Reclassification of Financial Instruments Under IAS 39 - Whether to eliminate differences with US GAAP

Date recorded:

The Board discussed possible amendments to IAS 39 Financial Instruments: Recognition and Measurement regarding reclassification of financial assets. This was the IASB's response to requests by certain constituents to create a 'level playing field' in this area with US GAAP. The possible amendments would allow reclassification of financial assets out of the category 'at fair value through profit or loss' in certain cases. In the staff proposals there was also additional guidance on impairment of such reclassified assets in the case of a reclassification due to rare circumstances. In the light of the current conditions, the Board will bypass its usual due process (as agreed by the Trustees) and immediately issue the amendment, most probably this week.

The Board discussed four key areas based on a staff draft available on the IASB's website:

  • Impairment
  • Effective date
  • Meaning of the term 'rare circumstance'
  • Disclosures



The Board discussed whether it was appropriate to introduce additional guidance on impairment based on the provisions under US GAAP in this amendment. It was noted that allowing reclassification in the same circumstances as under US GAAP but without also requiring the same impairment measurement as under US GAAP would not 'level the playing field'. One Board member highlighted that such reclassifications are rare under US GAAP as the impairment rules are a disincentive to reclassification. The Chairman said that the immediate issue before the Board is a political one - to allow reclassification under IFRSs in the same circumstances as US GAAP allows. He suggested that a separate follow-up step could be a working group between IASB and FASB on the subject of impairment (and possibly other issues) to provide a converged solution in the near-term.

The Board had a short discussion about the technical differences of both impairment approaches (both triggers and measurement). It emerged that the guidance under IFRS and US GAAP was too different to be reconciled/converged quickly.

Also, some Board members considered the approach under US GAAP for subsequent impairment tests as 'inferior' compared to IFRS. The Board also considered whether disclosure of expected recoverability along with the effective interest rate would be useful.

There seemed to be general agreement that any solution at this point would not be optimal, but given the circumstances it would be acceptable to proceed. However, as the guidance on impairment would not meet the goal of converging IFRS and US GAAP, the Chairman asked the Board to vote for deleting the relevant paragraph. The Board agreed by vote of 11-2.


Effective date

The Board briefly discussed the effective date for the amendment. The Board agreed that the amendment should be effective 1 July 2008 by vote of 11-2.


Meaning of the term 'rare circumstances'

The Board discussed whether a clarification of the term 'rare circumstances' should be provided in the actual standard text, notably whether the current credit crisis is such a 'rare circumstance'. After a short discussion it was decided that the actual text should not refer to the current conditions, but that an accompanying statement of the Board would clarify that the current situation is considered 'rare'.



Disclosures were the last point to be discussed by the Board. One Board member proposed requiring a reconciliation of fair values from the effective date of the amendment and the actual reclassification date (if between issue of the amendment and 31 October 2008), as this would make transparent any reclassifications that could be done with hindsight. The staff and some other Board members thought this was already covered by the amendments. The staff also confirmed that a user would be able to develop an income statement that would exclude the effects of reclassification. The Board agreed.


Other Issues

The Chairman then turned to other issues surrounding the amendments. Firstly, whether the amendments should provide for a possibility to reclassify financial instruments for which an entity invoked the fair value option. The Board objected to this.

Secondly, the Board was asked whether a working group or panel should be set up to provide in the near-term possible approaches to align the guidance under US GAAP and IFRS in certain areas of financial instruments accounting. The Board agreed.

Lastly, the Chairman asked the Board whether they agreed to bypass usual due process and go straight to the publication of the amendment. One Board member strongly indicated that he would dissent as he didn't agree with both the technical content and the bypass of the due process. The Board agreed by a vote of 11-2.

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