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Financial Instruments: Classification and Measurement

Date recorded:

Interaction between decisions on concentration of credit risk and other non-recourse instruments

The Board discussed the accounting for proportionate non-recourse instruments from the perspective of the holder. The majority of the Board agreed that the IFRS should include additional guidance that an entity had to ensure that any payments arising under the contract were consistent with the principle of all payments being payments of principal and interest (representing time value of money and credit risk). This required 'looking through' the non-recourse instruments to the underlying ring-fenced assets.

The Board discussed this principle in detail. Some Board members were concerned that the words did not reflect the principle that should have been articulated (in effect the difference between the credit risk and owner risk). The Board asked the staff to draft the principle to reflect that the holder always had to assess the repayment and its source. In case of non-recourse loans that meant that the promised return was evaluated for whether it represented compensation for credit risk or another economic substance.

One Board member in particular was concerned about this principle as he considered a non-recourse loan to be a loan with an embedded option. Consequently he would deny amortised cost accounting for all non-recourse loans as they did not exhibit basic loan features.

Summary of decisions

The Board considered the decisions taken during the process of redeliberation of the classification and measurement phase of the Financial Instruments project.

The Board clarified that with respect to underlying portfolio of investments in contractually linked instruments, additional credit protection (such as guarantees) for the underlying instruments would not prohibit amortised cost accounting.

With regards to reclassifications, the Board specified that following the identification of a change in the business model, an entity should reclassify the financial instruments in question from the start of the following period (including interim periods).

At least three Board members (and an additional Board member tentatively) indicated that they would dissent to the ED on the basis of the approach being adopted.