ESBG advocates for further clarity and consistency in IFRS 9 Impairment requirements

On 13 September, ESBG responded to the European Financial Reporting Advisory Group’s (EFRAG) consultation on the Post-implementation Review of IFRS 9’s impairment requirements.

In its response, ESBG stated its alignment with EFRAG’s priority assessment, but emphasized the need for elevating the Purchased or Originated Credit-Impaired (POCI) topic to “high” priority. It also recommends addressing climate-related risks as a medium priority. Additionally, ESBG highlights other crucial topics, including recognizing expected credit losses, clarifying Significant Increase in Credit Risk (SICR), and refining methods for measuring expected credit losses through forward-looking scenarios and post-model adjustments.

One significant concern addressed by ESBG is the ongoing cost risks faced by financial entities due to regulatory interpretations of IFRS 9. The measurement of expected credit losses for Stage 1 financial assets, subject to individual assessments for significant credit risk increases, lacks clear guidance, leading to varying interpretations by regulators and enforcers. ESBG proposes clarifying the standard to explicitly allow collective loss calculations alongside individual assessments.

ESBG also delves into issues related to determining significant increases in credit risk (SICR). They note the lack of clarity in the concept, resulting in inconsistent interpretations. Additionally, the exemption based on assuming low credit risk at the reporting date is seen as operationally complex and suited only for extremely low probability of default cases. Proposed solutions involve clarifying SICR determination methods and aligning with Basel Committee on Banking Supervision standards.

Regarding measuring expected credit losses, ESBG highlights inconsistencies stemming from the lack of specific guidance. To address this, ESBG urges the IASB to provide additional application guidance, illustrative examples, and clear “bright lines” to ensure consistent use of forward-looking information.

The current accounting approach for POCI assets presents challenges, particularly for institutions where POCI assets are not central to their business model. These institutions face operational difficulties and resort to manual adjustments due to IT system limitations, leading to inconsistencies in practice. To resolve this, ESBG suggests allowing POCI assets to be classified in stages with transfers, implementing a gross-up approach for recognizing initial expected credit losses, and continuing stage 3 accounting for credit-impaired loans subject to restructuring, ensuring a more accurate reflection of management’s objectives.

Lastly, ESBG supports EFRAG’s assessment of lacking clarity and comparability in current credit risk disclosures. The proposed solution involves setting clear disclosure objectives, requiring judgment in compliance, and implementing entity-specific disclosure requirements.