ITG discusses IFRS 9 impairment issues

The December ITG meeting provided useful clarification on a number of important implementation issues for IFRS 9 Financial Instruments.

At the December 2015 meeting, the ITG members appeared to agree that the IFRS 9 requirement for unbiased and probability-weighted estimates extends to the use of multiple economic scenarios rather than just a single consensus estimate. Doing so will pose a considerable challenge for even the most sophisticated banks and will need to be urgently assessed to determine its potential impact on systems and processes and the possible financial impact (see Paper 1).

Useful clarification was provided as to the period over which an entity measures expected credit losses (ECLs) on revolving facilities such as credit cards and overdrafts. When determining the period, an entity should consider the credit risk management actions that management expects to carry out and that serve to mitigate losses. Credit risk management actions were confirmed to be those that actually reduce outstanding undrawn limits. Revolving facilities should be segmented appropriately to reflect the various possible outcomes for those that are not expected to default. Possible future reinstatement of withdrawn limits should not be considered in this assessment (see Paper 4).

Credit enhancements such as guarantees do not have to be explicitly ‘part of the contractual terms’ to be considered ‘integral’ to those terms, and thus should be included in the ECL calculation, consistent with practice under IAS 39 (see Paper 5).