Cover Note (Agenda Paper 3)

The IASB is undertaking a PIR of IFRS 9 and has started its review of IFRS 9 by looking at the classification and measurement approach. In September 2021, the IASB published a Request for Information (RFI). At this meeting, the IASB discussed a summary of the feedback and a plan for the next phase of the project.  

The staff asked the IASB, if they have any comments or question on the feedback summarised or the plan for the next phase of the project.

Feedback summary (Agenda Paper 3A)

Overall, the PIR feedback is positive.

Classification and Measurement

Complexity: Many commented that the principles-based approach in IFRS 9 reduced complexity. Respondents expressed mixed views about whether complexity was increased or reduced by the removal of the IAS 39 requirement to bifurcate derivatives embedded in financial assets and the ‘available for sale’ category.

Cost versus benefit: Some respondents said that generally the change from IAS 39 to IFRS 9 had not resulted in significant changes in the classification of financial assets, however, for some entities substantial costs and effort were required to transition to IFRS 9.

Business model for managing financial assets

Most respondents shared the view that generally the business model assessment achieves the IASB’s objective of providing users of financial statements with useful information about how an entity manages its financial assets to generate cash flows.

Consistency: Many respondents said the business model assessment is not always being applied consistently and asked the IASB to provide additional application guidance and illustrative examples.

Reclassification: Many respondents reported that reclassifications had been infrequent and that it has been well understood in practice that a change in business model as specified in IFRS 9 is a ‘high hurdle’. Respondents (particularly preparers) said the requirements are too restrictive and suggested the IASB change the requirements to be less restrictive.

Contractual cash flow characteristics

Most respondents shared the view that generally the contractual cash flow characteristics assessment works as intended. Respondents noted the two types of financial instruments as areas of application challenges—financial instruments with sustainability-linked features and contractually-linked instruments.

Equity instruments and OCI

Respondents expressed mixed views on this topic. Stakeholders hold differing and strong views relating to:

• The benefits of fair value measurement versus cost-based measurement for equity investments
• Distinguishing between ‘realised’ and ‘unrealised’ gains and losses
• The importance of reporting amounts in profit or loss versus in OCI and the role of OCI

Comments were focused on the scope of the election to present fair value changes in OCI (OCI presentation election), non-recycling of those fair value changes, and the effects of the changes introduced by IFRS 9.

Financial liabilities and own credit

Respondents did not provide a significant amount of feedback on this topic. Most respondents that provided feedback said the financial liabilities requirements generally worked well and the requirement to present own credit risk in OCI is a welcome change compared to IAS 39 and works as intended.

Modifications to contractual cash flows

Most respondents to this question, including most of the accounting firms, said that modification of contractual cash flows is one of the areas for which most questions arise in practice and that IFRS 9 could benefit from clarification and additional application guidance. Most respondents said that as a starting point, the requirements for modifications of financial assets and financial liabilities should be described using consistent wording.

Amortised cost and the effective interest method

Some respondents said the effective interest method is working as intended and the requirements are well understood. In contrast, most respondents to this question said that the effective interest method is an area that gives rise to many questions in practice which the IASB could make helpful clarifications and provide additional application guidance.

Respondents identified the most challenging and interpretative areas as:

• What to consider in estimating the effective interest rate and how to reflect uncertainty that arises from conditions attached to the contractual interest rate
• Assessing whether subsequent changes in estimates of contractual cash flows are accounted for prospectively or retrospectively through a cumulative catch-up adjustment.

Transition

Respondents did not provide a significant amount of feedback on this topic, however for those that did, they said the transition requirements generally worked well.

Other Matters

Other matters respondents think the IASB should consider include derecognition of financial assets, financial guarantee contracts, intercompany loans and non-financial contracts. The staff will present an analysis of feedback on other topics at a future meeting.

IASB discussion

The agenda papers were discussed together.

Classification and Measurement: Overall the IASB understand that the standard is working as intended. There were mixed views on whether complexity has increased or decreased. One IASB member would like to know the reasons why people believe complexity has increased. Another asked the staff to analyse whether application guidance is needed here, rather than any standard setting issues.

Business model for managing financial assets: The IASB note that this is an area where judgement is applied and would like to understand whether the standard does not provide sufficient guidance in order to make this judgement. As business models across entities are different it is expected that different conclusions will be reached. The IASB confirmed that further analysis would be needed and further evidence would be require before the topic is reopened.

Contractual cash flow characteristics: The IASB members agreed that sustainability-linked financial instrument is an area that should be looked at promptly. Some IASB members talked about looking at this in a more holistic manner. The Chair wanted to reiterate that the IASB role was to ensure transparency, efficient and accountability to capital markets. He asked the staff to analyse what information would be useful to the users of the accounts in relation to green lending. Other IASB members asked the staff to find out from preparers and users how the IASB can help the in applying IFRS 9 to these specific instruments, without causing disruption on other products. A couple of Board members referred to the IFRIC agenda decision on TRTLO III in June 2021 and asked the staff to ensure this is considered when looking at this topic. The IASB also noted that after analysing this from a financial asset perspective, the staff should also consider the accounting from the issuers point of view i.e. the financial liability.

Modification to contractual cashflows: The chair asked that any changes made on modification or derecognition links to reclassification changes made to IAS 32 as part of the FICE project, and does not create any gaps between the two standards.

Amortised cost and the effective interest method: The IASB agreed this is an area that should be analysed further in order to determine whether this is an application issue and whether further application guidance related to the basic principles would be helpful.

Equity instruments and OCI: Some IASB members were of the view that the point raised in relation to this are not new and the IASB were aware of them during the development of IFRS 9. New evidence would be required in order to require a change in the standard, for example if investment decision have been impacted through this change. An IASB member asked if the staff could obtain views from insurance companies who have applied IFRS 9. One IASB member requested that a steer is given to the market early if this is an area that the IASB will look to change. The IASB asked the staff to find out if the information in the accounts currently is sufficient for users of the accounts.  

Transition: The staff confirmed that they will not bring back feedback on IFRS 9 transition requirements to a future meeting, given that the feedback was minimal and was positive. One IASB member was keen to understand the feedback and asked how many users responded in this area. The staff confirmed that only one user responded to the RFI. However this topic was raised during the outreach, and users generally said the reliefs provided in the transition requirements were helpful and no concerns were raised. 

IASB discussion

The agenda papers were discussed together.

Classification and Measurement: Overall, IASB members understand that the Standard is working as intended. There were mixed views on whether complexity has increased or decreased. One IASB member asked the reasons why people believe complexity has increased. Another asked the staff to analyse whether application guidance is needed here, rather than standard-setting.

Business model for managing financial assets: IASB members noted that this is an area where judgement is applied and asked to understand whether the Standard does not provide sufficient guidance in order to make this judgement. As business models across entities are different, it is expected that different conclusions will be reached. IASB members confirmed that further analysis would be needed and further evidence would be required before the topic is reopened.

Contractual cash flow characteristics: IASB members agreed that sustainability-linked financial instruments are an area that should be looked at promptly. Some IASB members talked about looking at this in a more holistic manner. The Chair reiterated that the IASB’s role was to ensure transparency, efficient and accountability to capital markets. He asked the staff to analyse what information would be useful to the users of the accounts in relation to green lending. Other IASB members asked the staff to find out from preparers and users how the IASB can help the in applying IFRS 9 to these specific instruments, without causing disruption on other products. A couple of IASB members referred to the IFRIC agenda decision on TRTLO III in February 2022 and asked the staff to ensure this is considered when looking at this topic. The IASB also noted that after analysing this from a financial asset perspective, the staff should also consider the accounting from the issuers point of view, i.e. the financial liability.

Modification to contractual cash flows: The Chair asked that any changes made on modification or derecognition links to reclassification changes made to IAS 32 as part of the FICE project, and does not create any gaps between the two standards.

Amortised cost and the effective interest method: IASB members agreed that this is an area that should be analysed further in order to determine whether this is an application issue and whether further application guidance related to the basic principles would be helpful.

Equity instruments and OCI: Some IASB members were of the view that the points raised in relation to this are not new and that the IASB was aware of them during the development of IFRS 9. New evidence would be required in order to require a change in the Standard, for example if investment decisions have been impacted through this change. An IASB member asked if the staff could obtain views from insurance companies who have applied IFRS 9. One IASB member requested that a steer is given to the market early if this is an area that the IASB will look to change. The IASB asked the staff to find out if the information in the accounts currently is sufficient for users of the accounts.  

Transition: The staff confirmed that they will not bring back feedback on IFRS 9 transition requirements to a future meeting, given that the feedback was minimal and was positive. One IASB member was keen to understand the feedback and asked how many users responded in this area. The staff confirmed that only one user responded to the RFI. However, this topic was raised during the outreach, and users generally said the reliefs provided in the transition requirements were helpful and no concerns were raised.

Plan for PIR Phase 2 (Agenda Paper 3B)

Summary of the topics for discussion in PIR Phase 2 including their expected timing:

• Contractual cash flow characteristics (including financial assets with sustainability-linked features and contractually linked instruments): April–May 2022
• Business model assessment: Q2/Q3 2022
• Equity instruments and OCI: Q2/Q3 2022
• Modifications to contractual cash flows: Q2/Q3 2022
• Amortised cost and the effective interest method: At same meeting as modifications
• Other matters: Q3 2022

The IASB plans to start the PIR of the impairment requirements in the second half of 2022.

There was no discussion of this paper.