Financial instruments — Limited reconsideration of IFRS 9 (classification and measurement)
During the November 2011 IASB meeting, the Board decided to reopen IFRS 9 to further consider 1) certain specific issues identified as entities have implemented IFRS 9, 2) the interaction of decisions made in the insurance project with the classification and measurement of assets managed to meet insurance liabilities and 3) whether further convergence could be achieved with the FASB and their financial instrument classification and measurement project.
During this meeting, the staff presented to the Board their recommendations on issues to be considered as part of the IASB’s reconsideration of classification and measurement. The staff recommended the Board include the following topics in the scope of the items to be considered when examining IFRS 9:
- contractual cash flow characteristics test
- bifurcation of financial assets
- a third business model remeasured through OCI.
The staff raised two other issues for consideration but did not recommend the Board re-open those discussions. Those two issues both related to equity instruments, the first being the fair value through other comprehensive income election and the other being not providing a cost-based exception for non-quoted equity investments.
The Board discussion started with a Board member asking the staff if they had an idea of what to do to address the insurance mismatch and where the FASB was going on classification and measurement to attempt further convergence. The staff responded they had some initial thoughts on the insurance issue including the possibility of introducing a third business model utilising OCI. With respect to where the FASB was on classification and measurement, the staff responded that the FASB was nearing finalisation of their redeliberations on classification and measurements so while an exposure document may not be issued they were aware of the FASB’s position on most of the important issues.
A few Board members expressed their support for reconsidering an exception to permit a cost based measurement for unquoted equity investments. They noted this was a particularly relevant issue for those in emerging and developing markets. They also suggested that the existing guidance in IFRS 9 where cost may be an estimate of fair value was difficult to understand and apply in practice. Other Board members raised concerns that introducing a cost based measurement would also require introducing separate impairment considerations. However, another Board member retorted that the financial crisis of the last few years was driven by debt instruments and not equity investments. One Board member introduced the idea that some of the challenges that preparers are facing with respect to measuring fair value of unquoted equity investments could potentially be addressed in the educational materials being prepared for IFRS 13.
One Board member raised concerns with the possibility of introducing two measurement models using OCI, one for debt instruments that would recycle to profit or loss upon derecognition and one for equity investments that would never recycle to profit or loss.
Certain Board members expressed differing views with respect to the importance of convergence. Some Board members stated that convergence would be good but is not the primary purpose of the reconsiderations and that the language should perhaps be tempered by using ‘try to reduce differences’ rather than full convergence. However, other Board members felt that convergence was critical citing the pressure of the G20 and noting that this represented an opportunity to further align but acknowledged that would also require the FASB to reconsider some of the decision they have made in their redeliberations.
Ultimately the Board agreed in a narrow vote [with 8 votes] to include the contractual cash flow characteristics test, the bifurcation of financial assets and introduction of a third business model remeasured through OCI to the list of topics to be addressed in the reconsideration of IFRS 9 and to attempt to address some of the concerns around unquoted equity investments through educational materials for IFRS 13.