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IFRS 9 — Financial instruments

Date recorded:

Agenda Paper 10: Impairment of long-term interests

The Senior Technical Manager introduced the agenda paper on long-term interests. The Committee had received a submission asking whether the measurement of long-term interests in associates and joint ventures, particularly impairment, should be governed by IFRS 9, IAS 28 or both. While IFRS 9 excluded interests in associates and joint ventures that were accounted for in accordance with IAS 28 from the scope of IFRS 9, IAS 28 provided examples of items that were considered to constitute a long-term interest in associates and joint ventures. Such items formed part of the ‘net investment’ in an associate or joint venture. This net investment was subject to impairment under the requirements of IAS 36. The submitter provided an example of an interest-bearing loan which met the definition of a financial instrument. As this was a part of the long-term interest, it was unclear whether they scope exclusion of IFRS 9 applied to this loan. The submitter presented four views with regard to the instrument:

  • View A: Entirely within the scope of IFRS 9.
  • View B: Entirely within the scope of IFRS 9 and in the scope of IAS 28/36 for impairment.
  • View C: Entirely within the scope of IAS 28.
  • View D: Within the scope of IFRS 9 for classification and measurement but excluded from IFRS 9 impairment.

A conducted outreach had resulted that some or all of the views were possible as the requirements were unclear. Many respondents had noted that they had observed diversity in practice.

The staff was of the view that the long-term interest was not part of the interests in the associate or joint venture that were accounted for under the equity method. Therefore, it was not scoped out of IFRS 9. The staff believed that the accounting for long-term interests was governed by a combination of IFRS 9 and IAS 28. Although IFRS 9 did not specifically exclude long-term interests from the scope of the impairment requirements, the staff believed that the more specific requirements in IAS 28 should take precedence. This way, the entire net investment would be subject to the same impairment requirements. The staff recommended issuing an agenda decision on that basis.

The Chairman asked if the solution would be an Annual Improvement or an amendment if the Committee decided not to proceed with the agenda decision. The Director for Implementation Activities replied that it could only be an Annual Improvement if the Committee concluded that the issue arose from an unintended oversight.

Many Committee members agreed with the staff’s recommendation to clarify the issue, preferably by way of an amendment. However, several Committee members expressed concern about the staff’s conclusion that IAS 28 preceded IFRS 9. One Committee member said that IFRS 9 could not be interpreted to include long-term investments for classification and measurement but not for impairment. Some struggled with the compatibility between IAS 36 impairment and IFRS 9 amortised cost accounting. Many Committee members preferred View B, while some preferred View C and View D.

The Chairman concluded that the issue should be solved by way of an amendment. He suggested that the staff brought back a paper with the suggested wording for the amendment.

One observing IASB member said that many issues relating to IAS 28 had been put on hold due to a broader project on the equity method. She said that this could be the same with this project. The Chairman suggested raising this issue with other Board members to obtain a clearer view of the Board’s intentions.


Agenda Paper 7: Transition for hedge accounting

The Technical Manager introduced the agenda paper that concerned a request for guidance on the transition from IAS 39 to IFRS 9. The Committee had been asked to consider whether an entity could treat a hedging relationship as continuing on transition from IAS 39 to IFRS 9 if the hedged item was changed from an entire non-financial item to a component of a non-financial item and this would be in order to align the accounting with its risk management objective (Issue 1). If Issue 1 required dedesignation, the Committee had been asked whether this changed if the entire non-financial item remained designated (Issue 2).

An outreach conducted by the IASB had resulted in mixed views for Issue 1. While accounting firms had tended to discontinue the hedge, securities regulators would continue the hedge. Issue 2 also prompted mixed views. Here, accounting firms had tended to continue the original hedge designation. All respondents had seen a potential for diversity as regards these issues.

The staff noticed that treating the hedging relationship as a continuing hedging relationship in Issue 1 implied a retrospective designation of a hedging relationship that was not permitted under IAS 39. As IFRS 9 required prospective application of the hedge accounting requirements, retrospective application was also not allowed under IFRS 9.

Under Issue 2, not changing the designation would result in a mismatch between the designation and the entity’s risk management objective (i.e. proxy hedging). Proxy hedging was not prohibited by IFRS 9 but there should be at least some kind of linkage in the staff’s view. IFRS 9 acknowledged that it would not always be possible to replicate the actual risk management perspective. Therefore, the staff believed that the entity could continue the hedging relationship.

The staff concluded that IFRS 9 provided sufficient guidance for these issues and therefore they should not be added to the Committee’s agenda. The staff had drafted an agenda decision to that effect.

One observing IASB member agreed with the staff recommendation and said that as regards Issue 1 the IASB had discussed the example in the deliberations for IFRS 9 and had decided that it would be retrospective designation and therefore dedesignation and redesignation was required. The Technical Director agreed and said that the issue should not be confused with rebalancing as rebalancing required a continuous hedging relationship. In addition, rebalancing only related to quantities and not to designation.

Many Committee members expressed support for the staff recommendation. One Committee member said that this might not be the desired outcome as effectiveness will suffer but he also said that the standard did not give room for interpretation.

One Committee member said that he struggled with Issue 2 as he could understand both possible views. Some Committee members expressed concern about the staff’s proxy hedging rationale to allow continuation for Issue 2 as proxy hedging was only allowed when an entity was precluded from hedging a risk component. The wording could lead to unintended consequences and therefore several Committee members requested to ring-fence the issue. The Technical Director agreed and proposed to tighten the words in the agenda decision to clarify that the rationale only applied in this case.

The Chairman asked the Committee if they agreed with the agenda decision subject to the agreed change in wording. All Committee members agreed.

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