Financial liabilities and own credit (Agenda Paper 3A)

The IASB has been discussing feedback to the Request for Information (RFI) Post-implementation Review of IFRS 9—Classification and Measurement since March 2022.

At this meeting, the IASB discussed the feedback on the RFI concerning the clarity and suitability of the requirements for financial liabilities, including the presentation of own credit changes in other comprehensive income (OCI) for financial liabilities designated at fair value through profit or loss (FVTPL). As the feedback indicated that there are no fundamental questions, the IASB was asked to decide whether, and if so when, to take further action to respond to these findings.

Summary of general feedback

Most respondents said that the requirements for financial liabilities generally worked well, and that the requirement to present own credit risk in OCI is a welcome change compared to IAS 39.

However, a few respondents mentioned the difficulty of separating fair value changes resulting from changes in own credit risk from fair value changes associated with other risks. Respondents’ views on potential actions needed were mixed, with some suggesting that the IASB provide illustrative examples while others suggested that all fair value changes should be recognised in OCI.

Those few respondents also suggested that the requirements for separating fair value changes resulting from changes in own credit risk should be extended to all financial liabilities that are measured FVTPL (instead of applying only to financial liabilities designated at FVTPL).

Staff analysis

Determining the effects of changes in own credit risk

The staff noted that the questions around how to determine the changes in fair value attributable to a financial liability’s credit risk, are similar to the questions the IASB received on the 2010 ED Own Credit Risk Exposure Draft. The IASB responded at the time by clarifying the difference between creditworthiness of the entity and the credit risk of a liability (paragraph B5.7.13 of IFRS 9), and that a change in a liability’s credit risk does not include changes in asset-specific performance risk (paragraphs B5.7.14 and B5.7.15 of IFRS 9).

Based on the feedback on the RFI, the staff is of the view that there are no fundamental questions about the suitability and clarity of the requirements for financial liabilities, including the presentation of changes in own credit risk in OCI. The staff therefore recommend that no further action is taken on this matter.

Requests to broaden the scope

The staff noted that paragraph BC5.53 of the Basis for Conclusions on IFRS 9 explains the IASB’s rationale in developing the requirements of IFRS 9 that it would not be appropriate to present fair value changes on financial liabilities that are held for trading in OCI. The staff also notes that, when developing IFRS 3, the IASB concluded that all liabilities for contingent payments should also be accounted for at FVTPL as this would faithfully represent the fair value of the liability. The staff therefore recommend that no further action is taken on this matter.

represent the fair value of the liability. The staff therefore recommend that no further action is taken on this matter.

IASB discussion

IASB members were overall supportive of the staff suggestions that no further action should be taken in relation to the questions about the determination of changes in the entity’s own credit risk and about the scope of fair value through OCI (FVTOCI). One IASB member questioned the statement that the proposed criteria to derecognise a financial liability in case of settlement via electronic transfer could not be applied to receivables. The staff clarified that the concept of cash in transit is outside the scope of IFRS 9 and that it is part of the cash flow statement project. The staff also noted that in the previous meeting it was agreed that the transition provisions in the exposure draft would be retrospective application without requiring the restatement of comparative balances and, considering that the proposed amendment for cash flows is going to be included in the same exposure draft, it is going to have the same transition approach.

Responding to the feedback and next step (Agenda Paper 3B)

At this meeting, the IASB was asked to decide whether sufficient work has been completed to conclude the PIR and for the staff to prepare the Report and Feedback Statement on the PIR.

Staff analysis of the work undertaken

Following the publication of the RFI, the IASB members and the staff have undertaken outreach activities with a wide range of stakeholders and other consultative bodies, performed an academic literature review and summarised feedback on the RFI from 952 comment letters.

Questions in the RFI that did not require decisions by the IASB

Classification and measurement: Question 1 in the RFI about the respondents’ application of the IFRS 9 classification and measurement requirements. The PIR feedback is positive and provided the same views and issues as the feedback the IASB has received previously through extensive dialogue with stakeholders both before and after IFRS 9 was issued. There were no application questions that required decisions by the IASB in relation to this question of the RFI.

Transition: Question 8 in the RFI about whether the transition requirements worked as intended and the transition disclosures achieved an appropriate balance between reducing costs and useful information. The IASB was not asked to make any decisions in relation to this topic since almost all respondents acknowledged that the requirements and reliefs provided on transition to IFRS 9 achieved a good balance between costs for preparers and benefits for users.

Questions in the RFI that did not require decisions by the IASB

At its meetings between April 2022 and October 2022 the IASB considered whether to take any action on matters identified in the PIR, for which the IASB’s response to feedback received are presented below:

Classification and measurement: The IASB was not asked to make any decisions in relation to this question.

Business model for managing financial assets: No further action needed.

Contractual cash flow characteristics:

• ESG-linked features and contractually linked instruments: The IASB decided to start a standard-setting project to clarify particular aspects of the requirements for assessing the contractual cash flow characteristics of a financial asset
• Other application questions: Following consultation with ASAF members on the application questions, the IASB decided either to consider the matter as part of other standard-setting projects or take no further action

Equity instruments and OCI: The IASB decided not to make any changes to the requirements in IFRS 9 because it did not identify any evidence that there are fundamental questions about the suitability or clarity of the requirements or that the benefits to users of financial statements are significantly lower than expected. However, to improve the transparency of amounts presented in OCI, the IASB tentatively decided to propose amendments to IFRS 7.

Financial liabilities and own credit: Subject to IASB decision on Agenda Paper 3A of this meeting.

Modifications to contractual cash flows: The IASB decided to add a project on amortised cost measurement and modifications to its research pipeline.

Amortised cost and the effective interest method: The IASB decided to add a project on amortised cost measurement and modifications to its research pipeline.

Transition: The IASB was not asked to make any decisions in relation to this question.

Other matters

• Cash received via electronic transfer as settlement for a financial asset: The IASB tentatively decided to develop an accounting policy choice to allow an entity to derecognise a financial liability before it delivers cash on the settlement date when specified criteria are met
• Other application questions: For other application questions following consultation with ASAF members, the IASB decided to either consider the matter as part of other projects or take no further action

Next steps

The staff will prepare a Report and Feedback Statement (the report) on the PIR which will be reviewed by the IASB. The Due Process Oversight Committee (DPOC) will also be provided with a draft of the report. Once the DPOC is satisfied that the IASB has completed the review satisfactorily, the report will be published.

IASB discussion

IASB members discussed a summary of the response to feedback from the PIR.

IASB decision

All IASB members agreed that adequate work had been completed to conclude the PIR and that the staff can now prepare the report and feedback statement