Financial Instruments: Amendments to IAS 32 and IAS 39

Date recorded:

Derecognition of Financial Assets

The Board decided to abandon a complete shift to the continuing involvement model proposed in the Exposure Draft. Therefore, the Board decided to retain an approach largely consistent with the current IAS 39, with some modification and clarification. The staff presented a flowchart to illustrated the four steps of the revised decision making process on derecognition:

1. Identify the assets transferred.

2. If substantially all of the benefits and risks have been transferred, then derecognition of the assets is appropriate. The Board clarified that a sale with a repurchase option at fair value would not disqualify derecognition.

3. If substantially all of the benefits and risks have been retained, no derecognition is allowed. This assessment will usually be based on an assessment of the variation of the present value of net cash flows-a test that will be similar, if not identical to the test in step 2 above.

4. If you have answered no to questions 2 and 3, then you would assess whether you have retained control over the assets transferred. The entity would continue to recognise the assets to the extent it could be forced to reacquire the assets. This would result in a similar approach for these items as the continuing involvement approach.

The Board noted that it may consider changing the phrase "benefits and risks" to "variation in outcomes"; however, the notion that each approach considers equally the upside and the downside is retained. The Board also asked that the final standard make clear that a transfer of 100 in receivables, with an expected/maximum loss of 5 and a guarantee of first losses up to 20 would be a failed sale - that is, no derecognition for any of the assets transferred.

The assessment of whether the entity has retained or transferred control is based on whether the transferee has the right and ability to sell the asset. For example, if an entity is required to put the assets back to the transferor, but the assets are available in the market, then the transferee may be able to sell and therefore, derecognition may be appropriate. Conversely, if the assets are not traded in the market, the put would prohibit sale of the assets and, therefore, derecognition would not be allowed. The final standard would also remove the limit of the liability to the strike price of the call option that was proposed in the Exposure Draft.

The Board decided to provide guidance related to the continuing involvement approach in the final standard for servicing, gains and losses, and non-cash collateral issues. The Board clarified that if there was a sale with a guarantee, then derecognition would still be possible, as the focus would be on whether the transferee can sell the asset.

Pass-Through Arrangements

The Board concluded that it should issue further guidance on pass-through arrangements. The focus of the assessment should be on the transferor, and not on the rights of any of the transferees. The staff's proposal was that pass through arrangements would only work if a proportion of the risks were transferred. That is, if the risks and benefits are shared proportionally (e.g. share in all losses based on ownership retained), then that proportion transferred would be derecognised.

The Board noted that IAS 39 requires the transfer of significant risks and benefits in order for derecognition. If these assets are transferred to an SPE, SIC 12 would most likely require consolidation of the SPE if a majority of the risks and benefits were retained by the SPE. Therefore, in many normal securitization transactions, the assets would be derecognised in the transfer to the SPE, only to be re-recognised when the SPE is consolidated.

One Board member clarified that this is a contradiction with the current IAS 39, specifically as clarified by IGCs 35-1, 35-2 and 35-3. Current IAS 39 uses the notion of "portion", not "proportion". Therefore, derecognition should be allowed for the portion of the asset in which benefits and risks have been transferred.

The Board noted this was only an issue when the pass-through arrangement transfers a disproportionate share of the risk (which was acknowledged is the most common type of transaction). Based on this Board member and other members' concern over the staff recommendation, the Board will re-deliberate this issue in the June 2003 meeting.

Macro Hedging

The Board noted that it is currently working on a model with several European banks that would allow for fair value hedge accounting for a macro hedge of interest rate risk. This model would:

  • Not require the designation of the hedging instrument to individual assets
  • Not spread change in fair value over line items in the balance sheet, but allow for one item as an asset and one item as a liability. It should be noted that these positions should not be shown net.
  • The assets should be classified based on their expected maturity. Pre-payment risk would not need to be measured as it would already be included in the measurement of the asset or liability.

The Board noted that it was trying to finalise this position with the European banks for its June 2003 meeting. If this issue is not resolved by that time, the Board intends to revert to its original position of not allowing macro hedge accounting. The reason for this deadline is that this issue may require re-exposure. The Board did note, however, that it was hopeful an acceptable solution could be found in time.

Basis Adjustments for Non-Financial Assets and Liabilities

The Board has previously voted to prohibit basis adjustments for the forecasted purchase or sale of a financial asset or liability. The issue discussed at this meeting was whether or not to provide an option to basis adjust for non-financial assets and liabilities in the final standard. The Board concluded (8 to 5 vote, 1 abstention) to allow an entity the option of whether to basis adjust for non-financial assets and liabilities. The 5 no votes believed that basis adjustments should be prohibited.

The Board noted that it is likely that this conclusion will change based on the current measurement project on the Board's agenda. However, this change would not be expected for some time.

Hedge of Portions of Non-Financial Assets and Liabilities

The Board clarified that hedging the rubber component of a forecasted purchase of tires (for example) was prohibited in IAS 39, unless regression analysis proved that the movement in the price of rubber almost fully offset the movement in the price of tires. That is, the Board noted that the 80 to 125 range at inception of the hedge is not enough to determine whether the instrument qualifies as a hedging instrument. That is, IAS 39 requires that the expectation be that the movements in the hedged item and hedging instrument is almost fully offset-a much higher threshold (e.g. "upper nineties").

The Board clarified that the entity would not be hedging the rubber component of the tire, but the price of the tire. The Board noted another example in that an entity could not hedge the A-rated component of a AA-rated portfolio. The Board noted that this is a clarification of the current IAS 39 and that implementation guidance should be provided.

Internal Contracts

Internal rate risk

The Board considered whether internal transactions (i.e. transactions between entities in the same reporting entity or group), could be designated as hedging instruments or hedged items under IAS 39. However, these contracts would need to be eliminated in the normal consolidation procedures. The Board asked to the Staff to add an example to the final standard that clarifies the right accounting treatments.

Foreign currency risk

The Board agreed to not change the accounting for foreign currency risk. This will be different from US GAAP, which allows movements in hedges of internal foreign currency transactions to be treated differently.

IAS 21

The Board clarified that receivables/payables between group entities can be classified as hedged items.


The Board clarified that segment results should report the gains or losses from the internal contracts, even if these contracts are eliminated in consolidation.

Loan Impairments

The Board considered whether a loan asset that has been individually assessed for impairment and found not to be impaired should be included in a collective assessment of impairment as proposed in the Exposure Draft. The Staff recommended that the loan should be included in a portfolio, however no provision should be recognised until an identifiable event occurs and the result of that event is measurable.

The Board noted that IAS 39 is an incurred loss model and not an expected loss model. Therefore, the aggregation of loans into portfolios with similar characteristics is vital to the proper assessment for impairment. Therefore, large loans that are known to be bad or good should probably not be included in the same portfolio of smaller loans to entities with different credit ratings. The Board asked the Staff to clarify the term "similar characteristics" in the final standard. The Board agreed with the Staff recommendations (11/2)

Economic Compulsion

The Staff proposed adding an example in the final standard that would require a liability be recognised based on the probability of dividend distributions. The Board agreed to go further and add an additional example that would require a liability be recognised for the following transactions:

Company A issues preferred shares that are redeemable at 1/1/200X. If Company A does not redeem the shares with cash, then the holders will be able to convert the shares into a fixed number of common shares whose current value is say, 100 times the value of each preferred share. Company A is economically compelled to redeem the shares for cash and therefore a liability should be recognised.

The Board unanimously agreed with the additional example and the staff's proposal.

Re-exposure Issues

The Board considered whether or not the topics discussed during the meeting should be individually re-exposed:

Impairment and reversals of impairment

No (3 Board members voted for re-exposure)

Derecognition of financial assets

No (3 Board members voted for re-exposure)

Pass-through arrangements

Wait until after decision is finalised.

Macro hedge of interest rate risk

Wait until after decision is finalised.

Basis adjustments

No (1 Board member voted for re-exposure)

Portions of non-financial assets and liabilities

No (0 Board members voted for re-exposure)

Internal contracts

No (0 Board members voted for re-exposure)

Loan Impairment

No (1 Board member voted for re-exposure)

Economic compulsion

No (0 Board members voted for re-exposure)

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