The ‘expected credit loss’ model in IFRS 9 Financial Instruments replaced the previous ‘incurred credit loss’ model under IAS 39 Financial Instruments: Recognition and Measurement, which only allowed credit losses to be recognised when a loss event occurred.

In a joint submission, CA ANZ and CPA Australia agree that the main objective of the impairment requirements in IFRS 9 – to provide investors with more useful and more timely information about an entity’s expected credit losses – has been achieved. However, feedback we received from members indicated there are several areas which could be further improved:

• There are questions around the appropriateness of the ECL model for entities other than financial institutions. Therefore, we recommend the current simplified approach for trade receivables, contract assets and lease receivables is extended to all loans and receivables held by entities that do not undertake lending as part of their ordinary activities (i.e., non-financial institutions).
• Many entities that are not financial institutions find the simplified approach still too complex. Therefore, we recommend further simplification of the simplified approach.
• There are challenges in applying the impairment requirements to related party loans and lending on non-commercial terms. The US Financial Accounting Standards Board (FASB) has excluded loans and receivables between entities under common control from the scope of its ECL model and we recommend the IASB considers the same.
• There is divergence in practice around how entities determine the point in time where a customer becomes a significant increase in credit risk. Additional guidance with practical examples on how to apply the term to different circumstances would be well received.
• There is some concern about the rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. We recommend the IASB clarifies this requirement.