Annual Improvements 2009

Date recorded: 15 Oct 2008

IAS 39 - Application of the Effective Interest Rate Method

The staff presented the Board with a proposal to amend the Application Guidance in IAS 39.AG6-8 regarding the application of the effective interest rate method. The issue was originally raised with the IFRIC, but it decided not to add the issue to the agenda and refer it to the Board for clarification. Two questions arise in this context:

What is a floating rate instrument?
How is the effective interest rate calculated for such instruments?

What is a floating rate instrument?

The guidance in IFRS is not sufficiently clear on what a floating rate is - is it market interest rate only or could it be other market factors or possibly entity-specific factors? The staff agreed that the guidance is not clear and proposed three alternatives:

Alternative 1: Provide no clarification
Alternative 2: Define floating rate instruments as any instruments with contractual variable cash flows amounts arising from changes in market variables
Alternative 3: Define floating rate instruments some other way

The staff was in favour of alternative 2 noting that it does not propose to define 'market variable' and instead providing some examples. One Board member agreed with the staff but wanted to clarify that the market variables must be observable.

The Board agreed with this proposal adding the word 'observable'.

How is the effective interest rate calculated for such instruments?

The issue regarding calculation is whether to include expectations about future cash flows when determining the EIR? The staff proposed to clarify IAS 39 that expectations should not be considered when determining the EIR of a floating rate instruments as defined above, that is apply IAS 39.AG7.

The Board agreed.