevents

Information

about currentconditions

Reasonable

and

supportableforecasts

+ +


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Estimating expected credit losses (ECL):implementation challenges

The time value of money

Choice of discount rate

Best available information

Past Current Future Area of

judgement

Availability of

data

Reliability offorecasts

+ +

A probability-weighted outcome

No prescribed approaches Not best estimate

Defining default

Determining 12-month and lifetime ECL


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Polling question 3

Which would be the most challenging aspect of

estimating the expected credit losses?

A. Creating lifetime estimates

B. Determining a probability-weighted

outcome

C. Incorporating forward looking forecasts

D. Discounting the expected credit losses

E. I do not know


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Illustrative example: PD approach

Correlating PD and LGD

Relying on rating agencies data

Individual vs. collective assessment

Challenges

0.15% x 25% x CU1mn = CU375

Loan originated at CU1mn, i.e., exposure at

default (EAD)

25% gross carrying amount irrecoverable ifloan defaults, i.e., loss given default (LGD)

0.15% probability of a default (PD) in the

next 12 months

12-month

ECL

allowancePD x LGD x EAD


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Illustrative example: provision matrix

Portfolio of trade receivables categorised by

common risk characteristics

Lifetime

ECL

allowance

Adjusting historical loss rates with forward-

looking estimates

Challenges

Days past

due (DPD)

030 3190 Over 90

Carrying

amount

CU800,000 CU200,000 CU50,000

Lifetime ECL

rate

1% 5% 10%

Lifetime ECL CU8,000 CU10,000 CU5,000


24/41




Disclosures

Reconciliation of opening and ending gross carrying amount and

credit loss allowance or provision

Financial instruments measured at 12-month ECL

Financial instruments measured at lifetime ECL

Financial instruments with objective evidence of impairment

Credit-impaired financial assets

Inputs, assumptions and techniques

Collateral information

Disaggregation by credit risk rating grades

Modified assets

Write-off policy

Assets evaluated on individual basis

Objective: Enable users to understand an entitys estimate of

expected credit losses and changes in credit risk


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Transition

Retrospective application is required; however, transition relief

is proposed.

Recognise 12-month ECL if credit risk is low; otherwise, lifetime

ECL are recognised

If determining initial credit risk requires undue cost or effort

Except when days-past-due is used as the only borrower-specific indicator of credit quality deterioration

Does not require restatement of comparatives, but permitted to

do so unless this requires the use of hindsight

Adjust opening retained earnings balance

Does not require disclosure of the effect of IFRS 9 on prior

period or IAS 39 on current period

Reconciliation of IAS 39 and IAS 37 ending balances and IFRS 9

opening balance


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credit loss model A comparison with the FASBs

proposals


Todays agenda


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A comparison with the FASBs proposals:similarities

Single impairment model for debt instruments, trade andlease receivables and loan commitments

Change from incurred to expected credit loss model

The same information is used to estimate ECL

The measurement of ECL is the same for financial

instruments with lifetime ECL


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A comparison with the FASBs proposals:key differences

Topic IASB FASB

Measurement

bases

Dual measurement

(12-month and lifetime ECL)

Single measurement

(current ECL)

Simplified

approach

Available for trade and lease

receivables

Not necessary

FVOCI assets Investment grade simplifcation Practical expedient not to

recognise ECLCredit-

impaired

assets

Originated or purchased

assets with objective

evidence of impairment

No allowance on initial

recognitionCredit-adjusted EIR

Purchased assets with

significant deterioration in credit

quality since origination

Gross up balance sheet with an

allowance based on lossexpectations at time of purchase

Interest

income

Based on gross or net carrying

amount

Based on gross carrying amount

Non accrual guidance


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Polling question 4

Would you prefer an impairment model that is

based on:

A. 12-month and lifetime dual measurement

ECL approach

B. Other dual measurement ECL approach(e.g., foreseeable future and lifetime)

C. Single measurement lifetime

ECL approachD. Existing incurred loss approach

E. None of the above


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credit loss modelA comparison with the FASBs proposals


Todays agenda


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How will the IASBs proposals impactentities?

More judgement and diversity of application Estimating ECL

Assessing when lifetime ECL are required

Likely to result in earlier recognition of credit losses

May increase the credit loss allowance or provision Depends on duration and quality of financial instruments

Depends on application of the current IAS 39 model

Potential volatility due to change in estimates

Cliff effect when financial instruments move between 12-monthECL and lifetime ECL and vice versa

Modification of current credit risk management and

financial reporting systems


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Page 32 2013 EYGM Limited.All Rights Reserved.

Next steps: what will entities need to do toimplement the IASBs proposals?

Establish governance structure and senior stakeholders involvement Conduct high level impact assessment

Define accounting policy and identify areas of judgement

Evaluate data availability and reconcile risk and finance data and

information sources

Examine IT dependencies

Leverage existing models (Group vs. legal entities)

Assess existing impairment model(s) and develop and validate new

impairment model(s)

Determine disclosure requirements Consider dependencies with other Groups projects and impacts on

capital and budgets

Think about communications to users


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Recap

One-minute

recap

R


34/41



Resources

IFRS Development,Issue 54

(March 2013):IASB proposes new expected

credit loss model

www.ey.com/ifrs

Applying IFRS

IFRS Outlook

IFRS Practical Matters

Core Tools

Good Group Illustrative Financial Statements

International GAAP

Disclosure Checklist IFRS Update

EY International GAAP

IFRS Q&As (internal only)

Th k f ti i ti !
http://www.ey.com/ifrshttp://www.ey.com/ifrs


35/41

The IASB proposes a new

expected credit loss model

What to expect?

Tuesday, 30 April 2013

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