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Financial Instruments: Classification and Measurement

Date recorded:

The fair value option

The Board discussed the tentative decisions reached at the February Board meeting regarding the fair value option, that is, to recognise the total fair value change in profit or loss and recognise the portion attributable to changes in own credit risk in other comprehensive income with an offsetting entry to profit or loss.

The staff noted that all the decisions on various issues related to fair value option were split and therefore suggested that the Board asked in the Exposure Draft constituents questions on alternative views related to these issues.

The Board agreed to describe in the Exposure Draft an alternative view that would require to recognise changes in own credit in equity. Some Board members disagreed as in their view such question would suggest that other comprehensive income and equity are interchangeable. Moreover, they questioned why such solution is proposed for financial liabilities to which fair value option was applied and not to, for example, convertible debt.

The Board agreed to ask the constituents whether they preferred the two-step approach (to recognise the total fair value change in profit or loss and recognise the portion attributable to changes in own credit risk in other comprehensive income with an offsetting entry to profit or loss) or a direct entry of the credit risk element in other comprehensive income.

The Board also agreed to ask constituents a question whether such tentative decision would create a mismatch in cases where an entity is matching a liability with a non-derivative asset. The Board agreed to suggest an alternative solution that would require the entity to recognise the liability's entire fair value change in profit or loss if the proposed approach created a mismatch with related assets.

One Board member also suggested that the ED should seek feedback on whether the credit risk component should include both change of credit standing and price of credit. He explained that the FASB has tentatively agreed that the amount separately presented in the performance statement would reflect only the change of entity's creditworthiness and not a change in the price of credit. The Board agreed.

Cost exception for some derivative contracts over unquoted equity instruments

Without much discussion the Board confirmed its previous tentative decision that there should not be a cost exception for any derivatives.

Other issues

The Board discussed whether to allow reclassification of financial liabilities between amortised cost and fair value. The majority of Board members agreed that no reclassification should be allowed as the guidance reflects the IAS 39 requirements (where reclassifications were prohibited) and there were no requests to allow reclassification of financial liabilities.

Some Board members suggested that as some of the liabilities are directly linked to financial assets, when those assets are reclassified in line with IFRS 9 (as the business model changes), this reclassification would have potential to create accounting mismatch without an equivalent guidance for financial liabilities.

Other Board members disagreed. Some expressed the view that the Board is trying to address a problem that does not exist and urged the Board to address the real issues.

Finally, the Board agreed not to allow reclassifications of financial liabilities and to carryforward the requirements in IAS 39. Nonetheless, given the discussion, the Board decided to include in the Basis for Conclusion a reasoning why this question was not addressed at this point (IAS 39 carryforward, limited project to address the issue of own credit). The Board also agreed to re-discuss the issue when the overall financial instruments accounting is discussed with the FASB.

Without much discussion the Board agreed to carryforward the subsequent measurement requirements in IAS 39 for loan commitments and financial guarantee contracts.


The Board considered transition requirements for the following two items that represent changes to requirements in IAS 39 Financial Instruments: Recognition and Measurement - fair value option guidance and elimination cost exception. The Board agreed to require full retrospective application of the new approach to account for financial liabilities to which the FVO has been applied.

The Board also agreed that the transition requirements for the elimination of the cost exception for financial liabilities should follow the requirements of IFRS 9:8.2.11 (for elimination of the cost exception for financial assets). That requirement would mean that any difference between fair value at the date of initial application and the previous carrying amount shall be recognised in the opening retained earnings of the reporting period that includes the date of initial application.

Correction list for hyphenation

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