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FRSC Invites Comments on IASB Proposals on the Impairment of Financial Assets (05-10)

May 2010


The Financial Reporting Standards Council (FRSC) invites comments on an exposure draft Financial Instruments: Amortised Cost and Impairment, issued by the International Accounting Standards Board (IASB).

The proposals form the second part of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard, to be known as IFRS 9 Financial Instruments. The first part of the project on the classification and measurement of financial instruments was completed with the issuance of IFRS 9, Financial Instruments: Classification and Measurement, while proposals on hedge accounting continue to be developed.

Both International Financial Reporting Standards (IFRSs) and U.S. generally accepted accounting principles (GAAP) currently use an incurred loss model for the impairment of financial assets. An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.

Under the proposals expected losses are recognized throughout the life of the loan (or other financial asset measured at amortized cost), and not just after a loss event has been identified. This would avoid the front-loading of interest revenue that occurs today before a loss event is identified, and would better reflect the lending decision. Therefore, under the proposals, a provision against credit losses would be built up over the life of the financial asset. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.

Comments are invited by June 30, 2010. The IASB exposure draft Financial Instruments: Amortised Cost and Impairment is available for download from the Get involved/Comment on a proposal page of the IASB website at www.iasb.org or from the FRSC website. Comments may be sent electronically to the IASB through the Get involved/Comment on a proposal page of the IASB website.

An IASB ‘Snapshot’, a high level summary of the proposals, is also available for download from the Get involved/Comment on a proposal page of the IASB website.