Financial Instruments: Recognition and Measurement

Date recorded:

The staff began the meeting by summarising the current classification model that is being pursued. In summary, financial instruments will be measured at fair value or amortised cost. Amortised cost will apply to debt instrument assets that are not held for trading that are deemed 'basic' and are managed on a contracted yield basis (the detailed criteria to be determined at the next Board meeting). Equity instrument assets not held for trading that meet a specified principle (to be determined at next meeting) will be fair valued through other comprehensive income (OCI) with no recycling and no impairment assessment. Other financial instruments will be fair valued through profit or loss. It is expected there will be a fair value option in the case of an accounting mismatch.

The following areas will also be discussed at the next meeting (week of 15-19 June 2009):

  • Embedded derivatives - whether to retain the existing guidance for financial host contracts or to remove the guidance and instead look to the amortised cost definition to identify characteristics of those debt instruments that will be at amortised cost and those that will be at fair value through profit or loss.
  • How the classification model will deal with debt instruments that have a concentration of credit risk.
  • Use of the fair value option.
  • Use of other comprehensive income (OCI) to record fair value gains and losses for equity instruments. The staff indicated that if a principle was developed for the use of OCI to record gains and losses for certain equity investments, there should be a discussion of whether reclassification may be required. This is because the principle allowing the OCI treatment may become applicable or cease to be applicable to a given equity investment subsequent to initial classification.


Before proceeding, the Chairman asked each Board member whether they broadly agreed with the direction in which the project was heading with regard to classification. All members except one agreed.

Transitional provisions

The staff summarised the view with which Board members present at the meeting on 1 June 2009 broadly agreed, basically a retrospective application approach subject to exceptions that would be addressed in more detail at the regular June Board meeting.

The Chairman requested views from the Board members who were not present at the last meeting when transitional provisions were discussed.

One Board member accepted that IAS 8 establishes a general principle for retrospective application which he agreed with. However, he felt that the appropriateness of that principle in this scenario depended on the robustness of the chosen classification model. For example, a loose classification model allowing an entity to effectively choose a measurement basis for each financial instrument may not be suitable for retrospective application because of the ability to be selective over the reversal of past recognised losses.

One Board member noted that entities selecting amortised cost accounting over fair value accounting to reverse past recognised losses would also restrict themselves from recognising future fair value gains.

Another Board member raised concern that they could not comment on the appropriateness of retrospective application without knowing the impact of the chosen classification model.

The staff felt that one of the main impacts of a revised classification model would likely be that some debt instruments currently classified as available for sale (AFS) would instead be measured at amortised cost (because of the removal of the tainting rules). Other impacts would depend on decisions made at the June Board meeting, such as the treatment of hybrid instruments.

The Chairman reiterated that the objective of the current meeting was to establish whether any Board members opposed to the staff pursuing further retrospective application. When put to the vote all except one agreed that the staff should proceed with preparing a more detailed paper on retrospective application for the main June Board meeting.

Board members requested that any staff paper on the matter include a cost benefit analysis of retrospective application and include examples of application. The staff stated that there were a number of areas to address with respect to retrospective application, including hedge accounting, impairment, and previous application of the fair value option/reclassifications amendment, which would be covered in their paper.

Equity investments: cost exemption

The staff began by summarising that the Board members who discussed the equity investment cost exemption at the last meeting broadly agreed with the proposal to remove it. The Chairman then asked each Board member who was not present at that meeting to provide their view. Of all the Board members, two did not agree with the proposal to remove this exemption. The reason given was the impact it would have on non-financial institutions holding significant unquoted equity investments. One Board member felt that fair values calculated would be unreliable and difficult to audit.

Another Board member suggested whether the criteria for fair value through OCI should be different for unquoted equities.


The staff provided a summary of upcoming documents and meetings:

  • The staff will be presenting educational webcasts next week to provide information on the project to date.
  • An invitation to comment staff paper is due to be issued in June 2009 regarding the incorporation of credit risk in liability measurement.
  • The classification and measurement exposure draft is planned to be issued in July 2009, with a minimum of a two month comment period. Comments would then be deliberated with the expectation of a final standard issued by December 2009. The staff confirmed that there was no intention to a make any final standard on classification mandatory for December 2009 year end financial statements, that is, it would be available for early adoption.
  • A request for views would be issued on impairment in July 2009 which would ask specific questions on the implementation challenges of different models. Comments received would provide input into Board discussions in September with an exposure draft planned for October 2009. At the June Board meeting, BNP Paribas will present to the Board the challenges of amortised cost accounting based on an expected loss model. Bank of Spain would also present their dynamic provisioning model.
  • An exposure draft dealing with hedge accounting is planned for issue in December 2009.


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