EFRAG has issued a feedback statement following the publication of its final comment letter on the IASB Exposure Draft Financial Instruments: Expected Credit Losses.
The feedback statement describes the main comments that EFRAG received in response to its draft comment letter and how those comments were considered by EFRAG when defining its position on the ED as expressed in its comment letter to the IASB.
Most participants agreed that the proposed impairment model would be more responsive to changes in credit quality, and therefore would result in an earlier recognition of credit losses.
The majority of participants indicated that the proposals would require significant implementation and ongoing costs. Furthermore, while most participants agreed that the proposals would be more operational compared to the IASB’s previous proposals, they identified that the overall operational difficulty to implement several elements of the ED would be high. In particular, participants argued that the requirement to track changes in credit quality since initial recognition would be operationally challenging, either because the required information was not available, or because they assessed credit deterioration in a different way to that described in the ED.
Many participants were concerned that the proposals in the ED did not allow them to sufficiently rely on their existing credit risk management and regulatory practices and therefore would be required to incur significant costs to align any differences.
A significant number of participants noted that more guidance and clarifications were necessary around the assessment of a significant increase in credit risk, the practical expedients and the approaches that could be used to make that assessment. In particular, some participants were concerned that the wording in the ED implied that they would need to apply a model that used probabilities of default as explicit inputs. These participants argued that they applied various approaches to assess credit deterioration in credit risk other than an approach that was strictly based on changes in the probability of default.
Many participants confirmed that recognising a 12-month expected credit loss allowance at initial recognition did not reflect the economics of lending. Nevertheless, most participants indicated that the distinction between financial assets that had deteriorated significantly in credit quality and those that had not, was generally consistent with the way their portfolios were managed.
A significant majority of the participants found the requirements for trade receivables and lease receivables clear, however, constituents were divided as to whether the simplified approach was necessary or aligned with their existing credit risk management.
Most participants found the proposed disclosures complex, overly prescriptive and operationally burdensome, particularly the requirement to provide reconciliation for the gross carrying amount and the associated allowance.
Participants were not specifically asked to indicate what lead time they would need to implement the proposals, however, some participants indicated that they would need sufficient lead time while other participants also mentioned that the transition requirements on the transition relief were not clear.
Press release
Feedback statement
© EFRAG - European Financial Reporting Advisory Group
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