Financial Instruments - Comprehensive Project

Date recorded:

At the March 2007 meeting the Board considered different approaches to moving towards the 'fair value model' which is the Board's long term objective in respect of the accounting for financial instruments. One approach discussed was the 'interim steps approach'.

At this meeting the Board discussed a model that could represent a possible interim step. The starting point of this model is the fair measurement principle rather than certain components of the existing standards (hedge accounting, derivatives, etc.). The reason for choosing this approach was that the existing mixed cost-fair value measurement requirements were considered to be the main source of complexity.

The key features of the model are:

  • Set fair value measurement as the default for financial instruments.
  • As an exception, financial instruments with certain cash flow characteristics that are not traded in an active market can be designated on initial recognition to be measured at amortised cost.

The consequences of this model were discussed in detail for the component 'hedge accounting'. Further details and illustrative examples are outlined in Agenda Paper 10 and 10A available in the Observer Notes Section of the IASB Website.

No decisions were made in this session. However, there appears to be a consensus regarding the following issues:

  • An 'interim steps approach' is in general a valid alternative to the one-step introduction of the fair value model and should be considered further.
  • Any interim step should result in more financial instruments being measured at fair value as anything else is considered to be a step back.
  • When considering 'complexity' the different forms of complexity should be taken into account. For example the reduction of complexity in applying (that is, understanding) the Standards might increase complexity in implementing the Standards in practice as new valuation models might need to be implemented.
  • If an interim step provides exceptions from fair value measurement for certain financial instruments a subsequent move towards fair value measurement should be allowed for these instruments.

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