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ED Financial Instruments: Amortised Cost and Impairment

ED Financial Instruments: Amortised Cost and Impairment. Webcast. 2009. Timetable: one project – three phases. * The above is in addition to a project on derecognition of financial instruments. ED Derecognition was published in March 2009.

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ED Financial Instruments: Amortised Cost and Impairment

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  1. ED Financial Instruments: Amortised Cost and Impairment Webcast 2009 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  2. Timetable: one project – three phases * The above is in addition to a project on derecognition of financial instruments. ED Derecognition was published in March 2009. 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  3. Scope: Amortised cost and Impairment Phase I- classification and measurement determines the categories: which financial assets would be at amortised cost (one impairment model for amortised cost) Phase II - the impairment phase addresses impairment method: what that impairment model would be 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  4. Current state: incurred loss impairment IAS 39 requires an incurred loss approach for financial assets What does that mean? • Impairment loss only recognised when: • Trigger (loss) event occurred • Impact can be reliably estimated Consequence: • Expected losses not recognised before trigger events 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  5. Criticisms: incurred loss impairment Overstates interest revenue before trigger event (front-loading) Does not reflect the underlying economics of the transaction Triggers inconsistently applied Loss recognition too late 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  6. Proposed impairment method:Expected cash flow (ECF) approach Main outcomes of the ECF approach include: Earlier recognition of impairment loss Eliminates front loading of interest revenue Better reflects underlying economics (eg pricing of instruments when lending decision is made) 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  7. Main features: ECF approach Interest revenue is recognised on the basis of expected cash flows (including initial expected credit losses) Impairment results from an adverse change in credit loss expectations Reversal of impairment loss when expectations change favourably Re-estimation of expected cash flows each period end 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  8. Presentation -- = Contractual interest revenue Allocation of initial expected credit losses Economic interest revenue (credit cost adjusted) Presentation (face of income statement) Effect of changes in expectations Interest expense 2009 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  9. Disclosure Disclosure Expected credit losses Quality of assets • Allowance account • Estimates and/or changes in estimates • Loss triangle • Others • Reconciliation of changes in non-performing assets • Vintageinformation 2009 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  10. Operational challenges The IASB is aware of the operational challenges of the model: Request for Information on feasibility in June 2009 Extensive outreach activities Expert advisory panel (EAP) Objectives: Advise the Board on how operational challenges of the ECF approach might be resolved Assist in field testing 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  11. Transition and effective date Transition Does not propose fully retrospective or prospective transition Adjust the effective interest rate to approximate the rate that would have been determined at inception using the ECF approach Effective date Around three years after final standard with early (voluntary) application permitted 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  12. Next steps Establishment of EAP Comment deadline : 30 June 2010 Final standard: 2010 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

  13. Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. 2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

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