The staff introduced this session by reminding the Board members of the two main areas in ED Improving Disclosures about Financial Instruments (proposed amendments to IFRS 7):

• Clarifying disclosures about financial instruments
• Liquidity risk of financial instruments

Clarifying disclosures about financial instruments

The staff turned to the proposal of a tabular disclosure of fair values in accordance with a three level hierarchy (similar to the US requirements). It was noted that respondents linked this hierarchy to the measurement guidance in IAS 39 and were confused if they had interpreted the guidance in IAS 39 as containing a 2, 3, or 5 level hierarchy. Constituents were worried about how to map the IAS 39 fair value levels to the definition of levels under the proposals.

The staff therefore proposed not to go forward with the three level disclosure of fair value, but instead to provide additional information on level 3 disclosures, where some of the inputs in modelling fair value were unobservable. One staff member presented an alternative proposal. This staff member disagreed with the staff proposal and proposed to adopt the approach in the ED and make clear the definitions of the levels are exactly the same as under US GAAP. Also the final amendment was to make clear that there is no link between the IAS 39 measurement hierarchy and the fair value disclosure hierarchy under the proposed amendments.

While a majority of the Board members expressed sympathy for the alternative staff view, some were concerned that the timing for requiring such a fair value hierarchy disclosure would not be acceptable given that this issue would be addressed in a broader context in the fair value measurement project. One Board member noted that this amendment would not only affect financial institutions, but also corporates.

The Board voted in favour of the alternative staff proposal and against the staff recommendation.

The Board also agreed to:

• Replace the notion of 'total unrealised gains or losses' with 'total gains or losses'
• Require disclosure of the effect of changing one or more of the significant unobservable inputs used in the fair value measurement of level 3 financial instruments to another reasonably possible assumption
• Eliminate the requirement to stratify fair value in proposed paragraph 27C

Liquidity risk of financial instruments

The staff then turned to the proposed amendments to the liquidity disclosures. Staff noted that most respondents welcomed the proposed amendments to the liquidity risk disclosures under IFRS 7. In light of comment received, the staff proposed the following changes to the original proposals:

• Require disclosure of separate maturity analyses for derivative and non-derivative financial liabilities based on contractual maturities, but provide relief from disclosing in the maturity analysis contractual maturities for a subset of derivative financial liabilities
• Emphasise the existing requirement to provide summary data about each type of risk arising from financial instruments based on information provided internally to key management personnel of the entity, as required in IFRS 7.34(a). This also clarifies that derivative financial liabilities not included in the maturity analysis based on contractual maturities (under the proposed relief above) should be disclosed in a maturity analysis on the basis of the information provided internally to key management personnel.
• Clarify the following issues:
  • the scope of the liquidity risk disclosures regarding derivatives that during their life can change between being financial assets or financial liabilities;
  • how amounts are determined when the amount payable is not fixed; and
  • how to consider master netting agreements.
• Retain the proposed treatments of
  • hybrid contracts; and
  • non-derivative trading liabilities.
• Clarify paragraph B11C so that it includes:
  • derivative financial liabilities that are recognised in the statement of financial position;
  • loan commitments that meet the definition of a derivative irrespective of whether they are recognised in the statement of financial position; and
  • issued financial guarantee contracts.
• Strengthen the wording in paragraph B11E to ensure disclosure of a maturity analysis for financial assets used in managing liquidity risk, if that is important to users of financial statements in understanding the liquidity risk of the entity.
• Other drafting clarifications.

While Board members had some questions on the details of the proposed changes to the liquidity risk analysis, they agreed to all changes as proposed by the staff.

Transition

The staff proposed to bring forward the effective date of the amendments to annual periods beginning on or after 1 January 2009, but not to require comparatives. Some Board members were concerned over the backdating in the light of the requirements of IAS 34 for interim reports. Staff informed the Board that this is a broader issue and they plan to bring back a paper on it at the February Board meeting.

The Board agreed with the staff proposals.