VIEWS: 5 PAGES: 15 POSTED ON: 9/27/2012
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.