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Expressions of individual views by members of the IASB and 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.
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The IASB proposes a new expected credit loss model: what to expect?
Todays moderator
Wei Li Chan
Ernst & Young Global IFRS Financial Instruments Working Group
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The IASB proposes a new expected credit loss model: what to expect?
Todays agenda
Current
Key
A comparison
Business
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The IASB proposes a new expected credit loss model: what to expect?
Todays presenters
Sue Lloyd
IASB Senior Director Technical Activities
Steven Robb
Ernst & Young LLP (UK) Financial Accounting and Advisory Services
The IASB proposes a new expected credit loss model: what to expect?
Robert Wadley
Ernst & Young LLP (US) US National Professional Practice Group
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Todays agenda
Current
Key
A comparison
Business
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The IASB proposes a new expected credit loss model: what to expect?
Target DP
ED: exposure draft RD: review draft IFRS: final standard
?
R: Redeliberations
The IASB proposes a new expected credit loss model: what to expect?
Application issues raised by constituents Interaction with the insurance contracts project Convergence with US GAAP 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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The IASB proposes a new expected credit loss model: what to expect?
IASB
FASB
IASB/ FASB
IASB/ FASB
FASB
IASB
December 2012 ED Current expected credit loss model (comments due 31 May)
The IASB proposes a new expected credit loss model: what to expect?
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Polling question 1
How much time will your entity require to implement the IASBs proposals?
A.
01 year
B.
C. D. E. F.
12 years
23 years
Todays agenda
Current
Key
A comparison
Business
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The IASB proposes a new expected credit loss model: what to expect?
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The IASB proposes a new expected credit loss model: what to expect?
Recognise lifetime expected credit losses on initial recognition and subsequent reporting periods Required for short-term trade receivables Policy election for long-term trade receivables and lease receivables
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The IASB proposes a new expected credit loss model: what to expect?
Low vs. high credit risk financial instruments: how would the model work?
Threshold S&P
12-mth PD* Allowance 0%
Investment grade
AA+ A
0.08%
Non-investment grade
BB
0.76%
BBB+
0.15%
BBB0.37%
B+
2.50%
B
5.46%
B8.64%
CCC/C
26.82%
D
100%
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
Page 16 The IASB proposes a new expected credit loss model: what to expect?
* Probabilities of default are based on S&P Global Corporate Average Cumulative Default Rates By Rating Modifier (1981-2011)
2013 EYGM Limited. All Rights Reserved.
Polling question 2
Does your entity support the operational simplification of 'investment/non-investment grade' and the rebuttable presumption of 'more than 30 days past due'?
A. B.
Yes to both
Yes to only 'investment/non-investment grade'
C.
D. E.
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
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
A probability-weighted outcome
Best available information
Information about past events
Reasonable and supportable forecasts
A probability-weighted outcome No prescribed approaches Not best estimate Best available information Past Current
Polling question 3
Which would be the most challenging aspect of estimating the expected credit losses?
A.
B.
C. D. E.
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The IASB proposes a new expected credit loss model: what to expect?
PD x LGD x EAD
0.15% x 25% x CU1mn = CU375
Loan
originated at CU1mn, i.e., exposure at default (EAD) 25% gross carrying amount irrecoverable if loan defaults, i.e., loss given default (LGD) 0.15% probability of a default (PD) in the next 12 months
Challenges
Correlating
PD and LGD Relying on rating agencies data Individual vs. collective assessment
Page 22 The IASB proposes a new expected credit loss model: what to expect?
030
3190
of trade receivables categorised by common risk characteristics historical loss rates with forwardlooking estimates
The IASB proposes a new expected credit loss model: what to expect?
Challenges
Adjusting
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Disclosures
Objective: Enable users to understand an entitys estimate of expected credit losses and changes in credit risk
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
Page 24 The IASB proposes a new expected credit loss model: what to expect?
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 borrowerspecific 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
Page 25 The IASB proposes a new expected credit loss model: what to expect?
Todays agenda
Current
Key
Business
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The IASB proposes a new expected credit loss model: what to expect?
Single impairment model for debt instruments, trade and lease 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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The IASB proposes a new expected credit loss model: what to expect?
IASB
Dual measurement (12-month and lifetime ECL) Available for trade and lease receivables Investment grade simplifcation
Originated
FASB
Single measurement (current ECL) Not necessary Practical expedient not to recognise ECL Purchased assets with significant deterioration in credit quality since origination
Gross
No
Credit-adjusted
Interest income
Based
Non
accrual guidance
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The IASB proposes a new expected credit loss model: what to expect?
Polling question 4
Would you prefer an impairment model that is based on:
A.
12-month and lifetime dual measurement ECL approach Other dual measurement ECL approach (e.g., foreseeable future and lifetime)
B.
C.
D. E.
Todays agenda
Current
Key
A comparison
Business
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The IASB proposes a new expected credit loss model: what to expect?
Potential volatility due to change in estimates Cliff effect when financial instruments move between 12-month
ECL and lifetime ECL and vice versa
Next steps: what will entities need to do to implement 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
Page 32 The IASB proposes a new expected credit loss model: what to expect?
Recap
Oneminute recap
2013 EYGM Limited. All Rights Reserved. Page 33 The IASB proposes a new expected credit loss model: what to expect?
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
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The IASB proposes a new expected credit loss model: what to expect?
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The IASB proposes a new expected credit loss model: what to expect?
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The IASB proposes a new expected credit loss model: what to expect?
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The IASB proposes a new expected credit loss model: what to expect?
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