While the G100 considers that the description of the objective of amortised cost measurement is well articulated we have the following concerns:

• it is not clear why the separate issues of amortised cost measurement and impairment would be dealt with in a single standard;
• an undue emphasis on revenue recognition concepts which form the basis of a separate project underway by the IASB; and
• the emphasis on complex measurement, presentation and disclosure for loan receivables, particularly for financial institutions compared with other types of entities.

The lack of an impairment trigger would introduce significant management judgment and potential subjectivity, additional potential for earnings volatility including pro-cyclicality and reduced comparability and understandability of the financial statements. We are concerned about its application to short-term receivables, in particular, for those entities that are not financial institutions. These entities hold receivables as a consequence of financing a revenue generating transaction and they are not usually being held for the purpose of generating/earning interest revenue. The business models of financial and non-financial institutions are quite different.

From a financial institution perspective an expected loss type of approach might enable these entities to provide for losses which are considered to be inherent in a portfolio but for which evidence of a loss event is not available or which, based on its analysis of the market economics or industry, are expected to be incurred in the near future. However, concerns remain about the practicality of the expected cash flow model as proposed for estimating expected losses. This concern could be better addressed by applying a different model based on the probability of default/loss approach at the portfolio level.
 

The G100 agrees with an approach which places an emphasis on the application of principles. While the Basis for Conclusions provides some useful guidance for preparers that information is not formally part of the Standard and does not have the same authority or sufficient clarity. The G100 believes that more clearly articulated guidance on application of the principles should be located within the body of the Standard.
 

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

While conceptually appealing in that it would introduce the use of forward looking information to the process of measuring credit losses and impairment (and noting that it does not rely on an incurred loss ‘trigger’) the proposed approach introduces significant practical difficulties.

Conceptually, and in certain limited cases, the proposed expected loss approach provides a more balanced approach to recognizing estimated credit losses over the life of a financial asset held for the purpose of earning interest revenue on a period-to-period basis over its life. In addition, the use of the effective interest rate method in allocating credit losses is consistent with the basis on which initial measurement of the financial asset occurs and the way in which interest revenue emerges. However, development of estimated probability-weighted cash flow information may be quite subjective and involves several critical issues in its application in terms of:

• estimating the timing and amount of the future cash flows: and
• the extent of the reliance on management judgment and expectations which are not necessarily evidenced by reliable, observable and auditable data.

In addition, the impact of subjective judgments and the treatment of changes in estimates potentially create an environment conducive to earnings management, the impact of which will depend on the relative significance of financial assets carried at amortised cost.

At the same time, depending on how it is applied by the entity, additional earnings volatility could be introduced. In addition, as noted in the response to Question 2, application of the proposed measurement principles may result in reduced comparability and understandability.

The G100 is also concerned about the approach to determining impairment. In our experience management considers the recognition and measurement of impairment of assets as a response to separate events and not as part of the ongoing revenue earning process from the asset. We believe that the approach to impairment should be consistent with the business model of the entity.

We also have concerns about:

• the accrual of impairment expense on an effective yield basis and its recognition as part of interest income;
• the absence of discussion about changes in credit expectations and its procyclical impact on the volatility of earnings;
• the lack of reference to an open portfolio methodology that practitioners consider is necessary to making the proposals operational. It is suggested that financial institutions and other entities with significant lending activity should be able to apply current accounting, risk management and pricing systems consistent with the way in which their businesses are managed; and
• the lack of consideration of a ‘through the cycle’ approach which would, in part, address the criticisms relating to the pro-cyclicality of existing requirements.

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

The G100 believes that the presentation and disclosure objective, while conceptually reasonable for interest bearing financial assets, is not appropriate for financial assets such as trade receivables. However, we also believe it is burdensome and irrelevant for users in the context of how financial institutions measure and monitor credit risk on interest bearing financial assets.
 

The G100 considers that the presentation requirements are not appropriate for financial institutions and for those entities holding financial assets for the purpose of earning interest revenue. We are concerned that the undue emphasis on presentation relevant for financial institutions is driving the proposals. Specifically, we have the following concerns:

• the requirement to separately disclose changes in estimates for gains and losses from initial expected credit losses allocated to a period. The G100 believes that these changes in estimates should not be presented as a separate line item and that all expected losses should be presented in the same line item; and
• financial institutions measure net interest margin separately from credit loss experience and in order that presentation is consistent with the way the business is managed these should be considered separately as the inclusion of credit loss amounts within net interest income will be confusing to users.

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

The G100 considers that while transparency is important the proposed disclosures are seeking an excessive amount of detail about credit losses and the quality of financial assets. For example:

• we do not believe that stress testing disclosures based on results provided to management will provide useful understandable or comparable information to users as many scenarios – especially those for financial institutions – are driven by narrow user groups such as prudential regulators, for specific purposes, or extreme scenarios for management purposes that are likely to be confusing or misleading to users; and
• the purpose of disclosing vintage information for each asset class for the year of origination and the year of maturity (which do not contain any credit risk information) is not clear. We consider that the current requirements of IFRS 7 ‘Financial Instruments: Disclosures’ for financial assets that are either past due or impaired provides users with more relevant information.

As indicated in our response to Q6 the focus of the disclosures appears to be in respect of financial institutions and those entities whose business model involves holding financial assets to earn interest revenue. This is not the case for the vast majority of non-financial institutions. These entities would generally provide credit to customers in accordance with the credit policy of the entity.

The extent and detail of the disclosure while onerous for financial institutions is excessive for other entities. For example:

• stress testing disclosures do not provide the user with relevant information especially if calculated for catastrophic scenarios. We believe that the ‘extreme’ stress testing required would be open to user misinterpretation and potentially counterproductive. In addition, the stress testing required by prudential regulators is measured on different bases;
• the purpose of disclosing vintage information for each asset class for the year of origination and the year of maturity (which do not contain any credit risk information) is not clear.

The current requirements of IFRS 7 for financial assets that are either past due or impaired provides users with more relevant information.
 

Yes. The G100 believes that at least 3 years notice of the effective date of the requirements would provide entities with sufficient time to develop and implement systems changes. Should entities wish to do so they are able to early adopt the requirements to coincide with the implementation of other changes.
 

(b) Would you prefer the alternative transition approach (described 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 Q8) please describe why and to what extent.

The G100 considers that the adjusted effective interest rate alternative is the most appropriate basis for managing the transition and determining comparative information. Although this approach involves more work on implementation an extended transition period of at least 3 years would provide time to manage the transition. However, given the expected cost and effort to make system changes to enable compliance with the requirements (establishing new data bases, developing appropriate policies, controls and procedures) it is unlikely that the asserted benefits of the proposed approach would be justified by the costs involved.

The G100 considers that, consistent with IAS 8, the disclosure is appropriate where there is a significant change in an accounting policy.
 

The G100 considers that these practical expedients are useful, particularly for those entities that are not financial institutions and for those entities that have short-term trade receivables. In these cases we believe that the expediency should be generally available for use by entities and not only where the impacts are immaterial. Entities would need to prepare information on both bases in order to determine whether the practical expedient is immaterial.
 

See response to Question 11.