Financial instruments: amortised cost and impairment

Comments from ACCA to the International Accounting Standards Board, June 2010.

Exposure draft (ED) issued by the International Accounting Standards Board

General points 

Under the current structure of IFRS, this ED and existing IFRS dealing with financial instruments are directed to financial reporting of both banks and the much larger numbers of industrial and commercial companies. Clearly the global financial crisis highlighted the need for a much greater focus on the banks but the result is that this ED does not address appropriately the needs of organisations other than banks and financial institutions, as we note in our responses below. This leads us to question whether it is feasible for this ED and other IFRS dealing with financial instruments to be written in a way which is appropriate to both complex international banks and general commercial companies whose principal financial assets are trade receivables. It may be time to consider separating standards on financial instruments for the banks and financial institutions from those for other companies.

ACCA continues to support the development of a single set of global accounting standards and in particular the joint development of new standards between IASB and FASB to help achieve that. We note that on the matter of impairment as on many other aspects of this critical project for a new accounting standard on financial instruments, there are significant differences between what the IASB and FASB are proposing, without any clear indication of how these are going to be resolved.  

We are well aware of the importance and urgency of the issue and the pressure from governments for the review of the accounting standards for financial instruments to be brought forward. However we are concerned that the proposals for impairment have been issued without the IASB apparently having resolved the majority of the practical issues with its implementation especially in banks. Field-testing should be a standard part of the IASB’s due process and the taking of shortcuts from that due process should be reserved for highly exceptional cases.

ACCA’s answers to questions posed by IASB

Question 1
Is the description of the objective of amortised cost measurement in the exposure draft clear? If not, how would you describe the objective and why?


Question 2
Do you believe that the objective of amortised cost set out in the exposure draft is appropriate for that measurement category? If not, why? What objective would you propose and why?

This objective seems clear, but entirely related to interest bearing assets. While appropriate for banks it is not really applicable to the trade receivables of most commercial companies that are of course included in the scope. The objective and the resulting definition of amortised cost places all the emphasis on the recognition of interest. It does not mention the balance sheet nor a reference to the prediction of future cash flows. Amortised cost will represent to a large degree the expected cash flows, albeit that it may also include the spreading forward of transaction costs, fees and premiums for example which are not included in those cash flows.

Question 3
Do you agree with the way that the exposure draft is drafted, which emphasises measurement principles accompanied by application guidance but which does not include implementation guidance or illustrative examples? If not, why? How would you prefer the standard to be drafted instead, and why?

We support principle-based standards and we agree with the proposed approach. More of the implications that are discussed in the Basis for Conclusions (BC) could perhaps be added to make clear some of the main implications of the proposed model (especially BC25). Examples would also be helpful in this context merely to illustrate some of these points, without restricting the application of the principles.

Question 4
(a) Do you agree with the measurement principles set out in the exposure draft? If not, which of the measurement principles do you disagree with and why?

(b) Are there any other measurement principles that should be added? If so, what are they and why should they be added?

We note that the main shortcomings of the incurred loss model are set out in BC11-14. IASB have not balanced this in our view with the advantages of the incurred loss model, reflecting some of the reasons why it was chosen in developing IAS39. 

These advantages are principally that it:

  • requires objective evidence that a loss has occurred and so potentially is less susceptible to ‘earnings management’;
  • provides a more direct link between the accounting and the underlying events – ‘telling it as it is’ – than will be reflected in the changing estimates of the expected loss model;
  • is arguably simpler.

We recognise that there is concern, however, that what constitutes objective evidence has varied in practice and this has not aided comparability. Some banks for example may have only provided when there has been a default in contracted payments, while others may have started to provide when economic conditions deteriorated and defaults of some sort would seem to be inevitable. Arguably these failings could be remedied to a significant extent by amendments, without replacing the whole model, as noted in the alternative views set out in the BC.

We agree with the Board’s rejections of impairments based on fair value and of impairments to reflect losses on a ‘through the cycle’ basis.

We agree that the expected loss model should result consistently in earlier recognition of credit losses compared to the incurred loss model. In the context of banks for example it will recognise in a more rational way the credit risk element implicitly included in the interest charge. 


  • it seems potentially more complex especially because of the change from most likely cash flow under IAS39 to weighted probabilities, and also the application to floating rate instruments;
  • the BC mentions the significant practical problems which have been raised by preparers especially banks in applying the model (as well as supplying the disclosure requirements). It does not seem those had been fully considered and reflected before the ED was published;
  • there is also significant subjectivity and judgement involved, and so scope for earnings management, given the very nature of expected cash flows.

Nevertheless on balance we support the principle of an expected loss model for impairment. Any implementation difficulties will need to be addressed in a practical manner before the proposals can go any further. We consider it is particularly important, if the expected loss model is to be as informative and transparent to users (to best ‘tell it as it is’), that the changes in expected losses are recognised fully in the year of change and not spread forward.

Question 5
(a) Is the description of the objective of presentation and disclosure in relation to financial instruments measured at amortised cost in the exposure draft clear? If not, how would you describe the objective and why?

(b) Do you believe that the objective of presentation and disclosure in relation to financial instruments measured at amortised cost set out in the exposure draft is appropriate? If not, why? What objective would you propose and why?


Question 6
Do you agree with the proposed presentation requirements? If not, why? What presentation would you prefer instead and why?

The presentation outlined in paragraph 13 will be suitable for a bank but would not be appropriate for a commercial company whose main financial assets are trade receivables. It would not be suitable to offset expected credit losses against interest revenue (if any) in their case. The IASB needs to determine whether such companies should deduct expected credit losses from revenue from goods sold or services provided and then have the changes in expectation shown separately. 

Question 7
(a) Do you agree with the proposed disclosure requirements? If not, what disclosure requirement do you disagree with and why?

(b) What other disclosures would you prefer (whether in addition to or instead of the proposed disclosures) and why?

We agree with the disaggregation requirements in paragraph 14 of the standard which seem to be sufficient for a principle-based standard that will have to cover a wide range of circumstances from complex international banks to general commercial companies.

The disclosures of the allowance account and the movements in the expected losses covered by paragraphs 15 to 19 might seem to be extensive but we consider they are important for users to be able to assess how well expectations of losses have been estimated by management and how they are changing (for example during an economic downturn). The sensitivities in 17(b) would seem difficult to require in a way which will be done consistently.

Paragraph 21 requires disclosure of credit quality which relies on a definition of non-performing as 90 days overdue. This seems a rather arbitrary definition that may not be appropriate in all circumstances and countries.

There are existing extensive disclosure requirements in IFRS7 and it would seem best, particularly to avoid excess and duplicated requirements if there was full consistency and a merger between this ED and IFRS7.  For example IFRS7 (paragraph 37) asks for disclosures about overdue assets and we are not convinced that these are needed in addition to those in the ED on credit quality.

The disclosure requirements seem principally written with banks in mind. There will also be a number of requirements which will be of limited relevance outside the financial sector – much of the contents of paragraphs 17, 20 and 22 for instance.

Question 8
Would a mandatory effective date of about three years after the date of issue of the IFRS allow sufficient lead-time for implementing the proposed requirements? If not, what would be an appropriate lead-time and why?

Given the urgency that IASB has attributed to this project, we find there is a disconnection with the three year implementation timetable proposed in this question. The practical issues of implementing the expected loss model need to be addressed and resolved. Subject to that having happened then we think a three year period after finalisation seems rather lengthy for users to wait for the improvements. However we note that there are several standards which may be completed at about the same time and would reserve judgement at this point as to how IASB overall should handle those.

Question 9
(a) Do you agree with the proposed transition requirements? If not, why?
What transition approach would you propose instead and why?

(b) Would you prefer the alternative transition approach (described above in the summary of the transition requirements)? If so, why?

(c) Do you agree that comparative information should be restated to reflect the proposed requirements? If not, what would you prefer instead and why? If you believe that the requirement to restate comparative information would affect the lead-time (see Question 8) please describe why and to what extent.

We agree with the transitional arrangements proposed and prefer those to the alternative model considered.

Question 10
Do you agree with the proposed disclosure requirements in relation to transition? If not, what would you propose instead and why?

We agree with the related disclosure requirements.

Question 11
Do you agree that the proposed guidance on practical expedients is appropriate? If not, why? What would you propose instead and why?


Question 12
Do you believe additional guidance on practical expedients should be provided? If so, what guidance would you propose and why? How closely do you think any additional practical expedients would approximate the outcome that would result from the proposed requirements, and what is the basis for your assessment?

These are meant to be helpful particularly to companies other than financial institutions. These are both predicated on the assumption that they can be used when the effect would not be material. We note that wherever requirements in IFRS are not material then arguably they can be disregarded and so these expedients in a way add nothing. B15 might be retained and the other material would be better included as non-mandatory educational illustrations and the suggested simplifications might thereby be able to be expanded.