IAS 39: Effective interest rate calculations

The Board agreed that the effective interest rate should be determined based on the expected period to prepayment, where this can be determined reliably, for financial instruments held at amortised cost with a call, put, prepayment, or term extension option. Where the prepayment cannot be reliably determined there is a default to the full contractual period. Credit losses incurred would be taken into account in determining the effective interest rate in these circumstances.

The Board considered a number of options in accounting for subsequent change in estimates in calculating the effective interest rate and decided on a catch up approach with new estimates of cash flows (the effective rate should be recalculated based on the new carrying amounts).

The Board decided to not add guidance in IAS 39 on how an entity should account for a modification of financial asset other than as a result of financial difficulties of the borrower

Pass-through arrangements

The Board considered concerns raised with the current wording of two of the three conditions as they relate to cases where (a) the entity pays out cash in advance of cash being collected and (b) the entity retains reinvested cash collections from the asset for a period before paying them out to the eventual recipients.

These conditions are worded as follows:

(a) short-term advances by an entity, to make up for shortfalls in cash collected from the asset under consideration,

(b) an obligation to remit the cash collections from the asset under consideration to the eventual recipients where such remittance is not 'without material delay',

(c) related to (b) where an entity retains and reinvests the cash collected from the asset under derecognition.

The Board agreed to retain condition (a) but to provide further clarity and to keep conditions (b) and (c) but clarify that these conditions apply to all the cash flows the investor is entitled to.

Measurement of retained interest under continuing involvement

The Board agreed to include guidance for measuring a retained interest where derecognition is prevented due the presence of a collar that comprises a put option obligation written by the transferor on the transferred asset and a call option right held (it should go through net profit or loss). This will be provided for cases where the asset is held at fair value and at amortised cost.

Lease payables

The Board agreed to scope derecognition of lease payables into IAS 39.

Example of application of the derecognition model

The Board agreed to include an additional example in the Application Guidance of IAS 39. This example will deal with the application of the derecognition model for an asset that is not readily obtainable and is transferred with a put option obligation written by the transferor.

IAS 39: Hedge accounting -- Internal transaction

The Board reaffirmed its position on internal transaction related to hedge accounting and that these transactions should be eliminated for consolidation purposes (requirements under IAS 27) and that no exception should be made contrary to the US GAAP (FAS 138, which allows an exception in specific cases.

It was agreed that this would not affect the designation using the internal contract where this is permitted and that the Basis for Conclusions should clarify that this only affects consolidated financial statements or where the contracts are between divisions of the same entity.

IAS 39: Loan servicing rights

The Board discussed whether loan servicing rights could be a hedged item and if not could they be allowed to be carried at fair value. The Board agreed that they could be designated as hedged items provided that the hedge conditions were met. They noted that it was anticipated that FASB will consider this issue and that any further deliberations should be deferred until then.

IAS 39: Originated loans

The Board agreed to amend the definition of originated loans and receivables and to restrict the loans and receivables category to exclude those where the holder may not recover substantially all of its initial investment other than because of credit deterioration.

IAS 32: Accounting for the purchase or induced early conversion of convertible debt

The Board agreed not to address the issue of how to account for repurchase and induced early conversation but to consider asking IFRIC to address the issue and in particular guidance adapted from the Canadian EIC Abstract 96 to the Application Guidance.

IAS 32: Puttable instruments

The Board agreed to include in the Standard illustrative examples of income statement and balance sheet formats that may used for:

(a) entities that do not have equity as defined in IAS 32, such as some mutual funds, and

(b) entities that have equity but whose share capital is not equity as defined in IAS 32, such as some co-operatives

Transition to Revised IAS 32 and IAS 39

The Board agreed to extend the proposed amendment to IFRS 1 to permit an entity that adopts IFRS for the first time before 1 January 2006 to present comparative information in the first year of adoption of IFRS that does not comply with IAS 39 and with the revised IAS 32.