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

Date recorded:

The Boards continued their discussion on reducing differences between the classification and measurement guidance in IFRS 9 and the FASB’s tentative classification and measurement model.


Scope of fair value through other comprehensive income for debt instruments

During the May joint Board meetings, the Boards tentatively decided to introduce a fair value through other comprehensive income (FVTOCI) category for debt instruments with amortised cost and FVTOCI having defined business models and fair value through profit or loss (FVTPL) being a residual category. Under both IFRS 9 and the FASB’s tentative model, instruments that do not meet the contractual cash flow characteristics assessment (i.e. solely principal and interest) would be measured at FVTPL.

During this meeting the Boards were asked whether an instrument would have to pass the contractual cash flow characteristics assessment to be classified as FVTOCI. The Boards both agreed that the FVTOCI category should only be available for financial assets that pass the contractual cash flow characteristics assessment and are managed within the relevant business model.


Fair value option

IAS 39 Financial Instruments: Recognition and Measurement provided a fair value option for both financial assets and liabilities if 1) doing so eliminates or significantly reduces an accounting mismatch, 2) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis or 3) the financial asset or financial liability contains one or more embedded derivatives and the entity elects to account for the hybrid contract in its entirety. IFRS 9 retained the eligibility conditions for designating financial liabilities under the fair value option, but on the basis that two of the eligibility conditions for designating financial assets under the fair value option were considered unnecessary under IFRS 9, IFRS 9 currently permits a fair value option for financial assets only when doing so would eliminate or significantly reduce an accounting mismatch.

The FASB’s tentative model currently includes a fair value option for a group of financial assets and financial liabilities if the entity manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) and the entity provides information on that basis to the reporting entity’s management. The FASB’s model also includes a conditional FVO for both hybrid financial assets and hybrid financial liabilities to avoid bifurcation and the separate accounting for an embedded derivative. However, based on the tentative decisions made during the May joint meetings, hybrid financial assets are not eligible for bifurcation.

The FASB staff recommended an irrevocable fair value option for financial assets at initial recognition when doing so eliminates or significantly reduces a measurement or recognition inconsistency. For financial liabilities, the FASB staff recommended an irrevocable fair value option at initial recognition when doing so results in more relevant information because it either eliminates or significantly reduces a measurement or recognition inconsistency or a group of financial liabilities or financial assets and financial liabilities managed and its performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy. For hybrid financial liabilities, the FASB staff recommended an irrevocable fair value option at initial recognition unless the embedded derivative does not significantly modify the cash flows that otherwise would be required for the contract or it is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative is prohibited.

One of the FASB members expressed his concerns with the staff recommendation stating that he did not support options and would prefer a requirement to measure item(s) at fair value if certain criteria are met. The FASB Chair expressed similar concerns. The Board members discussed how to set the appropriate criteria for requiring fair value measurement of financial liabilities or groups of financial assets and financial liabilities. The FASB Chair asked the staff if the revised criteria being discussed would address the needs of constituents for a fair value option if it were presented as an option rather than a requirement and the staff agreed. The FASB tentatively decided to provide an irrevocable fair value option at initial recognition for hybrid financial liabilities unless the embedded derivative or derivatives do not significantly modify the cash flows that otherwise would be required by the contract or it is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative is prohibited. The FASB also tentatively decided to provide an irrevocable fair value option at initial recognition for a group of financial assets and liabilities if the entity manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) on a fair value basis and the entity provides information on that basis to the reporting entity’s management.

The IASB tentatively decided to extend the current fair value option in IFRS 9 for financial assets to debt investments that would otherwise be measured at FVTOCI if doing so eliminates or significantly reduces an accounting mismatch.

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