Amendments to IAS 39: The Fair Value Option
Following the public round-table meeting in March on this issue, the IASB staff posted a paper on the IASB website and requested comments on three proposed Alternatives regarding effective date and transition issues.
The staff provided an overview of comments received, with many respondents noting that Alternative A would unfairly penalise existing IFRS preparers. In addition, many respondents expressed a preference for Alternative C over Alternative B. Alternative C was widely viewed as 'permissive' in that it allowed more entities to have a 'free choice' over designation of financial instruments.
Respondents also encouraged the Board to reconsider its tentative decision not to permit the restatement of comparatives.
It was indicated that letters of support for the current proposals had been received from various regulators.
The staff proposed Alternative C on the basis that it was the 'fairest' in terms of effect on existing IFRS preparers and first-time adopters. The Board agreed with Alternative C (vote 13-1) on the basis that existing IFRS preparers should not be prejudiced for applying the original guidance. A 'free-choice' would therefore be granted to early adopters of the amended fair value option.
In reacting to the overall proposals, some Board members indicated:
- preference for the original unrestricted fair value option as that was conceptually superior but would vote for the current proposals as they are better than the proposals contained in the first exposure draft and given the current situation coupled with the fact that this issue had to be resolved;
- some concern over certain jurisdictions in which regulators require management of certain financial assets and liabilities on a fair value basis as well as fair value accounting and the impact that the restricted fair value option, which is viewed as a retrospective step, would have on financial reporting;
- the restrictions placed on the fair value option were introducing unnecessary complexity into an already complex standard.
Following the general discussion, three Board members indicated their intention to vote against the restricted fair value option, some citing the fact that accounting is better served with an unrestricted fair value option as currently drafted in IAS 39. The amended fair value option would therefore proceed as an amendment to IAS 39 (vote 11-3).
The Board confirmed that the effective date of the amendment to IAS 39 would be 1 January 2006, with earlier application permitted. The period in which the 'free-choice' would be applied would be set as the three months following the date of publication of the amendment. The proposed publication date is June 2005. The staff indicated that this three month window was a subjective timeframe guided by IFRIC practise on Interpretations. It would be during this time that preparers would designate financial instruments as at fair value through profit and loss as well as consider those instruments that do not meet the criteria in the restricted guidance resulting in de-designation.
The Board agreed that pre-existing financial instruments at 1 January 2005 would be eligible for a three month window period in which the 'free-choice' could be applied. In addition, the Board agreed that instruments could be de-designated as at 1 January 2005, from fair value hedges, only if the reason for it is to apply the amended fair value option.
The Board indicated that the drafting of the amendment as regards the 'free-choice' would be so as not to prejudice quarterly reporters.
As regards restatement, the Board was persuaded by respondents and the staff and therefore agreed to allow restatement of comparative information. An entity can therefore apply the amended fair value option as at 1 January 2004 (transition date for a number of first-time adopters in Europe) provided they met the criteria of the amended fair value option at that time.
Where an entity, in adopting IAS 39, chooses to restate comparatives as permitted in that Standard, it would be required to restate that comparative information taking into account the requirements of the amended fair value option.