Agenda ref 10 11 December 2015 STAFF PAPER Transition Resource Group for Impairment of Financial Project Instruments Presentation of the loss allowance for financial assets measured Paper topic at amortised cost CONTACT(S) Bernadette Whittick bwhittick@ifrs.org +44 (0)20 7246 0552 Kumar Dasgupta kdasgupta@ifrs.org +44 (0)20 7246 6902 This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of the Transition Resource Group for Impairment of Financial Instruments. It does not represent the views of the IASB or any individual members of either the IASB or staff. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs. Introduction 1. We have received a submission regarding whether an entity is required, for financial assets measured at amortised cost, to present the loss allowance separately in the statement of financial position. 2. This paper: (a) sets out the relevant accounting requirements in IFRS 9 Financial Instruments (2014), IFRS 7 Financial Instruments — Disclosures and IAS 1 Presentation of Financial Statements ; (b) summarises the potential implementation issue raised by the submitter; and (c) asks the members of the Transition Resource Group for Impairment of Financial Instruments (‘the ITG’) for their views on the issue identified. The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more information visit www.ifrs.org Page 1 of 11
Agenda ref 10 Accounting requirements 3. Paragraph 54 of IAS 1 sets out the line items to be presented in the statement of financial position as a minimum and includes the following items: 54 The statement of financial position shall include line items that present the following amounts: [….] (d) financial assets (excluding amounts shown under (e), (h) and (i)); (e) investments accounted for using the equity method; […..] (h) trade and other receivables; (i) cash and cash equivalents; [….] (k) trade and other payables; (l) provisions; (m) financial liabilities (excluding amounts shown under (k) and (l)); […..] 4. Paragraph 55 of IAS 1 further notes that an entity shall present additional line items, headings and subtotals when such presentation is relevant to an understanding of the entity’s financial position: 55 An entity shall present additional line items (including by disaggregating the line items listed in paragraph 54), headings and subtotals in the statement of financial position when such presentation is relevant to an understanding o f the entity’s financial position. ITG │ Presentation of the loss allowance for financial assets measured at amortised cost Page 2 of 11
Agenda ref 10 5. Further requirements regarding the presentation of separate line items are set out in paragraphs 57 and 58 of IAS 1. Paragraph 58 of IAS 1 further notes that an entity needs to apply judgement in this regard [emphasis added]: 57 This Standard does not prescribe the order or format in which an entity presents items. Paragraph 54 simply lists items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position. In addition: (a) line items are included when the size, nature or function of an item or aggregation of similar items is such that separate presentation is relevant to an understanding of the entity’s financial position ; and [……] 58 An entity makes the judgement about whether to present additional items separately on the basis of an assessment of: (a) the nature and liquidity of assets; (b) the function of assets within the entity; and (c) the amounts, nature and timing of liabilities. 6. Amortised cost is defined in Appendix A of IFRS 9 as: The amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance. 7. Paragraph 5.5.1 of IFRS 9 requires an entity to recognise a loss allowance for expected credit losses on specific financial instruments: 5.5.1 An entity shall recognise a loss allowance for expected credit losses on a financial asset that is ITG │ Presentation of the loss allowance for financial assets measured at amortised cost Page 3 of 11
Agenda ref 10 measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d). 8. Paragraph BC48P of IFRS 7 highlights that the mandatory use of a loss allowance account for credit losses was widely supported by respondents [emphasis added]: BC48P The Supplementary Document proposed the mandatory use of a loss allowance account for credit losses, with separate disclosure of reconciliations for the two groups of financial assets that an entity would distinguish for the purpose of determining the loss allowance (ie assets in the ‘good book’ and assets in the ‘bad book’). Almost all respondents supported the mandatory use of a loss allowance account . Consequently, the 2013 Impairment Exposure Draft retained that proposal. 9. In respect of the loss allowance for financial assets measured at fair value through other comprehensive income (‘FVOCI’) , paragraph 5.5.2 sets out the following requirement [emphasis added]: 5.5.2 An entity shall apply the impairment requirements for the recognition and measurement of a loss allowance for financial assets that are measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A. However, the loss allowance shall be recognised in other comprehensive income and shall not reduce the carrying amount of the financial asset in the statement of financial position . 10. In addition, paragraph and B5.6.1(b) of IFRS 9 notes the following in respect of the loss allowance upon reclassification of a financial asset out of, and into, the FVOCI measurement category: ITG │ Presentation of the loss allowance for financial assets measured at amortised cost Page 4 of 11
Agenda ref 10 B5.6.1(b) [….] However if a financial asset is reclassified out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category, a loss allowance would be recognised as an adjustment to the gross carrying amount of the financial asset from the reclassification date . If a financial asset is reclassified out of the amortised cost measurement category and into the fair value through other comprehensive income measurement category, the loss allowance would be derecognised ( and thus would no longer be recognised as an adjustment to the gross carrying amount ) but instead would be recognised as an accumulated impairment amount (of an equal amount) in other comprehensive income and would be disclosed from the reclassification date. 11. Consistently with paragraph 5.5.2 and B5.6.1(b) of IFRS 9, paragraph 16A of IFRS 7 provides the following requirement in respect of the loss allowance on financial assets measured at FVOCI [emphasis added]: 16A The carrying amount of financial assets measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A of IFRS 9 is not reduced by a loss allowance and an entity shall not present the loss allowance separately in the statement of financial position as a reduction of the carrying amount of the financial asset. However, an entity shall disclose the loss allowance in the notes to the financial statements. 12. In respect of loan commitments and financial guarantee contracts, paragraph B8E of IFRS 7 states that the loss allowances should be recognised as a provision: BE8 For loan commitments and financial guarantee contracts the loss allowance is recognised as a provision. […..] ITG │ Presentation of the loss allowance for financial assets measured at amortised cost Page 5 of 11
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