Discussion at the October 2008 IASB Meeting
(FASB staff joined via telephone)
The Board discussed possible amendments to IAS 39 Financial Instruments: Recognition and Measurement regarding reclassification of financial assets. This was the IASB's response to requests by certain constituents to create a 'level playing field' in this area with US GAAP. The possible amendments would allow reclassification of financial assets out of the category 'at fair value through profit or loss' in certain cases. In the staff proposals there was also additional guidance on impairment of such reclassified assets in the case of a reclassification due to rare circumstances. In the light of the current conditions, the Board will bypass its usual due process (as agreed by the Trustees) and immediately issue the amendment, most probably this week.
The Board discussed four key areas based on a staff draft available on the IASB's website:
- Impairment
- Effective date
- Meaning of the term 'rare circumstance'
- Disclosures
Impairment
The Board discussed whether it was appropriate to introduce additional guidance on impairment based on the provisions under US GAAP in this amendment. It was noted that allowing reclassification in the same circumstances as under US GAAP but without also requiring the same impairment measurement as under US GAAP would not 'level the playing field'. One Board member highlighted that such reclassifications are rare under US GAAP as the impairment rules are a disincentive to reclassification. The Chairman said that the immediate issue before the Board is a political one – to allow reclassification under IFRSs in the same circumstances as US GAAP allows. He suggested that a separate follow-up step could be a working group between IASB and FASB on the subject of impairment (and possibly other issues) to provide a converged solution in the near-term.
The Board had a short discussion about the technical differences of both impairment approaches (both triggers and measurement). It emerged that the guidance under IFRS and US GAAP was too different to be reconciled/converged quickly.
Also, some Board members considered the approach under US GAAP for subsequent impairment tests as 'inferior' compared to IFRS. The Board also considered whether disclosure of expected recoverability along with the effective interest rate would be useful.
There seemed to be general agreement that any solution at this point would not be optimal, but given the circumstances it would be acceptable to proceed. However, as the guidance on impairment would not meet the goal of converging IFRS and US GAAP, the Chairman asked the Board to vote for deleting the relevant paragraph. The Board agreed by vote of 11-2.
Effective date
The Board briefly discussed the effective date for the amendment. The Board agreed that the amendment should be effective 1 July 2008 by vote of 11-2.
Meaning of the term 'rare circumstances'
The Board discussed whether a clarification of the term 'rare circumstances' should be provided in the actual standard text, notably whether the current credit crisis is such a 'rare circumstance'. After a short discussion it was decided that the actual text should not refer to the current conditions, but that an accompanying statement of the Board would clarify that the current situation is considered 'rare'.
Disclosures
Disclosures were the last point to be discussed by the Board. One Board member proposed requiring a reconciliation of fair values from the effective date of the amendment and the actual reclassification date (if between issue of the amendment and 31 October 2008), as this would make transparent any reclassifications that could be done with hindsight. The staff and some other Board members thought this was already covered by the amendments. The staff also confirmed that a user would be able to develop an income statement that would exclude the effects of reclassification. The Board agreed.
Other Issues
The Chairman then turned to other issues surrounding the amendments. Firstly, whether the amendments should provide for a possibility to reclassify financial instruments for which an entity invoked the fair value option. The Board objected to this.
Secondly, the Board was asked whether a working group or panel should be set up to provide in the near-term possible approaches to align the guidance under US GAAP and IFRS in certain areas of financial instruments accounting. The Board agreed.
Lastly, the Chairman asked the Board whether they agreed to bypass usual due process and go straight to the publication of the amendment. One Board member strongly indicated that he would dissent as he didn't agree with both the technical content and the bypass of the due process. The Board agreed by a vote of 11-2.
Sweep Issue
The staff raised an issue in respect of the transition rules of the October 2008 Amendment to IAS 39. IAS 39.103G states that 'any reclassification of a financial asset made in periods beginning on or after 1 November 2008 shall take effect only from the date when the reclassification is made'. In some countries entities will not be able to adopt this amendment until is has been approved by local law and in some cases this will be later than 1 November 2008. The staff raised the question whether, after 1 November 2008, such entities should be able to apply some form of retrospective reclassification linked to endorsement by local law.
The Board did not agree with this approach. The Board hopes that local jurisdictions will move quickly to endorse this amendment. Entities should decide prior to 1 November 2008 whether or not they intend to reclassify, subject to the requirements of local law, and calculate what the impact would be. Where endorsement occurs at a later date, it would not be acceptable for entities to postpone making a decision with respect to this amendment and subsequently adopt it retrospectively.
13 October 2008: IASB amends IAS 39 to permit some reclassifications
On 13 October 2008, the IASB issued amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. The amendments are a response to calls from constituents, particularly within the European Union, to create a 'level playing field' with US GAAP regarding the ability to reclassify financial assets. The amendments would permit reclassification of some financial instruments out of the fair-value-through-profit-or-loss category and out of the available-for-sale category. The amendments introduce into IFRSs the same possibility of reclassifications that is already permitted under US GAAP in limited circumstances. The amendments are effective 1 July 2008. Click for IASB Press Release (PDF 168k).
Newsletter on reclassification of financial assets
The IFRS Global Office of Deloitte has published a special edition IAS Plus Newsletter:
Amendments to IAS 39 & IFRS 7 – Reclassification of Financial Assets (PDF 97k) explaining the changes.
| 
Print
