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Financial instruments — Limited reconsideration of IFRS 9 (classification and measurement)

Date recorded:

FV-OCI measurement category

At their May 21, 2012 meeting, the IASB discussed whether to introduce fair value through other comprehensive income (FV-OCI) as a measurement category for eligible[1] debt financial instruments.

IFRS 9 does not contain a FV-OCI measurement category for eligible debt instruments and some constituents have raised a concern that the classification outcomes in IFRS 9 do not allow them to reflect their business models in a meaningful way.

Some board members noted that introducing a FV-OCI measurement category would, in addition:

  • reduce differences between IFRS 9 and the FASB’s tentative classification and measurement model[2]
  • address concerns about the potential accounting mismatch that may arise due to the interaction between the accounting for financial assets under IFRS 9 and the accounting for insurance liabilities under the Insurance Contracts project.

However, certain board members noted that introducing a FV-OCI measurement category would increase complexity in the accounting for financial instruments and were therefore suggesting to only have amortised cost and fair value recognised in net income (FV-NI) measurement categories. Most of the IASB board members supported the staff suggestion to introduce a FV-OCI category for eligible debt instruments.

For debt instruments classified and measured at FV-OCI, the staff suggested that both amortised cost and fair value information are relevant. Therefore, the staff recommended that:

  • Those financial assets would be measured at fair value on the balance sheet
  • Interest income would be recognised in net income (NI) using the effective interest rate method that is applied to financial assets measured at amortised cost
  • The impairment method used to recognise impairment losses/reversals in NI would be the same as that for financial assets carried at amortised cost
  • Fair value gains and losses would be recognised in OCI over the life of the financial asset and the cumulative fair value gain or loss would be reclassified to NI (i.e. recycled) when the financial asset is derecognised or impaired.

Some IASB board members questioned why recycling would be required for debt instruments but not for equity instruments (when designation at FV-OCI is made at initial recognition[3]).

The IASB staff noted that it had heard from entities that hold equity investments eligible for FV-OCI classification that those investments are not held for performance reasons but rather for strategic reasons, and therefore including related gains and losses in net income would not be relevant.

Other board members noted that recycling is important to investors and that that information should be presented in the statement of comprehensive income as opposed to the notes to financial statements. A majority of the board members tentatively agreed with the staff recommendations for debt instruments classified and measured at FV-OCI.

Subsequent to the IASB’s decision to introduce a FV-OCI measurement category and the decisions made about the accounting for the debt instruments included in that category, the boards jointly discussed when eligible debt instruments should be measured at FV-OCI on the basis of the business model within which they are held.

Some board members asked about the differences between the measurement categories for individual instruments. Some felt it was unclear why “managing on a fair value basis” is relevant in defining a business model.

The boards tentatively agreed that if investments in debt instruments are included in a portfolio managed with the objective to both collect contractual cash flows and sell financial assets, those debt instruments should be measured at FV-OCI. FV-NI would be the residual classification category for eligible debt instruments that do not meet the business model tests for amortised cost[4] or FV-OCI.

Reclassifications of assets

The boards also discussed whether to require reclassifications of financial assets when the business model changes.  Some board members suggested that a change in business model be better defined to avoid application issues.

All FASB board members disagreed with the guidance in IFRS 9 that requires reclassifications to take effect from the beginning of the reporting period following the change in the business model. The IASB staff and certain IASB board members noted that the IASB tried to prevent entities from “cherry picking” the date to account for reclassifications in achieving a more favourable outcome. FASB board members suggested that the boards might want to consider accounting for reclassifications as of the end of the reporting period in which the change in business model occurs (as opposed to the first day of the first reporting period following the change).

The boards tentatively agreed to require reclassifications of financial assets when the business model changes (expected to be very infrequent). The boards will discuss the accounting and disclosures related to reclassifications of assets at a future meeting.

 


[1] At their February 2012 joint meeting, the boards tentatively agreed that, in a manner consistent with IFRS 9 Financial Instruments, a financial asset could be eligible for a measurement category other than fair value with changes in fair value recognised in net income (FV-NI), if, at initial recognition, the "contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding."

[2] The FASB’s tentative model includes a FV-OCI measurement category for eligible debt instruments.

[3] Under IFRS 9, an entity may make an irrevocable election at initial recognition to present fair value gains and losses on an investment in an equity instruments in OCI. That option is not included in the FASB’s tentative model under which such investments would be measured at FV-NI.

[4] As tentatively decided at the joint meeting in April 2012, financial assets would qualify for amortised cost if the assets are held within a business model whose objective is to hold the assets to collect contractual cash flows.