In response to the recent financial crisis, aspects of financial reporting have come under the spotlight and calls for change have been raised. The financial reporting of losses on financial assets held at amortised cost is one such principal area and the International Accounting Standards Board (IASB) has reacted by proposing a new impairment model. Given the complexity involved in accounting for the impairment of financial assets, FEE and EFRAG feel that both European constituents and also other interested parties may benefit from having an additional, educational resource to assist them in understanding and analysing the new impairment proposals.
This joint FEE-EFRAG paper firstly provides detail on the context of the recent IASB proposals and then goes on to give a general description of the expected loss model (including two worked computations). This high-level analysis is followed by a discussion about what information is generated by the model, including a description of how the results would be presented and disclosed in the financial statements and associated notes.
Finally, the paper compares the expected loss model with other kinds of impairment models. Appendix A sets out a list of terms and definitions used in order to ensure a common language in the forthcoming impairment debates. The aim of the paper is to provide general characteristics of the expected loss model, highlight the potential complexities and challenges and stress the key differences from other models, rather than provide the assessment of its suitability, which would be set out in the comment letters to IASB by both FEE and EFRAG next year.