Financial Instruments — Classification and Measurement
At their joint meeting, the Boards discussed the accounting for reclassifications of financial instruments between the fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVTOCI) and amortised cost measurement categories. This follows from the May 2012 joint meeting in which the IASB tentatively decided to extend the existing reclassification requirements in IFRS 9 Financial Instruments to debt investments measured at FVTOCI, and the FASB tentatively decided to require financial assets to be reclassified prospectively when, and only when, the business model changes. Changes in the business model that require reclassifications must be (i) determined by the entity’s senior management as a result of external or internal changes, (ii) significant to the entity’s operations and (iii) demonstrable to external parties.
The FASB first considered the date on which a reclassification should take effect. The IASB staff noted that IFRS 9 requires an entity to recognise reclassifications as of the first date of the period beginning immediately after the period in which the change in business model that results in a reclassification occurs. Therefore, this IASB staff did not propose any reconsideration of this decision because such a change would be inconsistent with the IASB’s objective to make limited modifications to IFRS 9.
The FASB staff proposed that entities should recognise reclassifications between any of the categories as of the last day of the period in which the change in business model that results in a reclassification occurs; a proposal which is not converged with IFRSs.
The FASB staff noted that because the change in an entity’s business model is expected to be vary infrequent, given the characteristics outlined as part of the May 2012 joint meeting, reflecting the effect of the change in the business model in the period in which the change occurs provides more useful information to the users of the financial statements. The staff acknowledged that this recommendation is different from the requirements in IFRS 9. However, the staff believed that the date of reclassification would not be a key difference between the Boards’ respective classification and measurement models for financial assets, particularly given the anticipated infrequency of such events occurring.
A couple of FASB members expressed concern over the failure to converge with IFRSs. However, consistent with the views expressed by the FASB staff, they were comfortable with the staff’s recommendation. Multiple FASB members preferred that the reclassification date be consistent with the date in which a change in business model is recognised. However, they acknowledged the high preparer costs associated with this alternative. When put to a vote, the FASB tentatively agreed with the recommendation set forth by the staff; acknowledging the lack of convergence with the IASB in this area. One IASB member noted that the subsequent event disclosures required by IAS 10 Events after the Reporting Period would assist in reconciling the divergent views of the IASB and FASB in this area, as subsequent event disclosures would be expected to encompass disclosure of business model changes recognised as of the first date of the period beginning immediately after the period in which the change in business model that results in a reclassification occurs.
The FASB requested that its staff bring back the issue of disclosures related to reclassifications under its model at a later date.
The Boards then considered the mechanics of reclassifications. The FASB was asked to consider the accounting for all possible reclassification scenarios between the three measurement categories, while the IASB was asked to consider the accounting for the reclassification of eligible debt investments into and out of the FVTOCI measurement category (given that IFRS 9 already includes the requirements for reclassifying financial assets between amortised cost and FVTPL).
The FASB staff presented multiple recommendations regarding the accounting for reclassifications between amortised cost and FVTPL. Those recommendations included:
- For reclassifications from FVTPL to amortised cost, the fair value of the financial instrument becomes the amortised cost on the reclassification date, and an entity would calculate the effective interest rate (EIR) on the basis of this new carrying amount. This is consistent with existing requirements in IFRS 9.
- For reclassifications from amortised cost to FVTPL, an entity remeasures the asset at fair value and recognises the difference between amortised cost and fair value in net income. This accounting is consistent with IFRS 9.
One FASB member was concerned with the structure of the proposals. He found them complex and preferred that all reclassifications be treated as a derecognition event (as if sold and repurchased). However, other FASB members disagreed with the view that all reclassifications were derecognition events; nothing that they may be a change is business strategy.
With little additional feedback, the FASB tentatively agreed with the above staff recommendations.
The IASB and FASB staffs then presented multiple recommendations regarding the accounting for reclassifications between other categories. Those recommendations included:
- For reclassifications from FVTOCI to FVTPL, amounts accumulated in other comprehensive income are “recycled”, or recognised in profit or loss, and the financial asset continues to be measured at fair value.
- For reclassifications from FVTPL to FVTOCI, changes in fair value occurring after the reclassification date are recognised in other comprehensive income, and the financial asset continues to be measured at fair value. On the date a reclassification is recognised, an entity should calculate an EIR on the basis of the new carrying amount (i.e., fair value on the reclassification date) to determine the amounts of interest and amortisation it should recognise in profit or loss going forward.
- For reclassifications from amortised cost to FVTOCI, the financial asset is remeasured at fair value, and any difference between the amortised cost and fair value is recognised in other comprehensive income.
- For reclassifications from FVTOCI to amortised cost, the financial asset is transferred at fair value, but amounts accumulated in other comprehensive income are derecognised with an offsetting entry to the financial asset’s new carrying amount (i.e., the new carrying amount is treated as though it had always been classified at amortised cost).
Both Boards, with no debate, tentatively agreed with the above staff recommendations.
The IASB was asked to consider disclosures related to reclassifying eligible debt investments into and out of the FVTOCI measurement category. Deliberations on other disclosures related to its classification and measurement model will be considered during Friday’s IASB only meeting, while the FASB will consider disclosures related to its model at a future FASB only meeting.
The IASB proposed that the disclosure requirements in paragraphs 12B through 12D of IFRS 7 Financial Instruments: Disclosures should be extended to reclassifications into or out of FVTOCI, as applicable; believing the information equally relevant for these reclassifications.
One Board member expressed concern with the period in which the disclosures in paragraph 12D of IFRS 7 would be required. Specifically, he noted that paragraph 12D requires disclosure of the fair value of financial assets at the end of the reporting period as well as the fair value gain or loss that would have been recognised in profit or loss during the reporting period if the financial assets had not been reclassified, if an entity has reclassified financial assets. This Board member requested that this disclosure be amended to avoid an entity parking assets from one measurement category into another, such that an entity would be required to provide the disclosures in paragraph 12D to the extent that unrealised losses in a portfolio are of equal or greater value to that evident on the reclassification date. However, others believed that this disclosure was not necessary for the long-term because requiring information about the former measurement category is inconsistent with the objective of prospective reclassification. They also expressed concern at the cost of his proposal given that the scope of the disclosure.
When put to a vote, the IASB tentatively agreed with the IASB staff recommendation.