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Financial instruments – Limited amendments to IFRS 9 (classification and measurement)

Date recorded:

The IASB discussed the redeliberations of the IASB’s exposure draft ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9 (Proposed amendments to IFRS 9 (2010)) (‘the Limited Amendments ED’).

Interaction between the classification and measurement of financial assets and the accounting for insurance contracts liabilities

The staff noted that the feedback received about the interaction between the classification and measurement of financial assets and the accounting for insurance contract liabilities is consistent with the other feedback received on the Limited Amendments ED. That is, most respondents support the proposed introduction of the FVOCI mandatory measurement category for financial assets and agree that it contributes to achieving the objectives of the IASB. However, as noted above, many of those commenting on the interaction wanted additional changes to address accounting mismatches for entities that have insurance contract liabilities.

The view of the IASB staff was that the introduction of a fair value through other comprehensive income category was sufficient to address the concerns of insurance companies. Although some IASB members expressed the view that it may not be appropriate to finalise IFRS 9 Financial Instruments without a complete understanding of the interaction with the insurance contracts IFRS, the majority considered that it was important to finalise IFRS 9 as there is an urgent need for this to be published.

The interaction of IFRS 9 with insurance contracts will be discussed during the re-deliberation of the insurance contracts IFRS, rather than being separately addressed during the finalisation of IFRS 9.

Presentation and disclosure

In November 2013, the IASB tentatively decided to confirm its proposal in the Limited Amendments ED to introduce FVOCI into IFRS 9 as a mandatory measurement category. At that time, the IASB also tentatively decided to confirm that when an entity changes it business model for managing its financial assets, it must reclassify all affected financial assets according to the reclassification mechanics set out in IFRS 9 and the Limited Amendments ED. The staff further recommended that the IASB confirms the following related proposals for disclosures and presentation:

  1. Paragraph 12B in IFRS 7 Financial Instruments: Disclosures should be extended to reclassifications into and out of the mandatory FVOCI measurement category. As a result, this disclosure will apply to all reclassifications occurring in accordance with IFRS 9.
  2. Paragraph 12C in IFRS 7 should be extended to reclassifications from FVPL to FVOCI. As a result, this disclosure will apply to all reclassifications from FVPL.
  3. Paragraph 12D in IFRS 7 should be extended to (i) reclassifications from FVPL to FVOCI and (ii) reclassifications from FVOCI to amortised cost.
  4. Paragraph 82 in IAS 1 should be amended to include reclassifications from FVOCI to FVPL. As a result, when an asset is reclassified from FVOCI to FVPL, the amount previously recognised in OCI that is reclassified to P&L will be separately presented in the statement of comprehensive income.

The Board agreed with the staff’s recommendations and no issues were noted.

The staff further recommended that the Board confirms the proposal that the judgement involved in the assessment of an asset’s contractual cash flow characteristics should be added to IAS 1 Presentation of Financial Statements as an example of a judgement that could have a significant effect on the amounts recognised in the financial statements.

This relates to the assessment of an asset’s contractual cash flow characteristics where a financial asset will be eligible for classification at other than FVPL if it:

  1. Has a regulated interest rate if that rate provides consideration that is broadly consistent with consideration for the passage of time and does not introduce exposure to risks or volatility in cash flows that are inconsistent with the basic lending-type return; and/or
  2. Is acquired with a significant premium or discount and is prepayable at an amount that represents par plus accrued and unpaid interest (and may include reasonable additional compensation for the early termination of the contract) but the fair value of the prepayment feature on initial recognition of the financial asset is insignificant.

The Board agreed with the staff’s recommendations and no issues were noted.

Transition to IFRS 9 — Presentation of comparative information by first-time adopters of IFRS and early application of IFRS 9

The staff noted that on transition to IFRS 9, existing IFRS preparers are not required to restate comparative periods but, on balance, the staff believe that FTAs should be granted relief from presenting comparative information that complies with IFRS 9 if the beginning of their first IFRS reporting period is earlier than the effective date of IFRS 9 plus one year. This relief should only apply to the FTA’s applying the completed version of IFRS 9 once it is published and equally entities would not be permitted to newly early apply previous versions of IFRS 9 if their date of initial application of IFRS 9 is six months or more after the completed version of IFRS 9 is issued.

Several Board members expressed different views on whether or not a previous version of IFRS 9 should be available to apply once the final version has been completed and published and if yes how long that period of time should be.

The Board agreed with the staff’s recommendations.

Early application of IFRS 9 by FTAs and existing IFRS preparers

The staff recommended that existing IFRS preparers and FTAs:

  1. Are permitted to early apply the completed version of IFRS 9; and
  2. Are not permitted to newly early apply a previous version of IFRS 9 if their date of initial application is six months or more after the completed version of IFRS 9 is issued—however, if an entity has early applied a previous version before that six month window expires, the entity is permitted to continue to apply that version until the completed version of IFRS 9 becomes mandatorily effective.

The Board agreed with the staff’s recommendations.

Transition to IFRS 9 — Application of particular classification and measurement requirements and a transition issue on impairment

The staff recommend that the IASB re-affirm that in terms of transition and disclosure if it is impracticable (as defined in IAS 8 Accounting Policies, Changes in Estimates and Errors) on transition to IFRS 9 for an entity to assess a modified time value of money component of an asset’s interest rate based on the facts and circumstances that existed at the initial recognition of the financial asset, then the entity must assess the contractual cash flow characteristics of that financial asset without taking into account the specific requirements related to the modification of the asset’s interest rate. In addition, in those cases, the entity will be required to disclose the carrying value of the affected financial assets until those assets are derecognised.

The Board agreed with the staff’s recommendations with no issues noted.

The staff further believe that in particular cases it may be impracticable (as defined in IAS 8) for an entity to determine whether the fair value of the prepayment feature was insignificant when the asset was initially recognised. For example, that may be the case if the entity did not bifurcate the embedded prepayment feature and did not account for it separately at fair value under IAS 39. In those cases, the staff recommend that a transition provision is added whereby an entity shall assess the contractual cash flow characteristics of that financial asset without taking into account the exception for prepayment features.

The staff further noted that when the above applies then one would be required to disclose the carrying value of prepayable financial assets that, on transition to IFRS 9, were assessed without taking into account the exception because it was impracticable to do so. Such disclosure would be required until those prepayable financial assets are derecognised.

The Board agreed with the staff’s recommendations with no issues noted.

The staff recommend confirming the transition proposals in the Limited Amendments ED related to the FVO for entities that have already applied a previous version of IFRS 9 and are subsequently applying the amended C&M requirements in the completed version of IFRS 9. Specifically, those entities:

  1. Are required to revoke previous FVO elections if an accounting mismatch no longer exists at initial application of the completed version of IFRS 9 as a result of the amended C&M requirements, but are not permitted to revoke previous FVO elections if an accounting mismatch continues to exist; and
  2. Are permitted to apply the FVO to new accounting mismatches that are created by the initial application of the amended C&M requirements in the completed version of IFRS 9, but are not permitted to newly apply the FVO to accounting mismatches that already existed before the initial application of the completed version of IFRS 9.

The Board agreed with the staff’s recommendations with no issues noted.

On transition provisions and the initial application of the expected credit loss model, the staff noted that these are as relevant for FTAs as for existing preparers. Hence the staff recommended that the same transition provisions be applied by FTAs.

The Board agreed with the staff’s recommendations with no issues noted.

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