IAS 39: Amendments Resulting from the Reclassification Amendment to IAS 39
The staff presented the Board with its comment letter analysis and recommendations on the IASB's exposure draft Embedded Derivatives (Proposed amendments to IFRIC 9 and IAS 39). The exposure draft proposed the following:
- an entity must assess whether an embedded derivative is required to be separated from a host contract when the entity reclassifies a hybrid (combined) financial asset out of the FVTPL category.
- this assessment is to be made on the basis of the circumstances that existed when the entity first became a party to the contract.
- if the fair value of an embedded derivative that would have to be separated cannot be reliably measured, the entire hybrid financial instrument must remain in the FVTPL category.
The Board agreed without discussion to proceed with the proposed amendments subject to drafting changes as a clear majority of constituents agreed with the proposals.
The staff then informed the Board that some constituents were concerned over the effective date of 15 December 2008, particularly because of the implications of backdating the effective date. It was noted that this causes difficulties in jurisdictions where IFRSs become part of the law, which in some instances prohibits backdating. One Board member noted it was a good time to go back to normal and propose an effective date of at least 3 months after publication of the final amendments. Other Board members were generally sympathetic to this view. Some believed a different accounting treatment than the one proposed in the exposure draft was an accounting error, admitting that then there would be no reason for an amendment.
In the end, the Board decided that the amendments were to be applied retrospectively for accounting periods ending on or after 30 June 2009.
On this occasion, the staff provided a brief update on the issue of accounting for certain credit-linked instruments, commonly referred to as synthetic collateralised debt obligations (CDO), that do not have the actual assets the credit risk is referenced to in their asset pool.
The issue is whether the credit derivative embedded in the notes issued by such structures have to be bifurcated. Under IFRSs, common practice is to separate the embedded credit derivative in the notes issued by such a structure. Under US GAAP practice has evolved that would not bifurcate. Constituents noted that this would create an unlevel playing field. In December 2008 the Board decided there is no need to change IAS 39 as there is no diversity in practice under IFRS. The FASB has proposed guidance that would clarify the FASB's intentions when bifurcation was required.
Staff noted that the proposed guidance DIG C22 would be different from practice under IFRS in certain scenarios. However it also noted that this might in practice be a small difference (mainly due to the subsequent accounting for some of the beneficial interests issued by a synthetic CDO under US GAAP) and warned the Board not to make further piecemeal amendments to IAS 39 at this stage. If US GAAP wanted to fully align to IFRS this would require fundamental changes to the US guidance.
Some Board members were concerned over this update noting that certain constituents will pick this up. It was suggested to make clear in the IASB Update and on the IASB website about the current status, the practical implications, and the remaining differences on this issue.