financial instruments: impairment. 2 © 2015 kpmg llp, a delaware limited liability partnership and...

Financial Instruments:Impairment

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Scope of Expected Credit Loss (CECL) Model

• Loans, held-to-maturity debt securities and trade receivables • Receivables that result from revenue transactions• Reinsurance receivables• Lease receivables recognized by a lessor• Loan commitments• Financial guarantee contracts not accounted for as insurance or at fair value

through net income• Loans made by a not-for-profit entity to meet its mission (programmatic loans)

Would apply to the following financial instruments

• Equity instruments• Available-for-sale (AFS) debt securities• Loans made to participants by defined contribution employee benefit plans• Policy loan receivables of an insurance entity• Promises to give (pledge receivables) of a not-for-profit entity• Related party loans and receivables between entities under common control

Would not apply to the following


Expected Credit Loss Model

Replaces multiple

impairment models for debt

instruments measured at

amortized cost

Simplifies accounting for

purchased credit impaired (PCI) financial

assets

Uses single measurement objective for

expected credit loss


Recognizing Expected Credit Losses

Estimate of all contractual cash flows not expected to be collected

No recognition threshold

Allowance recognized at each reporting date

Allowance trued up by a provision in current period earnings


Measuring Expected Credit Losses

Historical

average loss

experience

Reasonable and

supportable

forecasts

Estimate of

lifetime expected

credit losses


Purchased Credit-Impaired Assets

Should include individual financial assets or groups of financial assets with shared-risk characteristics.

Acquired financial assets that have experienced a more than insignificant deterioration in credit quality since origination, based on the assessment of the acquirer.

Interest income would be based on expected cash flows at the date of acquisition (yield held constant).

Expected credit losses at the acquisition date would be recognized as an allowance through a gross up to the balance sheet.

The expected credit loss allowance would not be recognized in interest income.

Subsequent increases or decreases in expected credit losses would be recognized immediately in earnings as a provision for credit losses.

Credit impairment would follow same approach as originated assets.


Purchased Credit-Impaired Assets (continued)

Example – Purchased Credit Impaired Assets

Entity E pays $750,000 for a debt instrument with a par amount of $1,000,000. The instrument is classified at amortized cost. At the time of purchase, the expected credit loss embedded in the purchase price is $175,000.

The acquisition-date journal entry follows:

Loan – par amount $1,000,000

Loan – noncredit discount $ 75,000

Allowance for credit losses 175,000

Cash 750,000


Modified Debt Instruments

New loan - non-troubled debt restructuring (TDR) modifications

• Expected credit losses would be based on the contractual cash flows post modification – discounted using the post-modification EIR

TDR modifications• EIR used for measuring expected credit losses would be the original

(pre-modification) EIR• Cost basis would be adjusted so the EIR post-modification would be

the same as the original EIR, given the new series of cash flows• Cost basis would be increased or decreased• The cost basis adjustment = amortized cost basis prior to the TDR

less PV of the modified contractual cash flows (discounted at the original EIR)


Available-For-Sale Credit Loss Model

Impairment recognized using an allowance approach

Reversals of credit losses may occur

Length of time the fair value has been less than amortized cost is not considered


Qualitative disclosures about how an entity

estimates expected losses, including changes in

techniques and credit loss expectations

Rollforward of the allowance for expected credit losses

for financial assets measured at amortized cost

and FV-OCI

Current credit quality indicators that are disclosed under current GAAP would be disaggregated by year of

origination

A discussion of the type of collateral and extent to

which collateral secures an entity’s financial assets

Reconciliation between the purchase price and the par

value of PCI financial assets at the time of purchase

Disclosures

AFS debt securities

• Retain current disclosure requirements, updated for the general principles regarding disclosing credit risk


Transition

Other-than-temporarily impaired debt securities

• Prospectively• Amounts in AOCI as of the date of adoption that relate to significant

improvements in cash flow will continue to be accreted to interest income on a level-yield basis

PCI financial assets• All loans and debt securities acquired with deteriorated credit quality for which an entity applies Subtopic 310-30 (including by analogy) will be classified as PCI at the date of adoption

• At the date of adoption, gross up the allowance for lifetime expected credit losses with a corresponding adjustment to the carrying value

• Interest income will be recognized based on the yield as of the date of adoptionAll other assets

• Cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period


Effective Date and Transition Disclosures

Effective Date

• To be decided after considering constituent feedback (most likely calendar 2018 or 2019)

Transition disclosures would apply, including:

• Nature and reason for the change in accounting principle• Method of applying adoption• Effect of the adoption on line items on the statement of financial

position, if material, as of the beginning of the first period for which the guidance is effective

• Cumulative effect of the change on retained earnings or other components of equity


Impairment - Significant Differences Between FASB and IASB models

SubjectFASB ED and Tentative

Decisions IFRS 9Measurement Objective Single measurement objective for

measuring expected credit lossesDual-measurement objective

Instruments Measured at FV-OCI

Targeted amendments to current OTTI model

No limit is provided

Measurement Current estimate of contractual cash flows not expected to be collected

For assets in Stage 1, impairment would be measured as all shortfalls in cash flows over the life of the financial assets that are associated with the probability of a loss in the 12 months after the reporting date

For assets in Stage 2 or 3, lifetime expected credit losses would be recognized


Impairment - Significant Differences Between FASB and IASB models (continued)

Subject FASB ED and Tentative Decisions IFRS 9PCI Financial Assets

The purchase discount associated with expected credit losses would be recognized as an allowance at the acquisition date. Impairment would always reflect the entity’s current estimate of contractual cash flows that it does not expect to collect

Expected credit losses at the acquisition date would be factored into the effective interest rate (and would not be recognized as an allowance). Therefore, impairment would be based on the change from initial expected credit losses

Interest Income Recognition

Does not include a similar provision Would require interest income to be calculated on net carrying amount for financial assets that are ‘impaired’ (i.e. Stage 3)

Financial Instruments:Classification and Measurement


Equity investments

Financial liabilities measured at fair value

Assessment of a valuation allowance for a DTA related to an available-for-sale security

Classification and Measurement - Accounting


Classification and Measurement – Presentation and Disclosure

Public business entities: present the fair value of financial assets and

financial liabilities that are measured at amortized cost either

parenthetically on the balance sheet or in the notes

Disclose all financial assets and financial liabilities grouped by both measurement category and form of

financial assets

For financial instruments measured at amortized cost, disclosures

about fair value will be limited to: Fair value amounts, disaggregated

by major asset category and fair value hierarchy Level 1, 2, or 3

For equity investments without a readily determinable fair value

disclose: carrying amount, amount of impairments, and the observable and unobservable adjustments, if

any, for the annual period

For bifurcated embedded derivatives:

- Carrying amount;- Measurement attribute;

and- B/S line item in which the bifurcated embedded derivatives

and related host contracts are presented


Final standard expected second half 2015

• Modified retrospective application• Prospective for certain equity securities

To be decided after considering constituent feedback (most likely calendar 2018 or 2019)

Transition:

Classification and Measurement


Classification and Measurement - Significant Differences Between FASB and IASB models

Subject FASB IFRS 9Basis for Classification and Measurement

Intent and ability on an asset-by-asset basis

Based on cash flow characteristics and business model

Categories • Trading• Available for Sale• Held to Maturity (tainting

notion)• Loans Held for Sale (Lower

of Cost or FV)• Loans Held for Investment

• FV - P&L• FV - OCI• Amortized cost (no tainting)

FVO Unconditional Conditional:• Financial asset and/or

financial liabilities• Accounting mismatch• Certain hybrid instruments

Embedded Derivatives Bifurcation guidance applies for financial assets and financial liabilities

Bifurcation guidance does not apply for financial assets, but does for financial liabilities

Financial Instruments:Hedging


Financial Instruments Project – Hedging

Targeted improvements

• Hedge effectiveness threshold.• Hedging components of non-financial items.• Elimination of shortcut and critical terms match methods.

Scope of project may include:

Board expected to begin deliberations

financial instruments: impairment. 2 © 2015 kpmg llp, a delaware limited liability partnership and...

Documents

kpmg llp

registered trademarks

expected credit loss

swiss entity

trade receivables receivables

insurance entity

credit loss model

pledge receivables