The International Accounting Standards Board (IASB) recently concluded its Post-implementation Review of the impairment requirements in IFRS 9 Financial Instruments—Impairment and published a Project Summary and Feedback Statement.

Here’s the summary of conclusions:

• After analyzing the evidence gathered in the Post-implementation Review, the IASB concluded that the impairment requirements in IFRS 9 are working as intended. In particular, the IASB concluded that:
  • there are no fundamental questions (fatal flaws) about the clarity or suitability of the core objectives or principles in the requirements.in general, the requirements can be applied consistently. However, further clarification and application guidance is needed in some areas to support greater consistency in application. The benefits to users of financial statements from the information arising from applying the impairment requirements in IFRS 9 are not significantly lower than expected. However, targeted improvements to the disclosure requirements about credit risk are needed to enhance the usefulness of information for users.
  • the costs of applying the impairment requirements and auditing and enforcing their application are not significantly greater than expected.

They note along the way: “Many preparers said the principles allow them to align the approaches to assessing significant increases in credit risk with their credit risk management practices. Doing so reduces the incremental costs of applying the requirements and ultimately results in a faithful representation of changes in credit risk and the resulting expected credit losses.” The document provides the following information on the disclosure-related issue:

• most stakeholders—including users of financial statements—reported diversity in the information entities disclose about their credit risk exposures and expected credit losses. Most feedback related to specific disclosures, such as:
  • sensitivity analysis; post-model adjustments or management overlays; significant increases in credit risk; forward-looking information; and
  • the reconciliation of the expected credit loss allowance and changes in gross carrying amounts.
• To achieve greater consistency in the credit risk information disclosed by entities, most stakeholders suggested the IASB should add or amend specific disclosure requirements to meet the objectives, accompanied by application guidance or illustrative examples.
• However, some of the stakeholders who suggested improvements to IFRS 7 also asked the IASB to consider the proportionality of any potential improvements. They noted the importance of requiring comprehensive disclosures by entities that have significant credit risk exposures (such as financial institutions) while not unnecessarily burdening entities that have no significant credit risk exposures.

Here’s another issue that arose:

• Some other stakeholders said, although they agree with the current definition of a credit loss, the IASB should clarify the requirements and provide application guidance about how to distinguish between cash shortfalls that are accounted for as credit losses versus those accounted for as modifications, derecognitions or write-offs applying IFRS 9.
• Many stakeholders also asked the IASB to clarify the accounting for financial assets that have been modified, including both those that are credit-impaired at the time of the modification and those that are not.

Consequently,  as part of the amortized cost measurement project already in its research pipeline, the IASB will consider such matters as whether, or when, to account for changes in expected cash flows as a modification, derecognition, write-off or as expected credit losses; whether to present a modification gain or loss as part of the impairment expense for the period or separately; how to present a loss arising from writing-off a financial asset in the statement of profit or loss; and how to account for the recovery of amounts after a financial asset has been written-off. Here’s another issue that might have prompted some further action:

• …some stakeholders suggested the IASB should clarify how the general approach to recognizing expected credit losses is applied to specific types of financial instruments. In their view, such clarification is needed to achieve a better balance between the costs of applying the requirements and the benefits to users of financial statements. The specific types of instruments identified by stakeholders include:
  • financial instruments between entities under common control, such as intragroup financial instruments; and
  • financial instruments not issued on market-based terms or for reasons that are not solely commercial.

It might have, but didn’t:

• The IASB decided to take no action on matters related to the general approach. Feedback indicated that the approach works well for most financial instruments.
• … The IASB emphasized that IFRS 9 requires an entity to recognize expected credit losses based on reasonable and supportable information that is available to the entity without undue cost or effort. IFRS 9 therefore both requires and allows entities to adjust their approach to determining expected credit losses according to the circumstances.
• The IASB also noted that IFRS 9 does not require an entity to follow a mechanistic approach to estimating expected credit losses or to determining whether a significant increase in credit risk has occurred.

An ideal opportunity, in other words, for the IASB to reassert that if you think its standards (considering their length and degree of detail) are no longer truly “principle-based” in the way that the old, shorter standards were – well, then you’re wrong!

The opinions expressed are solely those of the author.