Agrees with IFRS Interpretation Committee technical analysis
WSBI (World Savings and Retail Banking Group) | ESBG (European Savings and Retail Banking Group)
Rue Marie-Thérèse, 11 - B-1000 Brussels
ESBG Transparency Register ID 8765978796-80
1 February 2019
WSBI-ESBG agrees with the technical analysis made by the IFRS Interpretation Committee based on the current IFRS 9 requirements concluding that unrecognised interest should be presented as a credit impairment gain in the profit and loss account following the cure of a credit-impaired financial asset. Notwithstanding the technical analysis made by the Committee, we believe that the question submitted may lead to a further and deeper analysis of whether the presentation as a credit impairment gain faithfully depicts the economics of companies using IFRS financial statements. In particular, we believe there may be strong arguments in certain jurisdictions to present such amounts in the net interest margin – NIM - based not only on giving more predominance to the nature of the cash flows being recovered but also considering (i) whether the originator of the credit has a contractual unconditional right to deduct from the unrecognised interests the amounts recovered from the debtor, and (ii) internal management practices that rank the precedence of those amounts.
- Income and expenses are presented in the profit and loss account usually based on their nature, therefore, the expectation would be that all contractual interests accrued during the life of the credit are reflected, if applicable, within interest margin.
- Interest margin typically reflect the results of financing activity of banks. Registering unrecognised interest in the loss allowance caption would lead users of financial data to distorted ratios for example on the loan average profitability.
- Users also expect that ‘reversal of loss allowance’ corresponds to the amounts previously recognised for this concept in the profit and loss account. Impairment gains, although possible in accordance with IFRS 9, are not very understandable and difficult to explain.
- General accepted practice is to allocate the amounts recovered first to past due interests when such a right is established within contractual terms or prior to beginning with the formal recovery process for a credit-impaired financial assets that is past-due In such cases, financial entities may consider that first they recover the interests accrued for late payment, then the contractual interest, and lastly the pending principal. Among other reasons for setting up such a rank would be increasing the probability to recover the unrecognised interests if a claim was filled with the debtor in case of new defaults.
- Once the debtor is no longer in the repayment process, but in the recovery phase, then we would agree that general accepted practice is to give precedence in any amounts being recovered (either in cash or forborne assets) to the pending principal before considering that any interests were recovered. In such cases the expected loss is very probable and financial entities objective is to minimize such loss.
- As stated in B.5.5.2 of IFRS 9, typically, credit risk increases significantly before a financial instrument becomes past due or other lagging borrower-specific factors are observed (for example, a modification or restructuring). In those cases lifetime expected credit losses are recognised and interests are calculated by applying effective interest rate to the amortized cost of the asset. It can be misleading for users of financial statements that part of contractual interests of financial assets in which a significant increase in credit risk have been identified but which are paying in accordance of the contractual terms, are recognised in the loss allowance caption of the profit and loss account and not in interest margin. Such types of debtors have not yet entered into the repayment or recovery process.
- We note that the Committee decision is silent on whether written-off loans – off-balance sheet figures – that may be recovered later should be also treated in the same way. We believe that for these written-off loans that are subsequently cured, any amount recovered is expected to reduce the cost of risk previously recognised and would agree only for these type of exposures to recognise a credit impairment gain. Recognising these amounts in the interest margin will distort average ratios of the loan portfolio on balance.
As a consequence WSBI-ESBG considers that it would be reasonable if entities could apply an accounting policy choice that permits a better alignment of the amounts presented in NIM with their credit risk management practices, in particular, considering the order of payment priority that entities have internally defined and the contractual terms of their loan portfolios, allowing to recognize in NIM the amounts recovered when there is economic substance and/or contractual evidence.
The World Savings and Retail Banking Institute (WSBI) represents the interests of 6,000 savings and retail banks globally, with total assets of $15 trillion and serving some 1.3 billion customers in nearly 80 countries (as of 2016). Founded in 1924, the institute focuses on international regulatory issues that affect the savings and retail banking industry. It supports the achievement of sustainable, inclusive, balanced growth and job creation, whether in industrialised or less developed countries.
World Savings and Retail Banking Institute - aisbl
Rue Marie-Thérèse, 11 ￭ B-1000 Brussels ￭ Tel: +32 2 211 11 11 ￭ Fax : +32 2 211 11 99
Info@wsbi-esbg.org ￭ www.wsbi-esbg.org
ESBG represents the locally focused European banking sector, helping savings and retail banks in 20 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 1,000 banks, which together employ 780,000 people driven to innovate at 56,000 outlets. ESBG members have total assets of €6.2 trillion, provide €500 billion in SME loans, and serve 150 million Europeans seeking retail banking services. ESBG members are committed to further unleash the promise of sustainable, responsible 21st century banking. Learn more at www.wsbi-esbg.org
European Savings and Retail Banking Group – aisbl
Rue Marie-Thérèse, 11 ￭ B-1000 Brussels ￭ Tel: +32 2 211 11 11
Published by WSBI-ESBG. 1 February 2019.