IFRS 9 Financial Instruments
Follow-up to European field-tests
This is a follow-up to the 2012-2013 field-tests on the proposed classification and
measurement, impairment and general hedging requirements of IFRS 9. This exercise
is being carried out by EFRAG in partnership with the ANC, ASCG, FRC and the OIC.
This questionnaire has been sent to respondents to the three 2012-2013 field-tests,
European banking and insurance associations and European National Standard
Setters. All responses are welcomed: please feel free to pass on this questionnaire to
other interested parties.
EFRAG staff will aggregate the results of all the questionnaires received on an
anonymous basis and only a list of companies who participated in the study will be
provided as an appendix. If you explicitly request it, the name of your company will
not be included.
EFRAG and your National Standard Setter, if applicable, will have access to the
information that you provide in response to this questionnaire. Your response will be
also shared with the other partner National Standard Setters on an anonymous basis
(i.e. participant’s identity will remain confidential).
The full EFRAG field-work policy is available on the EFRAG website.
Background
1
In 2013 EFRAG and the National Standard Setters (ANC, ASCG, FRC and the OIC)
carried out a field-test on the proposed classification and measurement requirements
for financial assets contained within IFRS 9 Financial Instruments, as amended by the
Exposure Draft Classification and Measurement (Limited Amendments to IFRS 9). The
field-test report was published on 17 June 2013 and is available on EFRAG’s website.
2
In 2013 EFRAG and the National Standard Setters (ANC, ASCG, FRC and the OIC)
carried out a field-test on the proposed impairment requirements in the IASB Exposure
Draft Expected Credit Losses. The field-test report was published on 19 July 2013 and
is available on EFRAG’s website.
3
In 2012, EFRAG and the National Standard Setters (ANC, ASCG, FRC and the OIC)
carried out a field-test on the Review Draft Hedge accounting. In addition a consultation
was held on the transition from IAS 39 Financial Instruments: Recognition and
Measurement to IFRS 9 for macro-hedging practices. The field-test report was
published on 24 July 2013 and is available on EFRAG’s website.
Objective of this questionnaire
4
These field-tests identified a number of concerns regarding the proposals. EFRAG and
the partner National Standard Setters wish to identify to what extent these concerns
are still applicable after the publication of the final IFRS 9 in July 2014.
1
Field-test follow-up questionnaire
5
The results from this questionnaire will be used as input into the process of
endorsement.
What you are invited to do
6
The EFRAG staff has developed this questionnaire to facilitate the data collection effort
and processing of findings. The questionnaire asks you to report on the tentative
results and conclusions of your internal assessment regarding the new requirements.
7
Please document your observations and findings in English in the sections specified. If
you have any questions about how to document in this questionnaire, please contact
your designated point of contact. Participants are encouraged to contact their own
national standard setter (as per the table below) where possible; otherwise participants
should contact EFRAG.
8
This questionnaire collects both qualitative and quantitative data. If you are not able to
provide quantitative data at this time, we would appreciate receiving your qualitative
input.
9
Participants are asked to send the questionnaire to their designated point of contact
and to EFRAG. Preferably, this should be before 31 December 2014. If you are not
able to respond by this time, please advise if you will be able to complete the
questionnaire by 31 March 2015 and when you expect to be able to do so.
Country
Organisation
Contact name
Phone number
E-mail address
All countries
EFRAG
Didier Andries
Benjamin Reilly
+32-22104400
didier.andries@efrag.org
benjamin.reilly@efrag.org
France
ANC
Thiery Hervé
+33 1 53 44 28 77
herve.thiery@anc.gouv.fr
Germany
ASCG
Jan-Velten Grosse
+49-3020641223
grosse@drsc.de
UK
FRC
Seema Jamil-O’Neill
+44-20-7492-2422
s.jamiloneill@frc.org.uk
Italy
OIC
Roberta Luly
+39-06-6976681
rluly@fondazioneoic.it
Outline of the questionnaire
10
This questionnaire contains:
(a)
general questions about your organisation:
(b)
questions on the classification and measurement requirements and what their
impact would be;
(c)
questions on the impairment requirements and their implementation;
(d)
an overall question on the general hedge accounting requirements.
11
Each section comprises a targeted set of questions. EFRAG and the National Standard
Setters encourage participants to respond to all parts of the questionnaire.
12
We appreciate that participants might not respond to some of the questions, because
questions are not applicable, information might not be available, the expected impact is
immaterial or participants do not wish to answer certain questions. We ask you to
respond only to those questions that are applicable in your circumstances and for
which you have some information (even if that information is only an early estimate),
and indicate the reason for not responding to a question.
13
The purpose of this field test is to gain an understanding of the impact of IFRS 9 and
any implementation challenges. In the conclusions to be drawn from this questionnaire
more weight will be given to responses that are substantiated by facts and analysis.
2
Questionnaire
General questions and contact information
Q1
Please provide the following details about your company:
(a)
Name of the group with IFRS consolidated financial statements.
(b)
Country where the parent company is located.
(c)
Size of the company: total balance sheet, total sales, total net income, net interest
income, number of employees (please indicate the financial period to which the
information relates).
(d)
Main activities carried out by the company.
(e)
Contact details including email address.
(f)
If you do not wish your organisation/company’s name to be included in the list of
participants, please indicate so here.
3
Content of this questionnaire
Part 1 – Classification and Measurement ....................................................................5
Part 2 – Expected Credit Losses ............................................................................... 16
Part 3 – General Hedge Accounting .......................................................................... 19
Part 4 – Overall assessment of IFRS 9 ..................................................................... 20
ECL Appendix – EFRAG staff comments on changes to Expected Credit Losses .... 21
4
Part 1 – Classification and Measurement
Entity’s progress in the impact assessment
Q2
To what extent is it possible to provide information on the quantitative impact?

How much progress have you made in assessing the impact of IFRS 9?

How likely it that any details provided in this section will be materially different to the
final outcome?

When do you think you will be in a position to estimate, with reasonable accuracy, the
final quantitative impact?
Follow-up from previous field-testing - instruments expected to be assessed as having
cashflows that are not SPPI
The SPPI assessment
14
Paragraphs BC4.12 – BC4.25 of IFRS 9 describe how the contractual cashflows
assessment is a way of determining whether a financial asset has ‘basic loan features’
and is therefore (subject to the entity’s business model for managing the financial
assets) measured at amortised cost (or Fair Value through OCI).
15
One of the purposes of this questionnaire is to determine whether the IFRS 9
assessment of a financial asset’s contractual cashflows accords with constituents’
views as what should be categorised as basic lending instruments.
The field-test results
16
The 2013 field-test identified a large number of classes of instruments currently held as
amortised cost that were expected to be assessed as having cashflows that were not
SPPI, which would result in those instruments being required to be held at FVPL. Some
of these instruments were viewed as basic lending instruments and the IASB
subsequently made changes to the guidance on the application of the SPPI test.
17
The EFRAG staff have considered the impact of these changes on each broad class of
instruments (see table on following pages) and EFRAG would like to know if this is
consistent with your own analysis.
5
Part 1 – Classification and Measurement
Instruments currently held at amortised cost that were expected to be assessed as having cashflows that are not SPPI
18
The descriptions in the following table are based on responses to the 2013 field-test (and in particular, Question 11 of that field-test).
19
In doing the assessment the EFRAG staff has not, unless explicitly stated, considered contractual cashflows determined to be ‘de minimis’ and
therefore not part of the SPPI test in accordance with paragraph B4.1.18.
Q3
To what extent is the assessment in the table below applicable to the financial instruments in your portfolio(s)? Please explain.
Description (per fieldtest participants) [see
following table for
further details]
EFRAG staff commentary1
on whether changes to
IFRS 9 since the field-test
impact are likely to impact
the SPPI assessment.
Financial assets with
interest rate mismatch
features
Changes to IFRS 9 could
impact the SPPI
assessment. Based on
paragraph B4.1.9A-C an
assessment would need to
be made on whether the
undiscounted contractual
cashflows were – or could
be – significantly different to
the cashflows where the
time value of money
element of interest was not
modified.
1
Do you agree with this
commentary? Please
explain.
Do you view these
instruments as basic
lending
instruments?
How do you
manage these
instruments
(e.g. banking
book, fair
value)?
Approximate
proportion of banking
book (if instrument
no longer
offered/likely to be
withdrawn please
indicate).
This commentary by the EFRAG staff is based around their understanding of IFRS 9 and the contractual characteristics of the various broad classes of instruments as
they were described by respondents to the 2013 field-test. Nothing stated should be taken as an interpretation of the requirements of IFRS 9 or of how the cashflows of
specific financial instruments should or will be assessed.
6
Part 1 – Classification and Measurement
Description (per fieldtest participants) [see
following table for
further details]
EFRAG staff commentary1
on whether changes to
IFRS 9 since the field-test
impact are likely to impact
the SPPI assessment.
Do you agree with this
commentary? Please
explain.
Do you view these
instruments as basic
lending
instruments?
How do you
manage these
instruments
(e.g. banking
book, fair
value)?
Approximate
proportion of banking
book (if instrument
no longer
offered/likely to be
withdrawn please
indicate).
This assessment would
require a qualitative and/or
quantitative judgement..
Financial assets with
regulated interest rates
These would now be
assessed as being SPPI.
New guidance for regulated
interest rates in paragraph
B4.1.9E means that a
regulated interest rate can
be considered as a proxy
for the time value of money
element for the purpose of
applying the condition in
paragraphs 4.1.2(b) and
4.1.2A(b).
Securitisation vehicles
(e.g. asset-backed
securities and
collateralised debt
obligations)
There have been no
relevant changes to IFRS 9
since the field-test that
would impact the
assessment of these
instruments.
Credit-linked products
There have been no
relevant changes to IFRS 9
since the field-test that
would impact the
assessment of these
7
Part 1 – Classification and Measurement
Description (per fieldtest participants) [see
following table for
further details]
EFRAG staff commentary1
on whether changes to
IFRS 9 since the field-test
impact are likely to impact
the SPPI assessment.
Do you agree with this
commentary? Please
explain.
Do you view these
instruments as basic
lending
instruments?
How do you
manage these
instruments
(e.g. banking
book, fair
value)?
Approximate
proportion of banking
book (if instrument
no longer
offered/likely to be
withdrawn please
indicate).
instruments.
Subordinated debt
securities
There have been no
relevant changes to IFRS 9
since the field-test that
would impact the
assessment of these
instruments.
Financial assets with
prepayment and call
options
These may potentially be
assessed as being SPPI.
The guidance in paragraph
B4.1.11(b) makes it clear
that an option to
prepay/require repayment is
a contractual term
consistent with SPPI.
Financial assets with
automatic early
redemption rights
These may potentially be
assessed as being SPPI. If
the early redemption
(contractual cashflows) are
triggered by an event that is
consistent with (for
example) an increase in
credit risk, paragraph
B4.1.10 indicates that this is
consistent with the
cashflows being SPPI.
8
Part 1 – Classification and Measurement
Description (per fieldtest participants) [see
following table for
further details]
EFRAG staff commentary1
on whether changes to
IFRS 9 since the field-test
impact are likely to impact
the SPPI assessment.
Financial assets with
prepayment above fair
value
These may potentially be
assessed as being SPPI.
Paragraph B4.1.11
indicates that prepayment
amounts can include
reasonable additional
compensation for the early
termination of the contract.
Debt-instruments with
non-vanilla features
These may potentially be
assessed as being SPPI., if
the non-vanilla features are
assessed as being de
minimis. Paragraph B4.1.18
now includes additional
guidance on determining
which contractual cashflows
to include in the
assessment.
Financial assets with
participation features
There have been no
relevant changes to IFRS 9
since the field-test that
would impact the
assessment of these
instruments.
Shared appreciation
mortgages
There have been no
relevant changes to IFRS 9
Do you agree with this
commentary? Please
explain.
Do you view these
instruments as basic
lending
instruments?
How do you
manage these
instruments
(e.g. banking
book, fair
value)?
Approximate
proportion of banking
book (if instrument
no longer
offered/likely to be
withdrawn please
indicate).
9
Part 1 – Classification and Measurement
Description (per fieldtest participants) [see
following table for
further details]
EFRAG staff commentary1
on whether changes to
IFRS 9 since the field-test
impact are likely to impact
the SPPI assessment.
Do you agree with this
commentary? Please
explain.
Do you view these
instruments as basic
lending
instruments?
How do you
manage these
instruments
(e.g. banking
book, fair
value)?
Approximate
proportion of banking
book (if instrument
no longer
offered/likely to be
withdrawn please
indicate).
since the field-test that
would impact the
assessment of these
instruments.
Preference shares
(regarded as debt
instruments)
There have been no
relevant changes to IFRS 9
since the field-test that
would impact the
assessment of these
instruments.
Financial assets with
derivatives bifurcated
under IAS 39
There have been no
relevant changes to IFRS 9
since the field-test that
would impact the
assessment of these
instruments.
Other (please describe)
10
Part 1 – Classification and Measurement
Further information about these descriptions
Description
Detail (as described by field-test participants)
Financial assets with interest rate mismatch features
Financial assets which are market standard products in their relevant jurisdictions, but
contain a modified economic relationship between principal and interest that could be
‘more than insignificant’. The contractual interest rate may be calculated by reference to
rates in previous periods or averages of the rates for various payment frequencies.
Examples of such instruments include:

retail mortgages with rates based on three-month Euribor with yearly resetting;

retail mortgages with monthly payments but contractual rates based on the average
of 12-month Euribor in the month preceding the reset.

retail mortgages with monthly payments where the contractual interest rate is
‘lagged’ and based on the market rate in a previous period;

loans with variable interest rates reset quarterly to the one-month rate;

loans with variable interest rates that reset semi-annually to a three-month rate;

loans with a variable interest rate based on the secondary market rate for an
indefinite period; and

perpetual debt instruments with indexed interest rate that is not connected to a
specific period of time.
Financial assets with regulated interest rates.
These instruments are common in various jurisdictions, including constant maturity rate
loans in China, ‘Livret A’ receivables in France and other financial assets with regulated
interest rates in European jurisdictions.
Securitisation vehicles (e.g. asset-backed securities and
collateralised debt obligations)
The underlying instruments give rise to payments other than principal and interest. In
addition, the exposure to credit risk of the financial assets (tranches) may be higher than
the exposure to credit risk of the underlying pool of financial instruments.
Credit-linked products
Some of these financial assets have limited synthetic exposures which may result in the
11
Part 1 – Classification and Measurement
Description
Detail (as described by field-test participants)
underlying cash pool not meeting the requirements in IFRS 9.
Subordinated debt securities
Non-payment would not constitute a breach of the contract and the holder did not have a
contractual right to unpaid amounts of principal and interest even in the event of the
debtor’s bankruptcy.
Financial assets with prepayment and call options
Prepayment and call options triggered by breaches of covenants.
Financial assets with automatic early redemption rights
These include ‘cash-sweep’ features linked to credit deterioration of the issuer.
Financial assets with prepayment above fair value
These allow the issuer to prepay the instrument above its fair value, for example, when the
prepayment amount is based on the outstanding coupons and principal and discounted
using a non-current rate.
Debt-instruments with non-vanilla features
Particular examples provided by participants in the field-test were

deep out of the money convertible bonds,

financial assets with a fixed annual interest payment and an insignificant expected
annual dividend payment, and

financial assets with changes of the size of the coupon and/or principal payments
driven by the performance of the issuer (e.g. revenues, EBITDA or net income).
Financial assets with participation features
Frequently included as part of loan restructurings, they may contain features that provide
returns other than payments of principal and interest (e.g. profit or property participation
rights)
Shared appreciation mortgages
As part of retail business certain loans could be issued with a low interest rate on the basis
that the entity would participate in the appreciation of the property, reflecting returns that
are not just payments of interest.
Preference shares (regarded as debt instruments)
Instruments with coupons fixed for a period of time, If the instrument is not redeemed a
variable interest rate with a fixed step-up is paid annually and after a certain time period
the issuer is obliged to pay all unpaid coupons.
Financial assets with derivatives bifurcated under IAS 39
Examples include:
12
Part 1 – Classification and Measurement
Description
Detail (as described by field-test participants)

Convertible bonds with an equity derivative;

Commodity linked coupons;

Fully funded total return swaps;

Credit linked notes;

Loans with an in the money interest rate floor;

Structured loans;

Investments in money market instruments;

Financial debt securities with leverage and constant maturity swap features; and

Structured debt securities with returns linked to interest rates.
13
Part 1 – Classification and Measurement
Other basic lending instruments
Q4
Are there any other financial assets you view as basic lending instruments that you
believe will be assessed as having cashflows that are not SPPI? If so, what are they
and how have you reached this conclusion?
Other banking book assets
Q5
Are there any other financial assets you manage as part of the banking book that you
believe will be assessed as having cashflows that are not SPPI? If so, what are they
and how have you reached this conclusion?
Qualitative impact assessment
Q6
Do you hold a significant number of financial assets that you view as being basic
lending instruments and/or managed as part of the banking book but that are unlikely to
be assessed as meeting the SPPI test in IFRS 9? Please explain. In addition,
approximately what proportion of your overall banking book are they and what level of
the fair-value hierarchy do you expect them to be?
Implications for lending practices
Q7
If you have identified any instruments in response to Q4 or Q5 above do you expect
any changes to be made in respect of these products (either to their contractual terms
or their availability)? Please explain.
Impact Assessment of Classification and Measurement requirements
Financial assets – debt instruments
20
EFRAG is interested in the overall quantitative impact of moving from IAS 39 to IFRS 9
and whether it is possible to assess the impact at this stage.
Q8
Approximately what proportion of each IAS 39 balance sheet category do you expect to
be assessed as SPPI or not SPPI?
Expected to be assessed as
Currently
SPPI
Not SPPI
Loans and receivables
Held to Maturity
AFS debt instruments
Financial assets – equity instruments
21
EFRAG is interested in the impact of the removal of the exemption from fair value
measurement for equity instruments that do not have a quoted market price in an
active market and whose fair value cannot be reliably determined.
14
Part 1 – Classification and Measurement
Q9
What is the impact of removing this exemption?
(a)
Do you view the impact of removing this exemption as significant or not? Please
explain.
(b)
What is the current cost and impairment of equity instruments held at cost because
they do not have a quoted market price in an active market and their fair value cannot
be reliably determined?
(c)
What is the estimated fair value of such equity instruments?
Other comments
Q10 Do you have any other comments regarding the impact of the classification and
measurement requirements of IFRS 9?
15
Part 2 – Expected Credit Losses
Overall question
Q11 What is the status of your assessment of the implications of the impairment
requirements of IFRS 9? Please explain.
Q12 When do you expect to have a (materially) complete understanding of the impairment
requirements of IFRS 9? Please explain.
Internal risk management
Q13 To what extent can your internal risk management be relied upon to provide the
necessary input for calculating the expected credit losses? Do you have forwardlooking information available in your internal risk management systems and are you
able apply it for IFRS 9 impairment purposes? Please identify the present and
expected status in the table below and provide explanations and comments.
Internal risk management system
Currently
In the future
Fully in line with IFRS 9
Partly in line with IFRS 9
Not in line with IFRS 9
Please provide further explanations and comments on your assessment in the table above.
Undue cost and effort
Q14 To what an extent can the current internal risk management system be relied on to
accommodate the application of IFRS 9? Please explain.
What additional systems need to be put in place? If so, what is the implementation cost
of the additional system? Please explain.
What is the ongoing cost of the new system, once implemented? Is the ongoing cost
significantly more than what is currently in place? Please explain.
16
Part 2 – Expected Credit Losses
EFRAG staff comments on changes to requirements
22
Attached below (see Appendix from page 21) are comments from the EFRAG staff on
issues identified during the field-test and subsequent changes to IFRS 9. The EFRAG
staff’s tentative view is that most of the issues raised have been addressed.
Q15 Do you agree with the EFRAG staff’s tentative view, in particular where it is stated that
the issue was resolved? Please explain.
Your analysis of impact of Expected Credit Losses
Q16 Could you describe and if possible quantify the result of your initial modelling of the
effect on provisions?2 In doing so, please indicate for each portfolio, whether you
expect to use the relief provided for in the transition requirements. Please explain.
Relief
Type of portfolio
Y/N
Lower
>25%
0-25%
Higher
0-25% 25-50% 50-75% 75-100% >100%
Loans to local, regional and
central governments
Loans to corporates
Loans secured on real estate
property
Retail loans
Loans to credit institutions and
investment firms
Other loans
Total loans
Debt securities (making use of
external ratings)
Debt securities (making use of
internal ratings)
Purchased or originated credit
impaired assets
Lease receivables
Trade receivables
Financial guarantees and loan
commitments
Please provide further explanations and comments:
Q17 Do you expect any impact of the new impairment guidance of IFRS 9 on the availability
of specific financial products and/or on their pricing? Please explain.
2
The quantitative data provided in response to this question will be treated in a confidential way and in
accordance with the EFRAG field-work policy, as well as all other information provided in response
to this questionnaire.
17
Part 2 – Expected Credit Losses
Q18 Do you have any other comments on the Expected Credit Losses requirements in
IFRS 9?
18
Part 3 – General Hedge Accounting
23
Based on the overall positive reactions from constituents during the consultation
process, EFRAG thinks that no further field-testing for general hedge accounting is
required. For this reason we include only one overall question on this issue in the
questionnaire.
Q19 Do you have any remaining concerns relating to the implementation of the general
hedge accounting requirements? Please explain.
19
Part 4 – Overall assessment of IFRS 9
Q20 When considering the requirements of IFRS 9, do you have any overall comments on
the standard not addressed elsewhere in this questionnaire? Please explain.
20
ECL Appendix – EFRAG staff comments on changes to Expected Credit Losses
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
Significant increase in credit risk
1
Participants in the field-test had the following requests IFRS 9 paragraph 5.5.9 notes that ‘At each reporting Issue resolved.
for additional guidance:
date, an entity shall assess whether the credit risk on a
financial instrument has increased significantly since
initial recognition. When making the assessment, an
 Determining the principle of transfer;
 How to define the threshold for the recognition of entity shall use the change in the risk of a default
occurring over the expected life of the financial
lifetime expected credit losses; and
 The practical expedients that could be used to instrument instead of the change in the amount of
expected credit losses. To make that assessment, an
make the assessment.
entity shall compare the risk of a default occurring on the
financial instrument as at the reporting date with the risk
of a default occurring on the financial instrument as at the
date of initial recognition and consider reasonable and
supportable information, that is available without undue
cost or effort, that is indicative of significant increases in
credit risk since initial recognition.’
IFRS 9 paragraph B5.5.5 notes that ‘For the purpose of
determining significant increases in credit risk and
recognising a loss allowance on a collective basis, an
entity can group financial instruments on the basis of
shared credit risk characteristics with the objective of
facilitating an analysis that is designed to enable
significant increases in credit risk to be identified on a
timely basis.’
IFRS 9 paragraph B5.5.7 notes that ‘The assessment of
whether lifetime expected credit losses should be
recognised is based on significant increases in the
21
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
likelihood or risk of a default occurring since initial
recognition (irrespective of whether a financial instrument
has been repriced to reflect an increase in credit risk)
instead of on evidence of a financial asset being creditimpaired at the reporting date or an actual default
occurring. Generally, there will be a significant increase
in credit risk before a financial asset becomes creditimpaired or an actual default occurs.’
The Implementation Guidance provides, amongst others,
examples clarifying:
(a) a significant increase in credit risk;
(b) when no significant increase in credit risk occurs;
(c) the responsiveness to changes in credit risk;
(d) the comparison with maximum initial credit risk;
and
(e) the counterparty assessment of credit risk.
12 month and lifetime expected credit losses
2
Operational difficulties in applying the proposed IFRS 9 paragraphs B5.5.49 to B5.5.54 explain which Issue resolved.
definitions related to the availability of data, adjustments information is to be used for estimating expected credit
to their existing risk management systems and losses.
estimating the lifetime probability of default.
For the purpose of this Standard, reasonable and
supportable information is that which is reasonably
available at the reporting date without undue cost or
effort, including information about past events, current
conditions and forecasts of future economic conditions.
Information that is available for financial reporting
purposes is considered to be available without undue
cost or effort.
22
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
An entity is not required to incorporate forecasts of future
conditions over the entire expected life of a financial
instrument. The degree of judgement that is required to
estimate expected credit losses depends on the
availability of detailed information.
An entity need not undertake an exhaustive search for
information but shall consider all reasonable and
supportable information that is available without undue
cost or effort and that is relevant to the estimate of
expected credit losses, including the effect of expected
prepayments.
Historical information is an important anchor or base from
which to measure expected credit losses. However, an
entity shall adjust historical data, such as credit loss
experience, on the basis of current observable data to
reflect the effects of the current conditions and its
forecasts of future conditions that did not affect the period
on which the historical data is based, and to remove the
effects of the conditions in the historical period that are
not relevant to the future contractual cash flows.
When using historical credit loss experience in estimating
expected credit losses, it is important that information
about historical credit loss rates is applied to groups that
are defined in a manner that is consistent with the groups
for which the historical credit loss rates were observed.
Expected credit losses reflect an entity’s own
expectations of credit losses. However, when considering
23
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
all reasonable and supportable information that is
available without undue cost or effort in estimating
expected credit losses, an entity should also consider
observable market information about the credit risk of the
particular financial instrument or similar financial
instruments.
12-month expected credit losses are defined as ‘The
portion of lifetime expected credit losses that represent
the expected credit losses that result from default events
on a financial instrument that are possible within the 12
months after the reporting date.’
3
Adjusting the regulatory parameters to comply with the
definitions of the ED would be operationally difficult, in
particular as the advanced Internal Ratings Based
models were based on through-the-cycle probabilities of
default.
IFRS 9 paragraph BC5.283 notes that ‘The IASB notes
that financial reporting, including estimates of expected
credit losses, are based on information, circumstances
and events at the reporting date. The IASB expects
entities to be able to use some regulatory measures as a
basis for the calculation of expected credit losses in
accordance with the requirements in IFRS 9. However,
these calculations may have to be adjusted to meet the
measurement requirements in Section 5.5 of IFRS 9.
Only information that is available without undue cost or
effort and supportable at the reporting date should be
considered. This may include information about current
economic conditions as well as reasonable and
supportable forecasts of future economic conditions, as
long as the information is supportable and available
without undue cost or effort when the estimates are
made.’
Issue not applicable.
Financial reporting has
a different purpose
than
regulatory
models.
24
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
4
Applying a standardised definition of default to different IFRS 9 paragraph 5.5.37 notes that “When defining Issue resolved.
individual portfolio characteristics would be difficult
default for the purposes of determining the risk of a
default occurring, an entity shall apply a default definition
that is consistent with the definition used for internal
credit risk management purposes for the relevant
financial instrument and consider qualitative indicators
(for example, financial covenants) when appropriate.
However, there is a rebuttable presumption that default
does not occur later than when a financial asset is 90
days past due unless an entity has reasonable and
supportable information to demonstrate that a more
lagging default criterion is more appropriate.”
5
Greater clarity should be provided in respect of IFRS 9 paragraph B5.5.40 notes that ‘When determining Issue resolved.
provisioning for revolving credit products which could be the period over which the entity is expected to be
withdrawn at short notice.
exposed to credit risk, but for which expected credit
losses would not be mitigated by the entity’s normal
credit risk management actions, an entity should consider
factors such as historical information and experience
about:
(a) the period over which the entity was exposed to credit
risk on similar financial instruments;
(b) the length of time for related defaults to occur on
similar financial instruments following a significant
increase in credit risk; and
(c) the credit risk management actions that an entity
expects to take once the credit risk on the financial
instrument has increased, such as the reduction or
removal of undrawn limits’
Low credit risk
25
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
6
The proposed definition would be applicable only to debt
securities and counterparties assessed by rating
agencies, rather than to retail portfolios where
delinquency information would be more relevant to
assess changes in credit risk.
Addressed by the final standard?
EFRAG staff
comment
IFRS 9 paragraph B5.5.23 notes that ‘To determine Issue resolved.
whether a financial instrument has low credit risk, an
entity may use its internal credit risk ratings or other
methodologies that are consistent with a globally
understood definition of low credit risk and that consider
the risks and the type of financial instruments that are
being assessed. An external rating of ‘investment grade’
is an example of a financial instrument that may be
considered as having low credit risk. However, financial
instruments are not required to be externally rated to be
considered to have low credit risk. They should, however,
be considered to have low credit risk from a market
participant perspective taking into account all of the terms
and conditions of the financial instrument.’
30 days past due
7
No operational difficulties reported but the threshold was IFRS 9 paragraphs B5.5.19 and B5.5.20 note that ‘The Issue partly resolved.
found to be too conservative, possibly leading to rebuttable presumption in paragraph 5.5.11 is not an
volatility.
absolute indicator that lifetime expected credit losses
should be recognised, but is presumed to be the latest
point at which lifetime expected credit losses should be
recognised even when using forward-looking information
(including macroeconomic factors on a portfolio level). An
entity can rebut this presumption.’
Responsiveness of the general model to changes in the economic environment
8
By using a point-in-time probability of default instead of a IFRS 9 paragraph BC5.285 notes that ‘The IASB notes
through-the-cycle probability of default, the proposed that the objective of the impairment requirements is to
model would exhibit high pro-cyclicality.
faithfully represent the economic reality of expected
credit losses in relation to the carrying amount of a
financial asset. The IASB does not include in this
The issue is not in line
with
the
primary
objective of general
purpose
financial
26
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
objective the recognition of a loss allowance that will
sufficiently cover unexpected credit losses, because that
is not the primary objective of general purpose financial
reporting.’
EFRAG staff
comment
reporting.
Purchased credit impaired financial assets
9
To be clarified when originated credit impaired assets IFRS 9 paragraphs BC5.214 to BC5220 provide further Issue resolved.
exist.
information on originated credit-impaired assets.
IFRS 9 paragraph BC5.216 notes that ‘In confirming that
a financial asset could be credit-impaired on origination
the IASB focussed on the potential for the modification of
contractual cash flows to result in derecognition. The
IASB considered an example in which a substantial
modification of a distressed asset resulted in
derecognition of the original financial asset. Such a case
is an example of the rare situation in which a newly
originated financial asset may be credit-impaired—it
would be possible for the modification to constitute
objective evidence that the new asset is credit-impaired
at initial recognition.’
Disclosures
10
IFRS 9 paragraph BCE.166 notes that ‘Respondents to Issue resolved.
the 2013 Impairment Exposure Draft were concerned that
Reconciliation between opening and closing this disclosure would be operationally too challenging.
balance of the gross carrying amount; and
Given the feedback raised on operational concerns, the
IASB made the disclosure less prescriptive and more
principle-based by clarifying that its objective is to provide
Disclosures by credit risk grades.
information about the significant changes in the gross
carrying amount that contributed to changes in the loss
Disclosures which were found the most complex were:


27
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
allowance during the period. In particular, the disclosures
are intended to enable users of the financial statements
to differentiate between the effects of changes in the
amount of exposure (for example, those due to increased
lending) and the effect of changes in credit risk. The
IASB considers that the requirement, as clarified, is less
operationally burdensome but still provides useful
information to users of financial statements.’
IFRS 9 paragraph BC48FF notes that ‘Some
respondents to the 2013 Impairment Exposure Draft also
commented that the disclosure was incompatible with the
credit risk management practices for some asset classes
and for non-financial entities, and noted that the
disclosure should be aligned with an entity’s internal
credit risk approach. In the light of this feedback the
Board decided to remove the requirement to provide a
disaggregation across a minimum of three credit risk
rating grades, and instead require that the disaggregation
to be aligned with how credit risk is managed internally.
The Board additionally decided to permit the use of an
ageing analysis for financial assets for which delinquency
information is the only borrower-specific information
available to assess significant increases in credit risk.’
Effective date and transition
11
IFRS 9 paragraph 7.1.1 notes that ‘An entity shall apply A
three
year
this Standard for annual periods beginning on or after 1 implementation period
The implementation dates of IFRS 9 and IFRS 4 were to January 2018. Earlier application is permitted.’
is granted.
be aligned.
IFRS 9 paragraph 7.32 notes that ‘The IASB will consider Deferred pending the
A three year implementation period was requested.
28
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
in developing the new IFRS 4 whether to provide an new IFRS 4.
option for insurers to reclassify some or all financial
assets when they first apply the new IFRS 4. This would
be similar to the option in paragraph 45 of IFRS 4 and
paragraph D4 of IFRS 1. The IASB included such an
option in IFRS 4 for reasons that may be equally valid for
phase II.’
Impairment-related modifications and write-offs
12
Operational problems highlighted were related to the
identification of modified financial assets and the
recalculation of the gross carrying amount on the basis
of the modified cash flows.
IFRS 9 paragraphs BC5.231 to BC5.235 note that ‘The IFRS 9 confirms the
IASB also proposed in the 2013 Impairment Exposure proposals in the 2013
Draft that the modification requirements should apply to Impairment ED.
all modifications or renegotiations of the contractual cash
flows of financial instruments. Although most
respondents supported the proposals, some noted that
they would have preferred that the requirements be
limited to modifications of credit-impaired assets or
modifications undertaken for credit risk management
purposes. These respondents believed that the proposed
requirements do not represent the economics of
modifications performed for commercial or other reasons
that are unrelated to credit risk management.
The full reasoning of the IASB can be found in
paragraphs BC5.232 to BC5.234 of IFRS 9.
The IASB decided to confirm the proposals in the 2013
Impairment Exposure Draft that the modification
requirements should apply to all modifications or
renegotiations of the contractual terms of financial
instruments.
29
ECL Appendix – EFRAG staff comments on changes to impairment requirements
Issue identified in the field-test
Addressed by the final standard?
EFRAG staff
comment
Trade receivables and lease receivables
13
Estimating 12-months’ and lifetime expected credit
losses was expected to be challenging. Challenges
related to the amount, availability and processing of
data.
IFRS 9 paragraph B5.5.35 notes that ‘An entity may use Issue resolved.
practical expedients when measuring expected credit
losses if they are consistent with the principles in
paragraph 5.5.17. An example of a practical expedient is
the calculation of the expected credit losses on trade
receivables using a provision matrix.’
30
31