IASB Request for Information: Post-implementation Review of IFRS 9 Financial Instruments ― Impairment

Page 1 of 12Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

26 Septemeber 2023Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Request for InformationPost-implementation Review of IFRS 9 Financial Instruments― ImpairmentThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide our comments on this Request for Information(RFI).Overall, we consider that the use of the expected credit loss (ECL) model in IFRS 9results in more timely recognition of credit losses and provides better information aboutan entity’s ECL as compared to the incurred loss model in IAS 39 Financial Instruments:

Recognition and Measurement. Nevertheless, we have identified application issuesrelating to certain aspects of the ECL requirements that warrant the IASB’s furtherconsideration. We provide detailed comments in the Appendix, and summarise ourprimary comments and recommendations below.Meaning of ‘credit loss’In our submission to the IFRS Interpretations Committee (IC) tentative agenda decisionLessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16), we expressed concernsover the unclear meaning of ‘credit loss’ for the purpose of ECL assessment. On the onehand, Appendix A of IFRS 9 defines a credit loss as ‘all cash shortfalls’, which may implythat an entity should include all cash shortfalls in ECL measurement irrespective whetherthey are due to credit-related reasons. On the other hand, the objective and underlyingconcept of the ECL model (e.g. significant increase in credit risk, risk of default and creditimpaired) seem to imply that the measurement of ECL should only be driven by credit-related factors.Some respondents considered that the IFRS IC may have clarified this issue in itsAgenda Decision (AD) Lessor Forgiveness of Lease Payments (IFRS 9 and IFRS 16)

by concluding that the lessor, who voluntarily forgives certain lease payments due bythe lessee, should include the anticipation of forgiving lease payments due into themeasurement of ECL of the operating lease receivable to reflect ‘all cash shortfalls’.However, other respondents considered that the AD has created further uncertaintyabout the boundaries of credit risk.Page 2 of 12We considered that the meaning of ‘credit loss’ is not only fundamental to the ECLassessment but is also closely related to the issue of the boundaries between therequirements on modification of financial assets and ECL (see below). In light of theongoing concern in the market, we recommend that the IASB undertake properstandard-setting activities to clarify the meaning of ‘credit loss’ in IFRS 9, i.e. whether itis based on an assessment of ‘all cash shortfalls’ or ‘shortfalls as a result of an inabilityto pay’. We also recommend the IASB conduct a thorough review of IFRS 9 to ensurethat the related concepts and terminologies applied in the ECL measurement align withthe clarified meaning of ‘credit loss’ within the context of IFRS 9.Interaction of the ECL requirements with the requirements on modification andderecognition in IFRS 9IFRS 9 does not contain clear guidance on how the requirements for modification andECL interact with each other. Specifically, following a modification that does not result inderecognition, it is unclear how an entity should account for the ECL and the effect ofthe modification. Questions arise as to whether certain losses should be treated asimpairment losses, write-offs, or modification losses. The uncertainty about theboundaries between the requirements for modification and ECL is further exacerbatedby the unclear meaning of ‘credit loss’ as mentioned above (‘all cash shortfalls’ or‘shortfalls as a result of an inability to pay’).In our submission to the IASB on PIR of IFRS 9 – Classification and Measurement, weexpressed significant concerns regarding the modification requirements. Due toinsufficient guidance in IFRS 9, different entities have developed varying accountingpolicies to assess whether a modification results in derecognition. The lack of clarityaffects whether a modification would lead to derecognition of the original financial assetand recognition of a new one, resulting in a reset of initial credit risk and hence stageclassification for ECL measurement. This is in contrast to cases where the modificationdoes not result in derecognition, and the modified financial assets would be classified asstage 2 if the credit risk has increased significantly.We note that the IASB has added a standard-setting project to its research pipeline onAmortised Cost Measurement, which will consider the modification of financialinstruments. In this regard, we strongly recommend the IASB include the interaction ofthe modification and ECL requirements within the scope of that project and commencethe project as soon as practicable.Accounting for financial guarantee contracts (FGCs)

FGCs are widely used financial instruments in Mainland China and Hong Kong. However,we noted several application issues relating to the accounting for FGCs and recommendthat the IASB provide guidance or clarification on how the relevant requirements in IFRS9 should be applied. These issues include:

From the holder’s perspective: There is a potential inconsistency between IFRS9:B5.5.55 and the discussions by the IFRS Transition Resource Group forImpairment of Financial Instruments in terms of what ‘integral’ means whenassessing whether cash flows from FGCs are integral to the contractual terms forECL measurement. This raises concerns on how to appropriately perform theintegral assessment, particularly when the FGC is not mentioned in the contractualterms or the FGC is obtained for a revolving pool of receivables.From the issuer’s perspective: IFRS 9 does not provide application guidance on howthe extant requirements for subsequent measurement in IFRS 9:4.2.1(c) are appliedPage 3 of 12to FGCs with premiums received over time, leading to diversity in practice. In addition,questions have also been raised as to how the two amounts recognised under IFRS9:4.2.1(c), namely the amortisation amount determined based on IFRS 15 and theECL allowance, interact with each other and hence how they should be presented inthe statement of profit or loss.If you have any questions regarding the matters raised in this letter, please contactCarrie Lau (carrie@hkicpa.org.hk) or Kennis Lee (kennislee@hkicpa.org.hk), AssociateDirectors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 12Work undertaken by the HKICPA in forming its views:

The HKICPA:

(a)

issued an Invitation to Comment on the RFI on 31 May 2023 to its members andother stakeholders;

(b)

sought input from its Financial Instruments Advisory Panel, Small and Medium-sized Practitioners Committee and its Technical Issues Support Group, whichmainly comprise technical and industry experts from large as well as small andmedium accounting firms (collectively, Practitioners);

(c)

held a public roundtable discussion for local stakeholders, including Practitionersand preparers from the banking industry on 14 August 2023;

(d)

reviewed the findings from regulators’ reports focusing on the impairmentrequirements in IFRS 9; and(e)

developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB RFIImpairment – overall (Sections 1 & 2 of the RFI)

1.We consider that the ECL model results in more timely recognition of credit lossesand provides better information about an entity’s credit losses as compared to theincurred loss model in IAS 39 Financial Instruments: Recognition and Measurement.We support the principle-based approach in IFRS 9 as such an approach providesflexibility to entities in conducting the ECL assessment based on their own creditrisk management policies and practices.Meaning of ‘credit loss’

2.Nevertheless, our respondents expressed concerns over the unclear meaning of‘credit loss’ for the purpose of ECL assessment within IFRS 9. On the one hand,Appendix A of IFRS 9 defines a credit loss as ‘all cash shortfalls’. Somerespondents interpreted this as a requirement to include all cash shortfalls in ECLmeasurement irrespective whether they are due to credit-related reasons or not.On the other hand, the objective and underlying concept of the ECL model (e.g.significant increase in credit risk, risk of default and credit impaired) aim to capturechanges in credit risk since the initial recognition of financial instruments. Thisimplies that the measurement of ECL should only be driven by credit-related factors.

3.Some respondents considered that the IFRS Interpretations Committee may haveclarified this issue by concluding in its agenda decision (AD) Lessor Forgiveness ofLease Payments (IFRS 9 and IFRS 16) that in the submitted fact pattern where thelessor voluntarily forgives certain lease payments due by the lessee, the lessorestimates the ECL on the operating lease receivable by measuring any credit lossto reflect ‘all cash shortfalls’ and such measurement includes the lessor consideringits expectation of forgiving lease payments recognised as part of that receivable.Other respondents, however, considered that the AD has created furtheruncertainty about the boundaries of credit risk.The boundaries of credit risk, if determined based on all cash shortfalls, may bemuch broader than those currently interpreted by many preparers and practitioners.For example, a bank offers prepayable fixed rate loans to borrowers. In the eventAppendixPage 5 of 12of a decline in market interest rates, according to the contractual terms, theborrowers have the right to prepay and then apply for new loans from the samebank or other banks to obtain a lower interest rate. Historical experience suggeststhat instead of prepaying the loans, a portion of the borrowers may renegotiateinterest rate terms that the bank is expecting to accept. The requirement to reflect‘all cash shortfalls’ may suggest that the anticipated modification which is driven bychanges in market interest rates should be factored into the ECL measurement andthat the impact of expected losses on future interest would be captured in the ECL.The same consideration may also apply to prepayable prime-based lending, whichis commonly used in mortgage loan products in Hong Kong. Hence, the meaningof ‘credit loss’ is particularly important, considering the volatility of interest ratesunder the current market condition.

4.We acknowledge the concerns raised by the respondents. The meaning of ‘creditloss’ is not only fundamental to the ECL assessment but is also closely related tothe issue regarding the boundaries between the requirements on modification offinancial assets and ECL (see detailed comments in Section 7 below). In light of theongoing concern in the market, we recommend that the IASB undertake properstandard-setting activities to clarify the meaning of ‘credit loss’ in IFRS 9, i.e.whether it is based on an assessment of ‘all cash shortfalls’ or ‘shortfalls as a resultof an inability to pay’. We also recommend that the IASB conduct a thorough reviewof IFRS 9 to revisit the related concepts and terminologies applied in the ECLmeasurement to ensure that they align with the clarified meaning of ‘credit loss’within the context of IFRS 9.Measuring expected credit losses (Section 4 of the RFI)

A.Financial guarantee contracts (FGC)

5.We and our respondents noted that the use of credit enhancements and financialguarantee contracts are common in Mainland China and Hong Kong. However,practical challenges were noted when applying the relevant requirements in IFRS9 to these financial instruments.(a) From the holder’s perspectiveThe ECL model requires an entity to consider cash flows from creditenhancements that are ‘integral’ to the contractual terms. Respondents fromaccounting firms noted that IFRS 9:B5.5.55 explains ‘integral’ as being part ofcontractual terms and not recognised separately by the entity. However, theDecember 2015 IFRS Transition Resource Group for Impairment of FinancialInstruments (ITG) meeting summary states that the ‘integral’ assessmentshould not be limited to those that are explicitly part of the contractual terms.This potential inconsistency in terms of what ‘integral’ means therefore raisesconcerns on how to appropriately perform the integral assessment, in particular,when the FGC is not mentioned in the contractual terms of the loans, and thisgives rise to diversity in practice.In light of the above, we recommend that the IASB address the marketconcerns by providing clarification on how to determine whether the relevantcash flows of a FGC are ‘integral to the contractual terms’, such that those cashflows constitute part of the ECL measurement of the financial assets. Inparticular, we recommend that the IASB provide guidance on applying thePage 6 of 12integral assessment to the following situations, which are commonlyencountered in today’s economic environment:

(i) In the case of credit protection purchased for a given loan at the same timeand in contemplation of the lending as part of an entity’s credit riskmanagement policy (i.e. not due to legal requirements or contractual terms),whether such credit protection should be considered ‘integral’ to the loan.(ii) In the case of a FGC obtained for a revolving pool of trade receivables withlimits on coverage, how should an entity determine: (1) whether such aFGC is ‘integral’ to the trade receivables (if it is not part of the contractualterms), and (2) which trade receivables in the pool would qualify forincluding the effect of the FGC for ECL assessment purposes (e.g. onlythose trade receivables that were recognised at the point in time when theFGC was entered into or all trade receivables existing at the reporting datethat are covered by the FGC).(b) From the issuer’s perspective(i) Multiple respondents from accounting firms shared the same observation,as described in Spotlight 4.3 of the RFI, stating that IFRS 9 does not provideapplication guidance on how the extant requirements for subsequentmeasurement are applied to FGCs in cases where premiums are receivedover the life of the guarantees, rather than upfront in full on initialrecognition. Due to the lack of guidance, there is diversity in practice onhow entities account for FGCs with premiums received over time, whichresult in different accounting outcomes.Some entities present their FGCs issued on a gross basis (i.e.recognising a receivable for future premiums not yet due and acorresponding FGC liability), which produces a similar outcome forFGCs for which the full premium is received upfront. The FGC liabilityis initially recognised at fair value based on the discounted amount offuture premiums not yet due. No ‘Day 2’ loss would be recognised asthe FGC liability is generally higher than the ECL allowance.Other issuers of FGCs do not recognise a receivable for futurepremiums not yet due. The FGC liability is measured and recognised attransaction price (i.e. zero) on initial recognition. After initial recognition,a ‘Day 2’ loss is recognised when applying the ‘higher of’ accounting inIFRS 9:4.2.1(c), given that the ECL amount would always be higherthan the initial zero FGC liability.(ii) These respondents also commented that there is no relevant guidance inIFRS 9 on how the two amounts recognised under IFRS 9:4.2.1(c), namelythe amortisation amount determined based on IFRS 15 and the ECLallowance, interact with each other and hence how those amounts shouldbe presented in the statement of profit or loss. Respondents noted that atleast one accounting firm publication states that there is an accountingpolicy choice on this matter. Therefore, they suggested that the IASBprovide guidance on this area to improve consistency in market practice.We noted that FGCs with premiums received over time is becoming prevalentand their potential impact could be material on entities whose primary businessis to issue financial guarantees. In addition, the adoption of different accountingPage 7 of 12practices may undermine the comparability of financial statements amongentities. In light of these considerations, we recommend that the IASB providerelevant application guidance on the subsequent accounting for FGCs withpremiums received over time, accompanied by illustrative examples on thepresentation of the amortisation amount determined under IFRS 15 and theECL allowance in the statement of profit or loss.B.Loan commitments

6.A respondent from the banking industry highlighted that there are differing views inthe market regarding whether the term ‘commitments’ referred to in IFRS 9:5.5.20has the same meaning as ‘loan commitments’ in IFRS 9:5.5.6. Specifically, IFRS9:5.5.6 refers to irrevocable loan commitments, whereas IFRS 9:5.5.20 does notexplicitly refer to ‘loan commitments’ but instead explains the conditions underwhich entities can apply the exception in that paragraph. As a result, some entitiesmay have interpreted the scope of IFRS 9:5.5.20 more broadly, including otherfacilities that are not irrevocable loan commitments.

7.For example, uncommitted overdraft facilities are generally not considered asirrevocable loan commitments under IFRS 9:5.5.6 as the facilities can beterminated at any time, with or without notice to customers. However, in practice,customers usually have some discretion to use the facility, and banks generallyextend credit under those facilities for commercial reasons. The ability of the banksto cancel the facilities, in some cases at any time including at point when theprospective borrower has requested drawdown under the facility, may not limit thebank’s exposure to credit losses to the contractual notice period, if any. Therefore,some entities consider that IFRS 9:5.5.20 could be applicable to uncommittedoverdraft facilities based on a similar rationale as discussed in BC5.254-BC5.261.

8.To address any potential diversity in practice, we recommend that the IASB clarifythe scope of IFRS 9:5.5.20 commitments, particularly the interplay between IFRS9:5.5.6 and IFRS 9:5.5.20 and the applicability of the exception in IFRS 9:5.5.20 touncommitted overdraft facilities.C. Forward-looking informationMultiple forward-looking scenarios

9.Several respondents shared similar observations, as outlined in Spotlight 4.1 of theRFI, about the diversity in the number of forward-looking scenarios entitiesidentified, the variable considered and the weightings attached to particularscenarios. Some of them considered that the diversity in application arises due tothe specific circumstances of each entity. Others noted that entities may not beclear as to what they need to achieve with multiple scenarios.

10.We noted that the ITG December 2015 meeting summary provides useful guidanceon formulating and incorporating multiple forward-looking scenarios in measuringECL. Specifically, the meeting summary has highlighted the importance of usingmultiple scenarios as the use of a single scenario would not achieve the objectiveof getting an unbiased and probability-weighted ECL amount as required by IFRS9:5.5.17(a). This is particularly relevant when there is non-linear relationshipbetween different forward-looking scenarios and their associated credit losses.Accordingly, we recommend that the IASB incorporate the relevant discussions andconclusions from the ITG into the Implementation Guidance or Basis forConclusions of IFRS 9.Page 8 of 12Meaning of ‘undue cost or effort’

11.IFRS 9:5.5.17(c) requires an entity to measure ECL based on reasonable andsupportable forward-looking information that is available without ‘undue cost oreffort’. Respondents from small and medium-sized accounting firms considered thatthere is a lack of guidance on what constitutes ‘undue cost or effort’ in IFRS 9.Hence, it is often challenging for audit practitioners to assess whether entities haveobtained sufficient forward-looking information for ECL measurement. In particular,the consideration for assessing ‘undue cost or effort’ could vary significantly amongentities of different sizes (e.g. listed entities versus SMEs).

12.We acknowledge the concerns raised by our respondents regarding the practicalchallenges in assessing the extent of forward-looking information needed for ECLmeasurement. We also consider that entities should exercise judgement whenapplying the requirements in IFRS 9:5.5.17(c), and such judgement may varyamong entities based on their own circumstances. To help entities of different sizesin assessing whether the forward-looking information is available without unduecost or effort, we recommend that the IASB provide guidance on the principle of‘undue cost or effort’ with reference to the relevant guidance in IFRS for SMEsAccounting Standard, such as consideration of the entity’s specific circumstancesand management’s judgement of the costs and benefits from applying thatrequirement.D. Timing of recognition of ECL

13.We noted that there is an inconsistency between 5.5.3 and Example 14 of theImplementation Guidance (IE88) of IFRS 9 regarding the timing of recognition ofECL. According to IFRS 9:5.5.3, an entity is required to recognise ECL at the firstreporting date. However, Example 14 in IE 88 of IFRS 9 shows that 12-month ECLis recognised as a ‘Day 1’ loss upon the initial recognition of a financial asset. Thisissue was discussed at the ITG April 2015 meeting, but no consensus was reached.

14.Considering that the timing of ECL measurement on ‘Day 1’ versus the firstreporting date could impact (i) the effect from foreign currency translation if thefinancial asset is denominated in a foreign currency; and (ii) disclosures relating toECL measurement, we recommend that the IASB provide relevant guidance toresolve the inconsistency between 5.5.3 and Example 14 of the ImplementationGuidance (IE88) of IFRS 9 and clarify the timing of ECL recognition.E.Intercompany receivables and trade receivables without significant financingcomponent

15.There are recurring concerns raised by our respondents about the measurement ofECL for intercompany receivables given that these receivables are typicallyinterest-free and repayable on demand, resulting in a zero effective interest rate(EIR). The same issue also appears in measuring the ECL of trade receivableswithout significant financing component for which the balances are initiallyrecognised at transaction price as required by IFRS 9:5.1.3. The zero EIR posesproblem in measuring the ECL for these financial assets, particularly in the event ofdelayed payment where the zero EIR does not reflect the time value of money.

16.We observed that interest-free intercompany receivables that are repayable ondemand and trade receivables without significant component are widespread inHong Kong. The determination of EIR for these financial assets is fundamental toPage 9 of 12the amortised cost measurement. Therefore, in our previous submission to theIASB regarding the PIR of IFRS 9 − Classification and Measurement 1 , wesuggested that the IASB provide guidance to address the abovementioned issues.Given the prevalence of such financial assets and the fact that the IASB has addeda project on Amortised Cost Measurement in its research pipeline, we recommendthat the IASB commence the project as soon as practicable to address these issues.Purchased or originated credit-impaired (POCI) financial assets (Section 6 of theRFI)

17.Our respondents generally considered that the requirements for POCI financialassets have been applied consistently.

18.Nevertheless, diversity in practice exists among entities regarding the presentationof favourable changes in the ECL of a POCI financial asset in the statement offinancial position in subsequent reporting periods. Specifically, the issue ariseswhen the favourable changes exceed the loss allowance estimated at initialrecognition. Some entities choose to adjust the changes directly to the grosscarrying amount, while others recognise a negative loss allowance (with the grosscarrying amount unaffected).

19.Although this is solely a presentation issue and does not affect the carrying amountof the POCI financial assets in the statement of financial position, our respondentsconsidered that loss allowance could be an important piece of information foranalysis or decision-making (e.g. as a KPI) for those entities where POCI lendingwas part of their ordinary activities. Hence, we recommend that the IASB clarify thepresentation to ensure consistency.Application of the impairment requirements in IFRS 9 with other requirements(Section 7 of the RFI)

A.Modification of financial assets

20.Our respondents (including respondents from the banking industry) expressedsiginificant concerns about the boundaries of modification of financial assets versusECL as outlined in the RFI. We noted that Example 11 in IE66 to 73 of IFRS 9demonstrates a two-step approach to accounting for ECL and the effect of amodification where the modification following the financial difficulty of the borrowerdoes not result in the derecognition of a financial asset. The lender first recognisesa modification gain or loss in profit or loss based on the modified contractual cashflows (without taking expected cash shortfalls into account) and makes acorresponding adjustment to the gross carrying amount. The lender thenremeasures the loss allowance on the modified financial asset and recognises animpairment loss due to a significant increase in credit risk. We also noted thatBC5.241 of IFRS 9 states that ‘if credit losses are crystallised by a modification, anentity should recognise a reduction in the gross carrying amount’. However, ourrespondents considered that it is not clear what a ‘crystallisation of credit losses’means, and the reference to modification in the same sentence begs the questionof whether a credit loss or a modification loss should be recognised first in such aninstance when read with Example 11 mentioned above.1 See paragraph 19(d) of the HKICPA’s submission to the IASB on PIR of IFRS 9 – Classification andMeasurement.Page 10 of 12

21.The uncertainty about the boundaries between the requirements for modification offinancial assets and ECL is further exacerbated by:

(a) the unclear meaning of ‘credit loss’ in IFRS 9 as mentioned in Sections 1 & 2above (i.e. ‘all cash shortfalls’ or ‘shortfalls due to an inability to pay’); and(b) no clear guidance of whether an entity should conduct an ECL assessmentimmediately before a modification. Given the credit risk management policiesand the internal controls that an entity has to go through before finalising amodification agreement, it is likely that the effect of the modified contractualterms (assuming credit loss means all cash shortfalls) would be reflected in theimpairment losses if an ECL assessment is required immediately before amodification. Write-off is another possible outcome of such an assessment.

22.In addition, due to insufficient guidance on the modification requirements,respondents from the banking industry observed that entities have developed theirown accounting policies to assess whether a modification results in thederecognition of a financial asset. These differing accounting policies impact thestage classification and consequently, the measurement of ECL. For example, inthe case of a modified financial asset that is derecognised by an entity, a newfinancial asset is recognised by the entity at the date of modification. The entityresets the date of initial recognition and classifies the new financial asset as stage1 (unless it is credit-impaired), measuring the loss allowance at an amount equal to12-month ECL under IFRS 9:B5.5.26. For the same modified financial asset,another entity may consider that such a modification does not lead to derecognitionbut determine that a significant increase in credit risk has occurred based on itsaccounting policy and therefore classify the modified financial asset as stage 2,resulting in the recognition of lifetime ECL.

23.Another similar example relates to credit facilities. We observed that different bankshave different accounting policies concerning modification requirements. Thisaffects whether the revision in the terms and conditions of a credit facility (e.g. creditlimit or credit period) would lead to the derecognition of the original credit facilityand recognition of a new credit facility, resulting in a reset of the stage classificationfor credit risk assessment. This is in contrast to cases where the modification doesnot lead to derecognition but the credit risk of the credit facility has increasedsignificantly, and the modified financial instrument will be classified as stage 2 forECL measurement.

24.In our submission to the IASB regarding the PIR of IFRS 9 Classification andMeasurement2, we expressed significant concerns about the insufficient guidancein IFRS 9 on determining when a modification leads to derecognition. This leads tovarious application questions including how to assess whether a modification is‘substantial’ and when to use qualitative or quantitative indicators or both. IFRS9:5.4.3 only refers to ‘renegotiation or modification that does not result inderecognition’ without providing any further guidance on how to perform theassessment. The feedback received in this RFI reaffirms the long-standing andwidespread nature of these application issues in Hong Kong, and reinforces thecrucial need for standard-setting activities to clarify the relevant requirements inIFRS 9. We believe that greater clarity regarding the interaction of the modificationrequirements with ECL measurement is necessary to ensure consistent applicationand comparability. As the requirements for modifications of financial instrumentswill be discussed in the IASB’s Amortised Cost Measurement pipeline project, we2 See our comments on Question 6 “Modifications to contractual cash flows” in the HKICPA’s submission tothe IASB on PIR of IFRS 9 – Classification and Measurement.Page 11 of 12strongly recommend the IASB include the interaction of the modification and ECLrequirements within the scope of that project and commence the project as soon aspracticable.B.Recoveries of amounts previously written-off

25.Respondents expressed differing views on the presentation of recoveries ofamounts previously written off, as IFRS Accounting Standards do not contain clearguidance on where such recoveries should be presented within the statement ofprofit or loss. Some accounting firms viewed the presentation of recoveries as anaccounting policy choice, allowing entities to present them either as ‘reversals ofimpairment’ within the line item of ‘impairment losses (including reversals ofimpairment losses or impairment gains)’ under IAS 1.82(ba), or in a separate lineitem in the statement of profit or loss. However, other respondents believed thatpresenting such recoveries as ‘reversals of impairment’ is incompatible with a write-off which constitutes a derecognition event (IFRS 9:5.4.4). Overall, theserespondents considered that IFRS 9 is not sufficiently clear as to the presentationof recoveries in the statement of profit or loss.

26.We acknowledge the concerns raised by the respondents. Inconsistent presentationcould reduce the comparability of financial information, as the amounts relating to‘write-off losses’ and ‘impairment gains or losses’ in the statement of profit or losscould play a crucial role in assisting stakeholders to assess the credit quality of anentity’s financial assets and hence to make informed decisions. As such, werecommend the IASB provide more clarity and guidance in this area.C. Recognition of ECL for trade receivables, contract assets and lease receivables

27.Our respondents raised an issue regarding the measurement of ECL for recognisedreceivables that arise from transactions in the scope of IFRS 15 or IFRS 16. IFRS9 does not provide specific guidance on how to apply ECL requirements to contractsthat have both recognised and unrecognised receivables. Consequently, questionsarise as to how an entity distinguishes whether cash shortfalls are related torecognised or unrecognised receivables when measuring ECL, and whether cashshortfalls should be attributed entirely to recognised receivables or partially tounrecognised receivables. Our respondents considered that this issue could impactthe ECL measurement for recognised receivables.

28.Considering the current challenging macroeconomic conditions, the recoverabilityof recognised receivables for long-term contracts and leasing arrangements hasremained a matter of key concern for many entities, especially those engaging inlong-term contracts, such as construction contracts, as well as lessors and propertyinvestment entities. These business sectors are prevalent in Hong Kong. Weacknowledge the potential widespread impact of this application issue and believethat providing clarification by the IASB would be helpful.Credit risk disclosures (Section 9 of the RFI)

29.Respondents have no significant concerns regarding the clarity and suitability of thecore objectives and principles of the disclosure requirements. They considered thatthe current disclosure objectives and requirements are generally clear and providegranular credit risk information to users of financial statements.Page 12 of 12

30.Some respondents (including preparers from the banking industry) proposedadding the following items to enhance credit risk disclosures:

(a) Provide appropriate disclosures about the use of multiple economic scenarios ifthe different scenarios could reasonably have a material impact on measuringECL. This may include the number of scenarios applied and the weightingsassigned to those scenarios.(b) Provide appropriate disclosures of management overlays, including themethodology applied and the quantitative amount impacting the loss allowance.Such disclosures could help users understand the subjectivity and assumptionsinvolved in making those overlays when measuring ECL.

31.We noted that IFRS 7.35G requires entities to provide disclosures regarding theinputs, assumptions and estimation techniques used to apply the requirements inSection 5.5 of IFRS 9. We consider that the use of macroeconomic scenariosincluding the parameters applied, as well as post-model adjustments ormanagement overlays, are examples of inputs and assumptions that entities mayconsider necessary to provide a more comprehensive understanding ofmanagement’s estimation of ECL. Hence, we recommend the IASB incorporatethese examples into IFRS 7.35G.~ End ~