Financial Instruments

Date recorded:

- issues other than hedge accounting

Purchased loans

The Board agreed IAS 39 should permit purchased loans to be classified as originated loans if they met the criteria for originated loans. However, if they are purchased for trading, then they must be included in financial assets held for trading.

Transaction costs

Transaction costs can include both external and internal costs, as long as they are direct costs of acquiring financial assets (rather than allocated costs). Also, transaction costs should not be included in the initial measurement of financial assets held for trading.

Loan commitments

The Board agreed that loan commitments at rates other than market rates of interest should be treated as financial guarantees. Therefore, they are accounted for under IAS 39 at initial recognition and under IAS 37 subsequently. Loan commitments at market are excluded from IAS 39.

Financial guarantees

The Board agreed that these should initially be measured at fair value. Subsequent measurement should be the higher of the initial measurement and the best estimate as defined in IAS 37. The Board noted that IAS 37 only applies here for measurement purposes and not for recognition.

Hedging interest rate risk on held-to-maturity financial assets

The Board agreed to prohibit the interest rate risk on held-to-maturity financial assets to be a hedged item for hedge accounting purposes.

Changes in credit risk in the fair value measurement of financial liabilities

The Board reaffirmed that changes in fair value should be recognised in the income statement and agreed to add disclosure requirements on the credit risk. The staff will present examples to the Board for discussion at the September meeting.

Effective interest rate calculations

The Board considered (a) whether to clarify the definition of effective interest rate to be consistent with IAS 18, Revenue, on fee recognition; (b) what period should be used when calculating the effective interest rate for financial instruments with a call, put, prepayment, or term-extension option; and (c) the accounting for subsequent changes in estimates used in calculating the effective interest rate for groups of financial assets.

The Board did not reach decisions on items (a) and (b) at this meeting. The Board decided that the cumulative catch-up method should be used for changes in estimates.

Initial measurement of financial instruments

The Board agreed to retain the provisions in the exposure draft and not to clarify further the principles of initial measurement of financial instruments.

Prospective effectiveness test

The Board agreed (vote 9-4) to modify paragraph 146 of IAS 39 by introducing the words "highly effective" in place of "almost fully offset". The 80%-125% hedge effectiveness guideline - which currently applies in assessing retrospectively whether a hedge has been highly effective - would be retained. As a result, the range of 80%-125% could become the guideline for prospective hedging designation as well as for retrospective effectiveness testing, which would converge with the US practice.

Designation of a derivative

The Board agreed that a derivative should not be designated as a hedging instrument for only a portion of the time period during which the derivative remains outstanding.

Application and implementation guidance

The Board agreed that the existing IAS 39 implementation guidance should be split in the body of the Standard and in mandatory appendices. The staff will clarify the split in the pre-ballot draft paper.

IAS 32

The Board tentatively agreed (vote 11-3) with the proposed the following re-drafting of IAS 32.77B(c):

An entity shall disclose ... whether its financial statements contain fair values which are determined in full or in part using a valuation technique based on assumptions that are not supported by observable market prices. If changing any such assumption to a reasonable possible alternative would result in a significantly different fair value, the entity shall make a statement of this fact and disclose the effect on the fair value of a range of reasonably possible alternative assumptions. For this purpose, significant shall be judged with respect to profit or loss and total assets or total liabilities.

However, the Board some Board members expressed concern that this amendment may still not be operational and should be considered further.

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