Financial Instruments: Comprehensive Project
The staff informed the Board that this was the first of two sessions at the December meeting. At this first session the following topics were discussed:
- Debrief on the public roundtable meetings on the global financial crisis;
- Assessment of embedded derivatives on reclassification; and
- Impairment of financial assets.
Debrief on the public roundtable meetings on the global financial crisis
Staff presented a summary of the three roundtables held in November and December 2008 in London, Norwalk, and Tokyo. While many issues were raised at the round table with impairment being the most discussed, none of the issues were identified as so urgent as to require changes to be applicable for 2008 reporting periods.
Many participants held the view that any further steps should ensure convergence between IFRS and US GAAP and follow due process (possibly accelerated). It was further noted that a comprehensive review of financial instruments accounting was necessary.
The IASB will publish a summary along with a list of participants in due course as requested by one Board member. Staff stressed that the roundtables had been webcast and recordings are publicly available.
The IAS Plus notes from the three roundtables can be found here.
Assessment of embedded derivatives on reclassification
The staff introduced the topic by noting that some participants at the round tables highlighted the interaction of IFRIC 9 Reassessment of Embedded Derivatives with the recent Reclassification Amendments to IAS 39/IFRS 7. It was suggested to amend IFRS to make clear that, on reclassification, an entity would be required to assess whether an embedded derivative would have to be separately accounted for under IAS 39.
The staff proposed to amend IFRIC 9 to make clear that reclassifications trigger an assessment of the criteria in IAS 39 on embedded derivatives. The Board agreed strongly, highlighting that nothing else had ever been intended. Further, the staff proposed to require retrospective application. The Board agreed.
The staff continued that the exposure draft for this amendment should be open to comment for 30 days only as this did not come as a surprise for constituents given the publicity about the Board's clear position on the issue. The Board agreed. It was further agreed to propose an effective date for annual periods ending on or after 15 December 2008.
This decision triggered some subsequent issues which the staff presented to the Board. The staff noted that it is not clear whether an assessment of bifurcation of embedded derivatives was to be based on the circumstances that existed on the date of reclassification or at the date of inception. The Board agreed with the staff recommendation to require the analysis being based on the circumstances existing at the date of inception. This decision avoided further subsequent issues.
As a final issue the Board decided to require mandatory classification of the entire contract in the fair value through profit or loss category if a separable embedded derivative cannot be fair valued reliably.
The staff noted that the exposure draft is expected to be issued by next week.
Impairment of financial assets
The staff noted that impairment was by far the most discussed issue at the round tables. Two main themes arose in connection with impairment:
- Different impairment approaches
- The meaning of impairment and effect on earnings
Staff said that impairment will be part of the comprehensive review on financial instruments accounting. At this meeting, only specific aspects were discussed:
- Differentiation between credit-related impairment losses and other fair value changes for AFS debt instruments
- Impairment triggers and reversals of impairment regarding AFS equity instruments
Differentiation between credit-related impairment losses and other fair value changes for AFS debt instruments
Participants at the roundtables highlighted the different measurement approaches for impairments of debt instruments in IAS 39 depending on the classification. Particularly, available-for-sale debt instruments' impairment is based on fair value. It was proposed to split up the total impairment charge into an incurred loss piece (that is, what would have been determined as impairment had the instrument been carried at amortised cost and the impairment provisions for amortised cost instruments had been applied) and a remaining balance. The staff noted that participants, however, were divided on the location of this split. Preparers preferred a split in the performance statement with incurred loss charges being recognised in income, while the remaining balance would be recognised in other comprehensive income. Users preferred disclosing the split in the notes with the total charge being recognised in profit or loss.
The staff asked the Board whether such disaggregation would be useful information. Staff further proposed, if the Board agreed, that this is done by requiring additional disclosures.
The Board had a lengthy discussion on this topic. Particular concerns were expressed over any immediate steps that would be impossible to implement for all entities. Further, it was questioned why assets held at fair value through profit or loss were not included. On this issue it was agreed to ask this question in any resulting exposure draft. Others questioned the urgency of this matter that required something to be done within weeks.
The staff presented the Board with possible approaches to a disclosure requirement. The Board discussed at length possible alterations to improve the proposal.
The staff noted that the FASB would discuss a similar proposal later in the day. The chairman noted that the Board should give its counterpart a clear direction on its views. There seemed to be consensus that any disclosure should make clear the resulting amounts if a fair value measurement impairment and an amortised cost impairment were applied. Again, it was questioned whether entities could generate this information retrospectively.
Impairment triggers and reversals of impairment regarding AFS equity instruments
The Board then continued to discuss impairment-related issues. The staff noted that some participants questioned whether the guidance on triggers for impairment of AFS equity instruments could be improved. There seemed to be no sympathy around the table to address the issue. Staff noted that any impairment trigger for equity instruments would be somewhat arbitrary.
The Board also briefly discussed a staff proposal not to address accounting for reversals of impairments of AFS equity instruments as a matter of urgency. It was decided to discussed with the FASB on these issues and bring them back in January.