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Financial instruments: Classification and measurement

Date recorded:

The Board discussed the following topics in relation to its proposed limited amendments to the classification and measurement (C&M) requirements in IFRS 9 Financial Instruments:

  • Relief to accelerate application of ‘own credit’ requirements;
  • Two additional transition issues related to the limited amendments to IFRS 9 and one related issue for impairment; and
  • Due process considerations.

Own credit requirements

The Board discussed whether ‘own credit’ requirements for financial liabilities in IFRS 9 should be accelerated so they may be applied sooner than the requirements for the C&M of financial assets. ‘Own credit’ refers to the risk that the issuer will fail to perform on that particular liability and does not necessarily relate to the creditworthiness of the issuer. The IASB staff noted that ‘own credit requirements’ have received strong support from constituents. However, in the absence of an amendment, they would generally not be applied before IFRS 9 is finalised.

As a result, the staff presented four possible approaches to respond to constituent feedback:

  • Approach A: Amend IAS 39 Financial Instruments: Recognition and Measurement to incorporate the requirements for the presentation of ‘own credit’ gains or losses on financial liabilities designated at fair value through profit or loss under the fair value option.
  • Approach B: Modify the early application guidance in IFRS 9 (2010) and later versions of IFRS 9 to permit the early application of the ‘own credit’ requirements.
  • Approach C: Once IFRS 9 is finalised, permit the early application of the ‘own credit’ requirements.
  • Approach D: Do not accelerate the application of the ‘own credit’ requirements.

Many Board members expressed support for Approach C. While these Board members acknowledged that the approach was inconsistent with the Board’s previous tentative decision to eliminate the phased implementation of IFRS 9, they noted the usefulness of reporting information related to ‘own credit’. Many of these Board members noted that their preference for Approach C as opposed to Approach B was based on a perception that any amendment to IFRS 9 (2010) would have a limited lifespan given the IFRS 9 project in nearing completion. However, they noted that a significant delay in the broader IFRS 9 project would result in a preference for Approach B.

One Board member expressed support for Approach D, noting that permitting early application of the ‘own credit’ requirements without having to apply the other requirements of IFRS 9 reduces comparability and further embeds the phased application of IFRS 9. Another Board member expressed support for Approach A to enhance the quality of that standard.

However, when put to a vote, the Board tentatively supported application of Approach C.

Transitional issues

The Board was asked to consider two transitional issues related to the limited amendments to IFRS 9, and one related issue for impairment.

The first issue the Board was asked to consider was whether, in the period in which the C&M chapters of IFRS 9 are initially applied, the following disclosures should be required:

  • Line item amounts that would have been reported in accordance with IFRS 9 for prior periods; and/or
  • Line item amounts that would have been reported in accordance with IAS 39 for the current period.

In relation to the prior period disclosure, the staff noted that questions have been asked about how to apply the requirements in paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors within the context of retrospective application when comparative periods are not required to be restated at transition (under the tentative decisions to date for the new C&M and impairment models, comparative periods need not be restated and restatement is only allowed if it does not involve the use of hindsight).

One Board believed that in the period in which IFRS 9 is initially applied, disclosure of the prior period amounts (under IFRS 9) and current period amounts (under IAS 39) should be required. He noted that application of the proposed C&M chapters represented a significant change, and thus, was concerned that comparability would be masked without such disclosures.

However, other Board members supported the lack of a disclosure in this area. The primary reason expressed for this view was in relation to the usefulness of such a disclosure. Specifically, Board members considered the interaction between the C&M and hedge accounting proposals and questioned whether disclosing current period amounts based on the IAS 39 requirements would result in useful information. They noted that disclosing IAS 39-based hedge accounting information would be information based on highly speculative assumptions (about what might have been if IAS 39 had been applied) that could distort comparability.

When put to a vote, Board members tentatively decided that in the period in which IFRS 9 is initially applied, disclosure of the line item amounts that would have been reported in prior periods in accordance with the C&M model in IFRS 9 and current period line item amounts that would have been reported in accordance with the C&M model in IAS 39, should not be required.

The Board was then asked to consider whether it should reverse its previous tentative decision and require current-period transition disclosures for impairment (i.e., disclosure of the current period line item amounts that would have been reported in accordance with the impairment model in IAS 39).

Board members generally questioned why, if the new model results in more useful information, entities should be required to continue applying the IAS 39 impairment model after they have transitioned to the new model. Additionally, Board members noted that the disclosures required when applying the new impairment model for the first time and on an ongoing basis would provide information about the effect of changes in measurement upon applying IFRS 9. However, one Board member preferred that disclosures offer more transparency about the impact of applying the new impairment model. Specifically, he requested that a disclosure be required to reconcile the ending IAS 39 impairment balance to the beginning IFRS 9 impairment balance; specifying, for example, the results of reclasses, remeasurement, the transitional impact of the C&M proposals and the transitional impact of the impairment proposals. Many Board members supported this proposal.

When put to a vote, Board members tentatively decided that in the period in which IFRS 9 is initially applied, disclosure of the current period line item amounts that would have been reported in accordance with the impairment model in IAS 39 should not be required. However, a reconciliation of the ending IAS 39 impairment balance to the beginning IFRS 9 impairment balance should be required.

Finally, the Board was asked to consider whether, after IFRS 9 is finalised and becomes the only version of IFRS 9 available for early application, previous versions of IFRS 9 should immediately cease to be available for early application, or whether the IASB should instead allow lead time before the revised early application provisions become effective. This question was raised in the context of continued application of IFRSs (i.e., not for a first-time adopter of IFRSs, which will be considered separately).

The staff recommended a six-month lead time. The example provided by the staff was that if all chapters of IFRS 9 were finalised on 30 June 2013, entities would no longer be permitted to choose to early apply previous versions of IFRS 9 in reporting periods beginning on or after 1 January 2014 (unless the entity was already applying a previous version of IFRS 9 before 1 January 2014). The staff believed that a six-month lead time was reasonable and would enable entities to manage their implementation projects and plan early application of IFRS 9.

Board members tentatively agreed with the staff recommendation.

Due process

The staff described the required and optional due process steps that have been undertaken in developing the proposed limited amendments to IFRS 9 and asked the IASB whether it was satisfied that all necessary due process steps had been complied with in advance of issuing an exposure draft. The staff also requested permission to ballot an exposure draft and recommended a comment period of 120 days in accordance with the IASB’s Due Process Handbook.

One Board member questioned whether the exposure draft for the limited amendments to IFRS 9 should be published in isolation, or instead, published in conjunction with the exposure draft for the impairment project. The staff noted if the exposure drafts for both projects were completed concurrently, the staff would seek to include both sets of proposals in the same Invitation to Comment. However, if those proposals are not made available concurrently, the staff would issue separate Invitations to Comments so as not to delay finalisation of any chapter of the IFRS 9 project.

No other objections were expressed in relation to the staff’s recommendations.

The staff asked Board members whether any planned to dissent to the proposals. One Board member noted an intention to dissent, while two other Board members noted they were considering dissention. Reasons for (possible) dissention included:

  • A perceived lack of conceptual basis/need for the fair value through other comprehensive income category and the articulation of the respective business models.
  • A belief that the proposals were inappropriately reintroducing intent-driven accounting.
  • Inability to achieve one of the primary objectives of the limited scope project (i.e., to reduce differences with the FASB’s model).
  • Perceived complexity of the proposals.