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Financial instruments: impairment
The IASB and the FASB discussed impairment accounting for purchased financial assets, including whether an impairment allowance should be established upon acquisition and the subsequent interest income recognition for purchased financial assets.
At the 22 March meeting, the boards discussed whether or not originated instruments and purchased instruments subject to impairment accounting should have consistent accounting models for interest income recognition and impairment. The boards did not reach a decision on this question and asked the staff to prepare examples for further discussion.
The boards continued their discussion on these issues using examples provided by the staff. The boards tentatively decided that for purchased financial assets that do not have an explicit expectation of losses (that is, loans recognised in the 'good book' upon acquisition) when analysed at the individual asset level, even when acquired as part of a portfolio, an entity should account for impairment in the same way as for originated loans. Interest income for these assets would be recognised on the basis of contractual cash flows. This decision effectively aligns impairment accounting and interest income recognition for originated loans and 'good' purchased financial assets (those that do not have an explicit expectation of losses at the individual asset level at acquisition). The boards will determine the appropriate impairment accounting model for these loans in redeliberating the Supplementary Document, which is currently open for comment.
The boards also discussed impairment accounting, including interest income recognition, for financial assets purchased where an explicit expectation of loss exists at the individual financial asset level (that is, where the loan goes into a 'bad book' at acquisition). The boards tentatively decided that interest income recognised should be based on expected collectible cash flows estimated at the date of acquisition (that is, to accrete purchase price to expected cash flows). As a result of limiting the recognition of interest income for these credit-deteriorated assets, a separate impairment expense would not be recognised at the date of acquisition.
The boards noted that their decisions at this meeting were subject to future discussions on pending issues. These issues include (1) determining how to differentiate purchased portfolios of financial assets into 'good books' and 'bad books' and what the underlying accounting should be and (2) whether 'nonaccrual' guidance is necessary, and, if so, how to apply it.
Insurance contracts At the 22 March meeting, the boards discussed whether or not originated instruments and purchased instruments subject to impairment accounting should have consistent accounting models for interest income recognition and impairment. The boards did not reach a decision on this question and asked the staff to prepare examples for further discussion.
The boards continued their discussion on these issues using examples provided by the staff. The boards tentatively decided that for purchased financial assets that do not have an explicit expectation of losses (that is, loans recognised in the 'good book' upon acquisition) when analysed at the individual asset level, even when acquired as part of a portfolio, an entity should account for impairment in the same way as for originated loans. Interest income for these assets would be recognised on the basis of contractual cash flows. This decision effectively aligns impairment accounting and interest income recognition for originated loans and 'good' purchased financial assets (those that do not have an explicit expectation of losses at the individual asset level at acquisition). The boards will determine the appropriate impairment accounting model for these loans in redeliberating the Supplementary Document, which is currently open for comment.
The boards also discussed impairment accounting, including interest income recognition, for financial assets purchased where an explicit expectation of loss exists at the individual financial asset level (that is, where the loan goes into a 'bad book' at acquisition). The boards tentatively decided that interest income recognised should be based on expected collectible cash flows estimated at the date of acquisition (that is, to accrete purchase price to expected cash flows). As a result of limiting the recognition of interest income for these credit-deteriorated assets, a separate impairment expense would not be recognised at the date of acquisition.
The boards noted that their decisions at this meeting were subject to future discussions on pending issues. These issues include (1) determining how to differentiate purchased portfolios of financial assets into 'good books' and 'bad books' and what the underlying accounting should be and (2) whether 'nonaccrual' guidance is necessary, and, if so, how to apply it.
The IASB and FASB continued their discussions on insurance contracts by considering unlocking the margin and an oral report on the Insurance Working Group Meeting held on 24 March 2011.
Unlocking the margin
The boards discussed:
Insurance Working Group Meeting
The board received an oral update on the 24 March 2011 Insurance Working Group meeting.
No decisions were made.
Next steps
The boards will continue their discussion on this project in April.
Unlocking the margin
The boards discussed:
- whether the residual or composite margin should be locked-in at inception (as proposed in the exposure draftInsurance Contracts and the FASB's Discussion Paper Preliminary Views on Insurance Contracts); and
- if not, how the margin might be unlocked.
Insurance Working Group Meeting
The board received an oral update on the 24 March 2011 Insurance Working Group meeting.
No decisions were made.
Next steps
The boards will continue their discussion on this project in April.
IASB-only sessions
IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations - Discontinued Operations
The Board tentatively decided that the proposed changes to discontinued operations do not meet the criteria for inclusion in the Annual Improvements Process. The Board expressed reservations about how urgent the need is to make those changes. It noted that the FASB has still to discuss this matter as well as discussing other changes to its discontinued operations requirements. The Board tentatively decided that it would not publish any exposure draft to amend IFRS 5 before the third quarter.
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