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Impairment project

VIEWS: 5 PAGES: 15

									REPARIS                         THE ROAD TO EUROPE: PROGRAM OF ACCOUNTING REFORM AND
                                INSTITUTIONAL STRENGTHENING




       IFRS 9 Impairment Project

       Pascal Frèrejacque
       REPARIS IFRS Seminar for banking supervisors
       Croatia National Bank, Zagreb – April 18-19, 2012

with generous support of
Key Messages

   Proposed expected loss models:

    » 2 constraints
       ‒ Ensure transparency
       ‒ Support for stability/limit pro-cyclicality

    » Closer to the provisioning objectives of banking regulators

    » IASB leaning towards a risk model better aligned with banks
      credit management systems

    » Addresses partially pro-cyclicality concerns

    » Challenges to address the financial instruments impairment
      issues does not favor timeliness (2009-2015)

                                                                    2
Loan provisioning: a dual perspective
  Transparency


                                    Jan 2015 ?       Expected loss
                                                     IASB / FASB

                 Incurred losses
                    (IAS 39)


                                   Jan 2005



                  Pre-IFRS impairment model in the
                                EU


                                                               Stability
                                                                           3
IAS 39 replacement Phase II – impairment methodology

    Exposure draft, Financial Instruments: Amortised Cost and
    Impairment published in November 2009


    The supplementary document Financial Instruments: Impairment
    was published in January 2011 (comment period closed on 1 April
    2011)


    It applies to financial instrument for all companies


    Re-deliberations are on-going




                                                                      4
Impairment project ‒ time line

Nov 2009    »   IASB Exposure Draft (ED): Expected Loss (EL) over the
                life of the assets (EIR approach)

May 2010    »   FASB ED: EL initial recognition (Day 1 approach)

Jan 2011    »   Joint IASB-FASB Supplementary Document (SD): dual
                good book / bad book approach

Jul 2011    »   Three-bucket joint approach: the relative credit risk model


Sep 2011    »   Three-bucket approach: absolute credit risk model, also
                known as the credit quality approach

Q4 2012     »   New ED expected, with possible mandatory effective date
                on 1 Jan 2015

                                                                          5
Impairment ‒ characteristics



    Applies to financial assets measured at amortised cost
    Considerations include expected credit losses over the
    entire life
    No need of actual loss trigger event
    Estimation of future cash flows is performed at inception
    and updated at the end of each reporting period
    Estimates are expected values




                                                                6
Impairment – three bucket approach

                   During the June 2011 joint Board meetings, the Boards
                   agreed to continue development of an impairment
                   approach for financial assets using three "buckets":


                     Bucket 1   Assets do not meet criteria for other buckets
  Credit Quality




                                Assets with possible future defaults (occurrence of observable
                     Bucket 2   events)



                                Individual assets with expected or incurred losses (occurrence
                     Bucket 3   of observable events)




                                                                                                 7
Impairment allowances



                       Definition                    Impairment allowance

                                                Portfolio level
            Assets does not meet criteria for
 Bucket 1   other buckets
                                                Horizon in the next 12 months

                                                Portfolio level
            Assets with possible future
 Bucket 2   defaults (occurrence of
                                                Remaining lifetime expected loss
            observable events)

                                                Individual asset level
            Individual assets with expected
 Bucket 3   or incurred losses (occurrence of
                                                Remaining lifetime expected loss
            observable events)




                                                                                   8
Relative credit risk model
                                                               »   All loans assets start in bucket 1

 Loans and debt securities originated or » Conceptually expected loss incorporated
          purchased or held                in the pricing of the loans
  All loans
irrespective                                                   »   Focus on credit deterioration (more than
  of credit
   quality                                                         insignificant credit deterioration) since
                                                                   origination, rather than absolute risk
           changes in                  changes in
          credit quality              credit quality
                                                               »   Day one loss limited by a 12 months
     1                        2                        3           horizon.... But lifetime expected loss for
  Assets                                          Individual
  with no
                       Collective
                                                    Assets
                                                                   the portion of the assets on which a loss
                        Assets
 observed                                          Impaired        is expected
                       Impaired
  events
                                                               »   Transfer between buckets as credit
                           Possible                Future or
                            future                  realized       deteriorates/improves
                            default                  default
                                                               »   Transfer back to bucket 1 when the
    Each bucket has assets of different credit quality             downward transfer notion no longer
                                                                   satisfied
                                                                                                                9
Specificities for credit-impaired assets



                           Credit impaired               »   Asset recognized at transaction price
                          purchased assets               »   Transfer between buckets 2 and 3 as
                                                             credit deteriorates/improves
                       Lower
                       credit
                                            Poor credit »    Favourable changes in cash-flow
                                              quality
                       quality                               through PL as an adjustment to the
                                                             impairment expense
                                  changes in             »   Disclosures to facilitate comparison
                                 credit quality              between originated loans and credit
                                                             impaired purchased loans
 Bucket 1             Bucket 2                Bucket 3
                                                         »   Disclosures to describe the cash flows
                                                             shortfalls (contractual vs explicit)

    Each bucket has assets of similar credit quality




                                                                                                      10
Transfer principles



    Good                                    Lower                                    Poor
    credit                                  credit                                  credit
    quality                                 quality                                 quality


                                                              Transfer
                       Transfer
                                                              Principle
                       Principle



   Bucket 1                                Bucket 2                               Bucket 3




Transfer based on changes in credit quality / collectability of cash flows to a particular level at
the reporting date but no “bright line”


 Transfer trigger: Internal credit risk assessment taking into account concepts and definitions
 of:
             » Probabilities of default
             » External ratings classifications
             » Regulatory guidance
                                                                                                      11
Recent discussions

June – Sep   »   Three bucket approach (absolute risk vs. relative risk) and
  2011           transfers between buckets


Oct 2011     »   Relative risk approach chosen (originated loans in bucket 1)


Dec 2011     »   Transfer between buckets


             »   Application of the general model to financial assets with and
Jan 2012         explicit expectation of loss at acquisition (no bucket 1)


Feb 2012     »   Transfers issues. Application of the three bucket approach to
                 trade receivables (three bucket model or simplified approach).
                 Impairment model for trade receivable with financing component

                      IASB and FASB joint discussions

                                                                                 12
IASB Impairment project ‒ next steps


 2011     »   Re-deliberation on supplemental document
          »   Develop an impairment model for open portfolios
              (current)




 2012     »   Re-expose Impairment project in 2012

          »   IFRS 9 publication
                       EU endorsement process, when?


 2015     »   Effective date proposed by the IASB


                                                                13
IFRS 9 - Conclusions

    IFRS 9 still work in progress
      Convergence with US GAAP and feedback from industry
       will have an impact on the final version of IFRS 9
      “Expected losses” concept in IFRS 9 has not been
       finalised yet
      New date for effective application is 2015
      IFRS 9 could be more principles based than IAS 39
      Room for interpretation may increase the pressure on
       preparers and regulators
    EU Endorsement pending since 2009
      IFRS 9 still not applicable in the EU
      Endorsement will have to wait for all phases to be
       completed


                                                              14
                 Thank you


The views expressed in this presentation do not
necessarily reflect those of the Executive Directors of
The World Bank or the governments they represent.

								
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