Post-implementation Review (PIR) of IFRS 9 — Classification and measurement

Date recorded:

Cover note (Agenda Paper 3)

In September 2021, the IASB published Request for Information (RFI) Post-implementation Review—IFRS 9 Financial Instruments—Classification and Measurement.

At this meeting the IASB discussed feedback received in response to the RFI with regard to:

  • Equity instruments and other comprehensive income (OCI)
  • Literature review update

The IASB was not asked to make any decisions at this meeting.

The staff also provided the Board with an updated plan for discussions of:

  • Equity instruments and OCI (June/July)
  • Modifications to contractual cash flows (Q3)
  • Amortised cost and the effective interest rate method (Q3)
  • Business model assessments (Q3)
  • Other matters (Q3)

Equity instruments and other comprehensive income (Agenda Paper 3A)

This agenda paper provided a review of academic literature on equity instruments and OCI.

Respondents expressed mixed views about the accounting for equity instruments. Stakeholders continue to hold differing, and often strong, views about:

  • The role of OCI and whether it should be used to distinguish between ‘realised’ and ‘unrealised’ gains and losses
  • The importance of reporting amounts in profit or loss versus in OCI and when amounts in OCI are recycled or not

The feedback on the PIR is very polarised between stakeholders that are supportive of (or indifferent to) the criteria and requirements and those that feel strongly the election should be available for a wider scope of investments.

The staff structured their analysis to distinguish between:

  • The OCI presentation election as intended
  • Requests to broaden the scope of the OCI presentation election
  • The cost exemption for unlisted equity instruments

OCI presentation election as intended

The feedback highlighted that there were concerns around the requirements being applied consistently. Respondents specifically commented on the lack of clarity in paragraph 5.7.5 of IFRS 9 on the criteria for an investment to be eligible for the OCI presentation election, which is one of the leading causes of the option being applied to a wider scope of instruments than originally intended. Respondents said that there is a significant difference between an investment not being held for trading (as required in paragraph 5.7.5 of IFRS 9) and one where ‘presenting fair value gains and losses in profit or loss may not be indicative of the performance of the entity’ as described in paragraph BC5.22 of the Basis for Conclusions on IFRS 9. In their view, this could lead to the designation of equity investments under the OCI presentation election that is not consistent with the IASB’s intention.

The IASB designed the OCI presentation election for equity instruments for which changes in value do not reflect the performance of the entity. Changes in the value of equity instruments held for trading always reflect the performance of the entity (i.e. its trading performance), and therefore are excluded from the OCI presentation election. For other equity instruments, IFRS 9 is designed so that an entity can determine whether the equity instrument is relevant to its performance. If it is then fair value changes are gains and losses on disposal are recognised in the profit or loss. If not, then fair value changes and gains and losses on disposal could be recognised in OCI. The staff therefore understand the feedback to clarify the scope of equity investments to which OCI presentation election can be applied.

Requests to broaden the scope of the OCI presentation election

Respondents who believe the OCI presentation election should be available for a wider scope of instruments tend to strongly favour recycling of amounts presented in OCI. The staff are therefore of the view that the requests for OCI recycling are not requests to amend the current OCI presentation election in IFRS 9. Rather, those requests are asking for a new classification category for equity instruments that they think would better reflect a long-term business model or strategy.

The staff believe that amending IFRS 9 to add a new classification category for equity instruments would add complexity and would only be justified if there is evidence that there is a significant deficiency in the information that investors are being provided. There does not appear to be an indication that the use of the OCI presentation option has led to a reduction in the usefulness of information provided to users of the financial statements or a disincentive for entities to make long-term investments.

Cost exemption for unquoted equity investments

A few respondents commented on the removal of the exemption to fair value measurement in IAS 39 for ‘investments in equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured’. These respondents argued that the cost of estimating the fair value of unquoted instruments exceeds the benefits of this information to investors, because entities often have limited access to information needed for such measurements and it is especially challenging to justify the techniques and key assumptions used in valuing some unquoted equity investments such as start-ups. These respondents further claimed that the use of unobservable inputs and judgements by management results in a high degree of measurement uncertainty.

The staff will present further analysis of the matters discussed in this paper at a future meeting.

IASB discussion

IASB members noted that most respondents that commented on equity investments said that the requirements in IFRS 9 are largely working as intended. In addition, most respondents noted that the option to present fair value changes on investments in equity instruments in OCI works as the IASB intended and that they are not aware of significant challenges in applying the principles and requirements in IFRS 9 in this regard.

It was noted that some companies, especially insurance companies that are yet to use IFRS 9, have strong views about being able to recycle gains and losses on equity instruments. In addition, some respondents noted that whilst the equity investment is held, OCI classification is appropriate as fair value movements are not relevant to their performance. However, in the period they dispose of the investment, it is relevant to their performance and should therefore be realised. An IASB member noted that holding an equity instrument and disposing of it are two different economic circumstances and may therefore warrant two different accounting treatments. This IASB member agreed with the staff that recycling would not result in users getting more information about realised gains or losses but disagreed that it would not provide better information. His view was that if this information is in the P&L in the year of the disposal rather than in the notes to the accounts, it has more prominence.

The Chair noted that if the IASB was to allow recycling on disposal, this would necessitate an impairment assessment on the investment.

Many IASB members were cautious about changing IFRS 9, given many of the respondents felt it was working well. In addition, when IFRS 9 was developed, there was feedback that the OCI presentation election may disincentivise entities from long-term equity investments, however respondents reported that they had not identified any evidence that the requirements had impacted entities’ investment decisions. One IASB member noted that standard-setting should only occur if the Standard is not working property and that if changes were to be made, the IASB should balance complexity of the change with the users needs.

The staff noted that any changes could not be looked at in isolation and the changes would be bigger than IFRS 9 and the PIR, as it would question the Conceptual Framework and the role of OCI.

No decisions were made on this paper.

Literature review update (Agenda Paper 3B)

The staff reviewed academic literature and will take this into consideration when analysing the feedback to the IFRS 9 PIR.

IASB discussion

The staff summarised the key findings.

IASB members found this paper very useful and believed it will be helpful during their work on the PIR.

IASB members noted the following points:

  • After the implementation of IFRS 9, most financial instruments remained in the same category as under IAS 39
  • It was interesting to note that the percentage of investments in long-term equity instruments did not decrease after the implementation of IFRS 9 which shows that the change in classification requirement did not disincentivise companies to make long term investments
  • Disclosures explaining the presentation election increased on implementation of IFRS 9
  • In the US, when FVTOCI classification was eliminated, companies did alter their investment portfolios

No decisions were made on this paper.

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