• Discussed with SAC: July 2001
• Discussed and added to Agenda at July 2001 IASB Meeting
• Discussed at November 2001 IASB Meeting
• Discussed at December 2001 IASB Meeting
• Discussed at January 2002 IASB Meeting with National Standard Setters
• Discussed at February 2002 IASB Meeting
• Exposure draft issued for public comment 20 June 2002 (Press Release (PDF 35k)
  
• Comment deadline 14 October 2002
• Discussed at December 2002 IASB Meeting (first consideration of comments on ED)
• Discussed at January 2003 IASB Meeting
• Discussed with Standards Advisory Council in February 2003
• Conducted Public Roundtable Discussions 10-14 March 2003
• Discussed at March 2003 IASB Meeting
• Discussed at April 2003 IASB Meeting
• Discussed at May 2003 IASB Meeting
• Discussed at June 2003 IASB Meeting
• Discussed at July 2003 IASB Meeting
• Exposure draft on Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk (macro hedging) issued for public comment 21 August 2003. Comment deadline 14 November 2003:
  
  • Press Release PDF 17k)
  • Special Global Edition of our IASPlus Newsletter (PDF 31k) summarising the proposals in the macro hedging Exposure draft.
• Discussed at September 2003 IASB Meeting
• Discussed at October 2003 IASB Meeting
• Discussed at November 2003 IASB Meeting
• December 2003: Final revised versions of IAS 32 and IAS 39 released by the IASB (excluding possible changes for macro hedging). Click for Press Release (PDF 82k).

Timetable

• Click for IASB Project Timetable

Further Issues Arising after December 2003 Revisions to IAS 39

We have created a Separate Agenda Project Page covering the IASB's work on further amendments to IAS 39 for issues that have arisen after the December 2003 revisions to IAS 39 were published.

Background

This project is considering revisions to IAS 39, Financial Instruments: Recognition and Measurement, based on issues identified by IASB constituents and the IAS 39 Implementation Guidance Committee.

Download the Exposure draft and Our Letter of Comment

The ED of Proposed Amendments to IAS 32 and IAS 39 may be downloaded without charge from the IASB's website. There are three separate documents.

Click here to download our Comment Letter on Proposed Amendments to IAS 32 and IAS 39 (PDF 139k).

Key Proposals in the Exposure Draft

Public Roundtable Discussions of Proposed Amendments to IAS 32 and IAS 39 in March 2003

The IASB held public roundtable discussions of its Exposure draft of proposed amendments to IAS 32 and IAS 39 in Brussels and London from 10 to 14 March 2003. The purpose of the discussions was to provide an opportunity for the Board and constituents to meet and discuss issues raised in the comment letters on the IASB's Exposure draft. The roundtable discussions were not decision-making meetings of the Board. Rather, they were intended to help increase the Board's understanding of various constituent views and, hopefully, lead to mutually acceptable solutions. A total of 108 respondents to the Exposure draft participated in the roundtables.

There were nine sessions of roundtable discussions, each with a different group of constituents. However, all of the discussions covered similar topic areas and the issues raised in each session generally were similar, with the exception of the last two sessions, which were dedicated to discussion of issues related to insurance companies:

• Click to download our Unofficial Summary of the First Seven Roundtable Sessions (PDF 52k) on issues other than insurance issues.
• Click to download our Unofficial Summary of the Sessions on Insurance (PDF 27k).

Click for IASB's Press Release announcing the roundtables.

Consideration of Comments on the Exposure draft

The comment period ended on 14 October 2002. The IASB received more than 170 comment letters. In December 2002, the Board decided to schedule a public roundtable discussions with the objectives: improve the interaction between the Board and its constituents and to provide mutual education. The sessions will begin with the IASB's Standards Advisory Council on 24-25 February 2003. Then, those who submitted letters of comment will be invited to meet with the Board during the week of 10 March 2003. Exact dates and locations are to be determined.

At the Board's January 2003 meeting, the staff noted that 107 requests have been received by the deadline to participate in the IAS 32/39 roundtable discussions. The Board agreed that a set of guiding principles and questions would be distributed to participants prior to the roundtable discussions. That document will highlight several guiding principles that underlie the proposals in the ED. The Board will ask the roundtable participants whether they agree with the principles. The questions will be organised into the following five sections:

• The distinction between debt and equity, including derivatives on own shares,
• Derecognition of financial assets,
• Derivatives and hedge accounting,
• Impairment of financial assets, and
• Other issues

The Board was clear that the participants should not in any way feel obligated to respond to each question either in writing prior to the discussions or during the discussions. The participants should focus their efforts on those issues that they believe should be improved. After the discussions, the staff was requested to make the appropriate changes, clear those changes through selected Board members, and then post the document to the website.

Board members made some general comments arising from the recent financial instrument roundtable discussions. The Board considered staff proposals on the issues for future discussion.

General Comments

The following comments were made by individual Board members and do not necessarily reflect the overall views of the Board:

• Most Board members believed that the roundtable discussions were worthwhile.
• In some cases, wording problems caused people to misunderstand the Board's intent in the Exposure draft (ED) of proposed amendments to IAS 32 and IAS 39.
• Some participants in the roundtables clearly favoured a principle based standard while others wanted more detailed guidance. The Board must assess the appropriate balance.
• Some participants said they supported the principles in the ED but felt that some of the more detailed guidance in the ED was inconsistent with the principles. This was particularly evident in the proposals for dealing with hedge ineffectiveness.
• The Board should bear in mind that this is an improvements project and not a complete rewrite of the financial instruments standards.
• Some commentators objected to the proposals because they did not want to change from their current practices.

Decisions at the Board's April 2003 Meeting

Fair Value Measurement Option. The Board agreed:

• to retain the fair value measurement option for all financial instruments as proposed in the Exposure draft of amendments to IAS 39 and to clarify that the election of fair value is irrevocable;
• to clarify that demand deposits may be recognised at fair value, which is the amount payable on demand today;
• to require disclosure, for financial assets held for trading or designated to be measured at fair value, of the amount included in net profit or loss; however, disclosure will not be required of the criteria used to select the items; and
• not to permit exclusion of the effects of an entity's own credit risk in measuring fair value; separate disclosure of the fair value effect of an entity's own credit risk will not be required.

Basis Adjustment for Hedges of Forecasted Transactions. The Board discussed the proposal in the ED to prohibit basis adjustment for forecasted transactions that resulted in the recognition of an asset or liability. After discussion, the Board agreed to allow an option for basis adjustment for non-financial assets. This adjustment would, however, be considered as an indicator of impairment. It was noted that the staff should consider in a future paper the effect of this option on the definition of 'cost of an asset' particularly in IAS 16.

Firm Commitments. The Board discussed the proposal in the ED to treat hedges of firm commitments as fair value hedges, rather that as cash flow hedges. The Board agreed to retain the proposal of the ED even for a foreign currency firm commitment.

Reversal of an Impairment Loss on Available-for-Sale Financial Assets. The Staff reported that 87% of respondents to the ED disagreed with the proposal in the ED to prohibit all reversals of impairment losses on AFS financial assets. The Board agreed (by vote of 8 to 6) that AFS equity instruments should be measured above cost in equity and below cost in the income statement. The Board agreed to go back to the requirement in the existing IAS 39 (by vote of 10 to 4) that an impairment loss on an AFS debt instruments should be reversed if the impairment event reverses. The Board will consider whether this change needs to be exposed. Some Board members believed this to be necessary as they considered the decision in respect of equity instruments to be a fundamental change in accounting for AFS equity instruments.

Treatment of Hedges of Forecasted Transactions. The Board reaffirmed (by vote of 13 to 1) that hedges of forecasted transactions should be treated as cash flow hedges, as proposed in the ED (and as is in the existing IAS 39).

Decisions Relating to Amendments to IAS 32, Financial Instruments: Presentation and Disclosure

Puttable Instruments. The Board agreed to retain a liability classification for puttable instruments (whether conditional or not) and to emphasise alternative presentations that would be consistent with IAS 1. Consequential amendment to IAS 1 may be needed.

Treasury Share Transactions. The Board agreed not to change the classification of a commitment to repurchase an entity's own shares as a liability, but the final standard will clarify that this does not apply to agency transactions for clients.

Separating the Liability and Equity Components of Compound Instruments. The Board agreed that the method of separation should not be prescribed in a revised IAS 32.

Disclosure. The Board discussed risk disclosure and fair value disclosure. The Board agreed to retain the proposals in the ED regarding risk disclosure but noted that this is being discussed, with respect to financial institutions, as part of the IAS 30 project. The Board also agreed to retain the fair-value-related disclosures proposed in ED paragraphs 77B(a), (b), (c), and (e), and to check the US requirements (both SEC and FASB) before finalising the sensitivity disclosure proposed in paragraph 77B(d).

Derivative and Non-Derivative Contracts on Own Equity. The Board discussed various examples of contracts on an entity's own equity and agreed that the answers provided under the ED were appropriate. The staff proposed to amend the definitions and clarify the ED to identify the principles more clearly. The Board expressed concern that if no re-exposure is planned the changes could lead to major unintended consequences. Consequently, the Board asked the staff to submit proposed changes for consideration at future meeting at which a decision will be made.

Economic Compulsion. The ED proposed to eliminate the notion in existing IAS 32.22 that an instrument that the issuer is economically compelled to redeem because of a contractually accelerating dividend should automatically be classified as a financial liability. The Board agreed to retain the proposal in the ED but to clarify that, in most cases the instruments are liabilities.

Contingent Settlement Provisions. The ED proposed to require liability classification for any financial instrument that the issuer could be required to settle by delivering cash or other financial assets, depending on whether uncertain future events occur or depending on the outcome of uncertain circumstances, without regard to the probability of those events or circumstances occurring. The Board agreed to review the drafting regarding the effect of clauses that have no realistic possibility of occurring. The staff proposed that if the contingent settlement is dependant on an entity's own equity, the instrument should be assessed to determine whether it is a compound instrument. The staff proposed to remove paragraph IAS 32.19 (probability of settlement).

Parent Guarantees of Distributions. The Board discussed whether additional terms (such as a guarantee of payments or redemption) agreed directly by a parent entity with the holders of its subsidiary's equity instrument should result in a liability classification of those instruments in the consolidated financial statements. The Board agreed to liability classification in the consolidated financial statements at the amount of the guarantee.

Treatment of Derivatives on Interests in Subsidiaries, Associates, and Joint Venture. The Board agreed that such derivatives are within the scope of IAS 32 and IAS 39.

Offsetting of Financial Assets and Liabilities. The Board agreed that management intention should be a factor in offsetting financial assets and liabilities.

Decisions at the May 2003 Meeting

Derecognition of Financial Assets

The Board decided to abandon a complete shift to the continuing involvement model proposed in the Exposure draft. Therefore, the Board decided to retain an approach largely consistent with the current IAS 39, with some modification and clarification. The staff presented a flowchart to illustrated the four steps of the revised decision making process on derecognition:

1. Identify the assets transferred.

2. If substantially all of the benefits and risks have been transferred, then derecognition of the assets is appropriate. The Board clarified that a sale with a repurchase option at fair value would not disqualify derecognition.

3. If substantially all of the benefits and risks have been retained, no derecognition is allowed. This assessment will usually be based on an assessment of the variation of the present value of net cash flows-a test that will be similar, if not identical to the test in step 2 above.

4. If you have answered no to questions 2 and 3, then you would assess whether you have retained control over the assets transferred. The entity would continue to recognise the assets to the extent it could be forced to reacquire the assets. This would result in a similar approach for these items as the continuing involvement approach.

The assessment of whether the entity has retained or transferred control is based on whether the transferee has the right and ability to sell the asset. For example, if an entity is required to put the assets back to the transferor, but the assets are available in the market, then the transferee may be able to sell and therefore, derecognition may be appropriate. Conversely, if the assets are not traded in the market, the put would prohibit sale of the assets and, therefore, derecognition would not be allowed. The final standard would also remove the limit of the liability to the strike price of the call option that was proposed in the Exposure draft.

The Board decided to provide guidance related to the continuing involvement approach in the final standard for servicing, gains and losses, and non-cash collateral issues. The Board clarified that if there was a sale with a guarantee, then derecognition would still be possible, as the focus would be on whether the transferee can sell the asset.

Pass-Through Arrangements

The Board concluded that it should issue further guidance on pass-through arrangements. The focus of the assessment should be on the transferor, and not on the rights of any of the transferees. The staff's proposal was that pass through arrangements would only work if a proportion of the risks were transferred. That is, if the risks and benefits are shared proportionally (e.g. share in all losses based on ownership retained), then that proportion transferred would be derecognised.

The Board noted that IAS 39 requires the transfer of significant risks and benefits in order for derecognition. If these assets are transferred to an SPE, SIC 12 would most likely require consolidation of the SPE if a majority of the risks and benefits were retained by the SPE. Therefore, in many normal securitisation transactions, the assets would be derecognised in the transfer to the SPE, only to be re-recognised when the SPE is consolidated.

One Board member clarified that this is a contradiction with the current IAS 39, specifically as clarified by IGCs 35-1, 35-2 and 35-3. Current IAS 39 uses the notion of "portion", not "proportion". Therefore, derecognition should be allowed for the portion of the asset in which benefits and risks have been transferred.

The Board noted this was only an issue when the pass-through arrangement transfers a disproportionate share of the risk (which was acknowledged is the most common type of transaction). Based on this Board member and other members' concern over the staff recommendation, the Board will re-deliberate this issue in the June 2003 meeting.

Derivatives and Hedging

The Board still supports the principle that derivatives should be recorded at fair value. Board members felt, however, that the justification for this should be explained in the Basis for Conclusions. Further, at its April 2003 meeting the Board agreed that the staff should explore:

• Various hedging issues including proposals to be submitted by commentators, but within the framework of the principles in the ED.
• Inter-group hedging, provided that any profit or loss arising from these transactions is eliminated.
• The use of non-derivative instruments as hedging instruments.
• Eliminating cash flow hedges.

Macro Hedging

The Board noted that it is currently working on a model with several European banks that would allow for fair value hedge accounting for a macro hedge of interest rate risk. This model would:

• Not require the designation of the hedging instrument to individual assets
• Not spread change in fair value over line items in the balance sheet, but allow for one item as an asset and one item as a liability. It should be noted that these positions should not be shown net.
• The assets should be classified based on their expected maturity. Pre-payment risk would not need to be measured as it would already be included in the measurement of the asset or liability.

The Board noted that it was trying to finalise this position with the European banks for its June 2003 meeting. If this issue is not resolved by that time, the Board intends to revert to its original position of not allowing macro hedge accounting. The reason for this deadline is that this issue may require re-exposure. The Board did note, however, that it was hopeful an acceptable solution could be found in time.

Basis Adjustments for Non-Financial Assets and Liabilities

The Board has previously voted to prohibit basis adjustments for the forecasted purchase or sale of a financial asset or liability. The issue discussed at this meeting was whether or not to provide an option to basis adjust for non-financial assets and liabilities in the final standard. The Board concluded (8 to 5 vote, 1 abstention) to allow an entity the option of whether to basis adjust for non-financial assets and liabilities. The 5 no votes believed that basis adjustments should be prohibited.

The Board noted that it is likely that this conclusion will change based on the current measurement project on the Board's agenda. However, this change would not be expected for some time.

Hedge of Portions of Non-Financial Assets and Liabilities

The Board clarified that hedging the rubber component of a forecasted purchase of tires (for example) was prohibited in IAS 39, unless regression analysis proved that the movement in the price of rubber almost fully offset the movement in the price of tires. That is, the Board noted that the 80 to 125 range at inception of the hedge is not enough to determine whether the instrument qualifies as a hedging instrument. That is, IAS 39 requires that the expectation be that the movements in the hedged item and hedging instrument is almost fully offset-a much higher threshold (e.g. "upper nineties").

The Board clarified that the entity would not be hedging the rubber component of the tire, but the price of the tire. The Board noted another example in that an entity could not hedge the A-rated component of a AA-rated portfolio. The Board noted that this is a clarification of the current IAS 39 and that implementation guidance should be provided.

Internal Contracts

Internal rate risk

The Board considered whether internal transactions (i.e. transactions between entities in the same reporting entity or group), could be designated as hedging instruments or hedged items under IAS 39. However, these contracts would need to be eliminated in the normal consolidation procedures. The Board asked to the Staff to add an example to the final standard that clarifies the right accounting treatments.

Foreign currency risk

The Board agreed to not change the accounting for foreign currency risk. This will be different from US GAAP, which allows movements in hedges of internal foreign currency transactions to be treated differently.

IAS 21

The Board clarified that receivables/payables between group entities can be classified as hedged items.

Segment

The Board clarified that segment results should report the gains or losses from the internal contracts, even if these contracts are eliminated in consolidation.

Loan Impairments

The Board considered whether a loan asset that has been individually assessed for impairment and found not to be impaired should be included in a collective assessment of impairment as proposed in the Exposure draft. The Staff recommended that the loan should be included in a portfolio, however no provision should be recognised until an identifiable event occurs and the result of that event is measurable.

The Board noted that IAS 39 is an incurred loss model and not an expected loss model. Therefore, the aggregation of loans into portfolios with similar characteristics is vital to the proper assessment for impairment. Therefore, large loans that are known to be bad or good should probably not be included in the same portfolio of smaller loans to entities with different credit ratings. The Board asked the Staff to clarify the term "similar characteristics" in the final standard. The Board agreed with the Staff recommendations (11/2)

Economic Compulsion

The Staff proposed adding an example in the final standard that would require a liability be recognised based on the probability of dividend distributions. The Board agreed to go further and add an additional example that would require a liability be recognised for the following transactions:

Company A issues preferred shares that are redeemable at 1/1/200X. If Company A does not redeem the shares with cash, then the holders will be able to convert the shares into a fixed number of common shares whose current value is say, 100 times the value of each preferred share. Company A is economically compelled to redeem the shares for cash and therefore a liability should be recognised.

The Board unanimously agreed with the additional example and the staff's proposal.

Re-exposure Issues

The Board considered whether or not the topics discussed during the meeting should be individually re-exposed:

Decisions at the June 2003 Meeting

Pass-through arrangements

The Board discussed whether to permit an obligation to pay a disproportionate share of the cash flows of the original asset to qualify for pass-through accounting (portion) or whether as a condition for pass-through accounting, the entity retains no or a fully proportionate interest in the original asset.

The Board noted that IAS 39 as drafted is not clear and that additional guidance must be given on how to apply the requirements to pass-through arrangements. The observer notes contained a Flowchart of the staff's proposal that is integral in understanding the Board's proposal. It should be noted that the first step of the process is to determine the reporting entity-which could include an SPE that is consolidated as a result of SIC 12. Therefore, the test would be conducted through the viewpoint of the consolidated entity, and not the individual entity that "sold" the assets to the SPE.

The Board agreed 12 to 1 (with one abstention) to approve the decision tree in the flowchart. The Board did not believe this change would require re-exposure.

Fair value measurement guidance

The Board discussed several issues related to determining fair value when (a) a quoted price in an active market exists, (b) recent market transactions when no active market exist, and (c) the use of valuation techniques when no active market exists. The Board made the following decisions related to when a quoted price in an active market exists:

• Valuation techniques may not be used to measure fair value when an active market exists.
• IAS 39 will be clarified to require the use of quoted rates when an active market for that rate exists.
• Bid-ask prices should be used in determining fair value. Mid-market prices should not be used since they may result in immediate gains.
• When more than one active market exists for which an asset or liability can be disposed of immediately without cost or risk (that is without bundling or any modification), the most advantageous market price should be used. The most advantageous market price is the one that results in the highest price.
• Blockage factors should not be considered, as it is uncertain whether they exist and, even if they exist, whether their value could be determined reliably.
• The final standard will clarify that entities may adjust the quoted market prices for changes in factors that affect the price of the instrument at the balance sheet date.
• The final standard will not contain guidance on what constitutes an active market.

• The Board agreed to remove the second level of the fair value hierarchy so that when an active market does not exist, a valuation technique should be used. The Board clarified that one input to the valuation technique may be to look at recent market transactions for similar items.
• The price received in an inactive market should be the best indicator of the fair value as proposed in the Exposure draft. Therefore, an entity that purchases assets in an active market, packages these assets, and sells the package in an inactive market could have a gain on the transaction.

Cash instrument hedging

The Board concluded that financial instruments other than a derivative (a "cash instrument") should not be designated as a hedging instrument other than for foreign currency risk.

Contracts on own equity

At its April 2003 meeting, the Board determined that contracts that either (a) involve an obligation to deliver cash or other assets or (b) may be settled using a variable number of own shares as a means for payment should be classified as a liability, not equity. The result of this decision requires amendments to the definitions of financial assets, financial liabilities, and equity instruments in IAS 32. The Board finalised changes to these definitions to incorporate the April decision.

Sensitivity disclosures

The Board tentatively decided (8 to 3) that sensitivity disclosures should be provided for fair values estimated using a valuation technique for each valuation assumption not supported by observable market prices. Certain Board members are concerned that the requirement for sensitivity disclosures could be quite onerous, for example when 100 models with 4 different variables each that are not supported by observable market prices exist. The Board will discuss this issue further at its September 2003 meeting.

Finalisation issues

The Board decided that the final amendments to IAS 32 and IAS 39 should be issued in two stages. The first versions of IAS 32 and 39 will be those that include the all decisions that are not being re-exposed. The second and final versions will include the decisions from issues re-exposed. The Board is taking this approach to try to ensure users in countries adopting IFRS in 2005 have as much of the final standard as possible in hand when preparing for 2005.

As a result of a letter received from the Japanese Accounting Standards Board, the Board reconsidered its recent decision on the impairment of available-for-sale equity securities. The Board reversed its earlier decision to stay with the proposal in the Exposure draft. That is, an impairment of an available-for-sale equity instrument would create a new cost basis. Therefore, increases in value should be recognised as equity. The Board also clarified that the decrease in fair value must be prolonged in order for an impairment loss to be recognised – consistent with existing implementation guidance. The Board confirmed that the impairment of debt securities should be accounted for similarly to the impairment of originated loans.

The Board noted that the work of the EITF on Issue 02-03 should be followed, and if EITF makes a decision the IFRIC may want to look at issuing similar guidance.

Currently, there is one issue the Board has determined requires re-exposure (macro hedging). However, the Board noted one other issue to be discussed in July that may require re-exposure – that is, the conflict between IAS 32/39 and the Exposure draft on share based payments. One Board member expressed his intent to dissent to both IAS 32 and IAS 39, while one additional Board member expressed his intent to dissent to IAS 39.

Decisions at the Board's July 2003 Meeting

Purchased loans

The Board agreed IAS 39 should permit purchased loans to be classified as originated loans if they met the criteria for originated loans. However, if they are purchased for trading, then they must be included in financial assets held for trading.

Transaction costs

Transaction costs can include both external and internal costs, as long as they are direct costs of acquiring financial assets (rather than allocated costs). Also, transaction costs should not be included in the initial measurement of financial assets held for trading.

Loan commitments

The Board agreed that loan commitments at rates other than market rates of interest should be treated as financial guarantees. Therefore, they are accounted for under IAS 39 at initial recognition and under IAS 37 subsequently. Loan commitments at market are excluded from IAS 39.

Financial guarantees

The Board agreed that these should initially be measured at fair value. Subsequent measurement should be the higher of the initial measurement and the best estimate as defined in IAS 37. The Board noted that IAS 37 only applies here for measurement purposes and not for recognition.

Hedging interest rate risk on held-to-maturity financial assets

The Board agreed to prohibit the interest rate risk on held-to-maturity financial assets to be a hedged item for hedge accounting purposes.

Changes in credit risk in the fair value measurement of financial liabilities

The Board reaffirmed that changes in fair value should be recognised in the income statement and agreed to add disclosure requirements on the credit risk. The staff will present examples to the Board for discussion at the September meeting.

Effective interest rate calculations

The Board considered (a) whether to clarify the definition of effective interest rate to be consistent with IAS 18, Revenue, on fee recognition; (b) what period should be used when calculating the effective interest rate for financial instruments with a call, put, prepayment, or term-extension option; and (c) the accounting for subsequent changes in estimates used in calculating the effective interest rate for groups of financial assets.

The Board did not reach decisions on items (a) and (b) at this meeting. The Board decided that the cumulative catch-up method should be used for changes in estimates.

Initial measurement of financial instruments

The Board agreed to retain the provisions in the Exposure draft and not to clarify further the principles of initial measurement of financial instruments.

Prospective effectiveness test

The Board agreed (vote 9-4) to modify paragraph 146 of IAS 39 by introducing the words "highly effective" in place of "almost fully offset". The 80%-125% hedge effectiveness guideline – which currently applies in assessing retrospectively whether a hedge has been highly effective – would be retained. As a result, the range of 80%-125% could become the guideline for prospective hedging designation as well as for retrospective effectiveness testing, which would converge with the US practice.

Designation of a derivative

The Board agreed that a derivative should not be designated as a hedging instrument for only a portion of the time period during which the derivative remains outstanding.

Application and implementation guidance

The Board agreed that the existing IAS 39 implementation guidance should be split in the body of the Standard and in mandatory appendices. The staff will clarify the split in the pre-ballot draft paper.

Transition - IAS 39

First time adopters:

IFRS 1 prohibits retrospective application and requires prospective treatment from January 2001 for derecognition. The Board decided to change the date so that the derecognition provision shall be applied from 1 January 2004, prospectively. Retrospectively application is permitted.

First time adopters (2005 only):

The Board decided that the comparative figures are not required to be restated from local GAAP for IAS 39 only (other than derecognition requirements). Therefore, the Balance sheet and the income statement reconciliations required under IFRS 1 will not include financial instruments.

Entities already under IFRS

The Board agreed that entities already under IFRS should apply the provisions for derecognition prospectively, similar to first-time adoption, and retrospective for the other requirements.

Transition - IAS 32

For all entities, the effective date will be for financial years beginning on or after January 2005 with retrospectively application required (with prohibition of prospective application).

IAS 32

The Board tentatively agreed (vote 11-3) with the proposed the following re-drafting of IAS 32.77B(c):

An entity shall disclose ... whether its financial statements contain fair values which are determined in full or in part using a valuation technique based on assumptions that are not supported by observable market prices. If changing any such assumption to a reasonable possible alternative would result in a significantly different fair value, the entity shall make a statement of this fact and disclose the effect on the fair value of a range of reasonably possible alternative assumptions. For this purpose, significant shall be judged with respect to profit or loss and total assets or total liabilities.

However, the Board some Board members expressed concern that this amendment may still not be operational and should be considered further.

Decisions at the Board's September 2003 Meeting

IAS 39: Effective interest rate calculations

The Board agreed that the effective interest rate should be determined based on the expected period to prepayment, where this can be determined reliably, for financial instruments held at amortised cost with a call, put, prepayment, or term extension option. Where the prepayment cannot be reliably determined there is a default to the full contractual period. Credit losses incurred would be taken into account in determining the effective interest rate in these circumstances.

The Board considered a number of options in accounting for subsequent change in estimates in calculating the effective interest rate and decided on a catch up approach with new estimates of cash flows (the effective rate should be recalculated based on the new carrying amounts).

The Board decided to not add guidance in IAS 39 on how an entity should account for a modification of financial asset other than as a result of financial difficulties of the borrower

Pass-through arrangements

The Board considered concerns raised with the current wording of two of the three conditions as they relate to cases where (a) the entity pays out cash in advance of cash being collected and (b) the entity retains reinvested cash collections from the asset for a period before paying them out to the eventual recipients.

These conditions are worded as follows:

(a) short-term advances by an entity, to make up for shortfalls in cash collected from the asset under consideration,

(b) an obligation to remit the cash collections from the asset under consideration to the eventual recipients where such remittance is not 'without material delay',

(c) related to (b) where an entity retains and reinvests the cash collected from the asset under derecognition.

The Board agreed to retain condition (a) but to provide further clarity and to keep conditions (b) and (c) but clarify that these conditions apply to all the cash flows the investor is entitled to.

Measurement of retained interest under continuing involvement

The Board agreed to include guidance for measuring a retained interest where derecognition is prevented due the presence of a collar that comprises a put option obligation written by the transferor on the transferred asset and a call option right held (it should go through net profit or loss). This will be provided for cases where the asset is held at fair value and at amortised cost.

Lease payables

The Board agreed to scope derecognition of lease payables into IAS 39.

Example of application of the derecognition model

The Board agreed to include an additional example in the Application Guidance of IAS 39. This example will deal with the application of the derecognition model for an asset that is not readily obtainable and is transferred with a put option obligation written by the transferor.

IAS 39: Hedge accounting -- Internal transaction

The Board reaffirmed its position on internal transaction related to hedge accounting and that these transactions should be eliminated for consolidation purposes (requirements under IAS 27) and that no exception should be made contrary to the US GAAP (FAS 138, which allows an exception in specific cases.

It was agreed that this would not affect the designation using the internal contract where this is permitted and that the Basis for Conclusions should clarify that this only affects consolidated financial statements or where the contracts are between divisions of the same entity.

IAS 39: Loan servicing rights

The Board discussed whether loan servicing rights could be a hedged item and if not could they be allowed to be carried at fair value. The Board agreed that they could be designated as hedged items provided that the hedge conditions were met. They noted that it was anticipated that FASB will consider this issue and that any further deliberations should be deferred until then.

IAS 39: Originated loans

The Board agreed to amend the definition of originated loans and receivables and to restrict the loans and receivables category to exclude those where the holder may not recover substantially all of its initial investment other than because of credit deterioration.

IAS 32: Accounting for the purchase or induced early conversion of convertible debt

The Board agreed not to address the issue of how to account for repurchase and induced early conversation but to consider asking IFRIC to address the issue and in particular guidance adapted from the Canadian EIC Abstract 96 to the Application Guidance.

IAS 32: Puttable instruments

The Board agreed to include in the Standard illustrative examples of income statement and balance sheet formats that may used for:

(a) entities that do not have equity as defined in IAS 32, such as some mutual funds, and

(b) entities that have equity but whose share capital is not equity as defined in IAS 32, such as some co-operatives

Transition to Revised IAS 32 and IAS 39

The Board agreed to extend the proposed amendment to IFRS 1 to permit an entity that adopts IFRS for the first time before 1 January 2006 to present comparative information in the first year of adoption of IFRS that does not comply with IAS 39 and with the revised IAS 32.

Decisions at the IASB's October 2003 Meeting

The Board considered a proposal that a financial instrument be classified as an equity instrument rather than a financial liability only if both conditions (a) and (b) are met:

• (a) The instrument includes no obligation:
  • (i) to deliver cash or other financial assets; or

  • (ii) to exchange financial assets or financial liabilities under conditions that are potentially unfavourable to the entity.

• (b) If the instrument will or may be settled in the entity's own equity instruments, it is:
  • (i) a non-derivative that includes no obligation for the entity to deliver a variable number of its own equity instruments; or

  • (ii) a derivative that will be settled by the entity exchanging a fixed amount of cash or of other financial assets for a fixed number of its own equity instruments (other than its own equity instruments that are themselves contracts for the future receipt or delivery of equity instruments)

The Board had previously tentatively agreed to clarify guidance for determining fair value in inactive markets by stating that the best evidence of the fair value of a financial instrument at initial recognition is the transaction price (that is, the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison to other observable, current market transactions or is based on a valuation technique whose variables include only data from observable markets.

This decision has been questioned but the staff recommended that the decision be confirmed. The Board agreed to converge the wording in this regard to US GAAP.

The Board considered whether to stipulate the requirement for prospective effectiveness testing in the Standard by:

• emphasising that a hedge qualifies for hedge accounting only if it is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; and
• specifying that 'the highly effective' prospective effectiveness test is passed if expected effectiveness is in the range of 80 to 125 percent (that is, the same test that IAS 39 requires for assessing whether a hedge has been effective retrospectively).

The staff noted that there is no guidance on the recognition of income on a financial asset that either fails to obtain derecognition or is measured under continuing involvement. Similarly, there is no guidance on the recognition of interest or other expense on the associated liability.

The staff proposed guidance based on the premise that the entity is continuing to recognise (all or some of) the asset. The logical extension of this principle is that the entity should also continue to recognise the income arising from (all or some of) the asset, and simultaneously recognise an expense for the associated liability. The Board agreed.

The Board agreed to clarify that where individual items have been tested for loan impairment, the individual items have a different weighting when tested as part of a portfolio.

The Board also agreed that retrospective application of derecognition on initial recognition would be permitted provided the necessary information is available.

Decisions at the Board's November 2003 Meeting

The Board discussed whether to include additional guidance to clarify what contracts to buy or sell non-financial items are within the scope of IAS 32 and 39. The Board agreed to include the following wording in paragraph 6 and 7.

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

a. when the terms of the contract permit either party to settle it net in cash or another financial instrument;

b. when the non-financial item that is the subject of the contract is readily convertible to cash.

A written option to buy or sell a non-financial item that can be settled in cash or another financial instrument, or by exchanging financial instruments, in accordance with paragraph 6(a) or 6(d) is within the scope of this Standard. Such a contract cannot be entered into for the purpose of making or taking delivery of the non-financial item in accordance with the entity's expected purchase, sale or usage requirements, because the option writer does not have the ability to require delivery.

December 2003: Final Revised Versions of IAS 32 and IAS 39 Released

The IASB has published the final texts of the revised versions of IAS 32 and IAS 39 on financial instruments. IASB subscribers may download them from the IASB's Website. Click for IASB Press Release (PDF 81k).