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Financial Instruments: Classification and Measurement

Date recorded:

The IASB held an IASB only session to discuss the transition and disclosure requirements as a result of the limited amendments to IFRS 9.

Transition

The IASB discussed how and when the classification and measurement requirements in IFRS 9 should be applied. The IASB also discussed the transition to IFRS 9 as a whole considering the interaction between its phases.

Staff papers for the meeting generally considered:

  • how the proposed limited modifications to the classification and measurement requirements in IFRS 9 should be initially applied in relation to modifications to the contractual cash flow characteristics assessment, modifications to the business model assessment as a result of the FVTOCI category for eligible debt instruments and the extension of the existing IFRS 9 fair value option requirements to debt instruments measured at FVTOCI; and
  • when the proposed limited modifications to the classification and measurement requirements in IFRS 9 should be initially applied.

Limited amendments to classification and measurement

Regarding transition to the limited modifications to the classification and measurement requirements in IFRS 9, Board members tentatively agreed with the recommendations as set forth by the staff with little debate. Those recommendations included that on transition to the amended classification and measurement requirements, an entity would be required to:

  • retrospectively apply the contractual cash flow characteristics assessment as set out in IFRS 9 (2010) where it is impracticable to apply the amended contractual cash flow characteristics assessment retrospectively; and
  • disclose the carrying values of the financial assets whose contractual cash flows have been assessed under IFRS 9 (2010) as opposed to the amended classification and measurement requirements due to impracticability until the affected financial assets are derecognised.

No amendments to the existing IFRS 9 transition requirements would be required as a result of:

  • the proposed amendments to the business model assessment, or
  • the proposed extension of the fair value option for accounting mismatches to debt instruments that would otherwise be measured at FVTOCI.

IFRS 9 as a whole

Regarding general transition guidance on the IFRS 9 project as a whole, many Board members noted the complexity currently present in IFRS 9 as a result of the number of phases involved in the project and the versions of IFRS 9 previously issued. However, they acknowledged that they could not modify past decisions related to early application of IFRS 9.

Board members did express many specific questions and concerns, including:

  • Should entities which early applied IFRS 9 (2009) or IFRS 9 (2010) be compelled to early apply the complete package of IFRS 9, once available? Many Board members expressed concern with comparability, and thus, preferred that those applying IFRS 9 (2009) or IFRS 9 (2010) be compelled to adopt the complete version of IFRS 9 early. However, most Board members acknowledged that in issuing previous versions of IFRS 9, the IASB had represented to constituents that they would not force early application of other phases of the project as a result of a decision to early apply IFRS 9 (2009) or IFRS 9 (2010).
  • Should comparability trump everything such that entities are no longer able to early apply issued phases of IFRS 9 without early applying the complete package of IFRS 9, once available? Many Board members expressed major reservations with the lack of comparability present in the marketplace. They preferred that early application of any single phase of IFRS 9 no longer be permitted without applying all phases of IFRS 9. However, a few Board members noted that all issued phases of the project are expected to provide for an improvement to financial reporting, and thus, they expressed reservation in prohibiting early application of individual phases of the IFRS 9 project. To limit comparability issues, many Board members expressed a belief that once the limited amendments to IFRS 9 or the impairment project are finalised, entities should no longer be permitted to early apply previous versions of IFRS 9.
  • Should early application of the hedging phase of IFRS 9 be allowed? One Board member believed that the hedging project would greatly benefit users of financial statements. Thus, he suggested that the hedging project be spun out from IFRS 9 so as to allow early application of this phase without requiring early application of all phases of IFRS 9. However, most Board members expressed reservations about this approach.
  • Can a decision about transition guidance be provided without more specificity as to when all IFRS 9 phases will be completed? Many Board members noted that significant uncertainty existed as to the timing of completion of remaining phases of the IFRS 9 project, and thus, he noted that transition discussions were premature. However, most Board members noted that a principle for transition on IFRS 9 must be established. They noted that this principle would require reassessment as remaining phases of the project were completed.

After voicing these general concerns, Board members considered specific recommendations for transition as outlined in staff papers.

The IASB tentatively decided that entities which have applied IFRS 9 (2009) or IFRS 9 (2010) before applying the limited amendments to IFRS 9 must revoke previous fair value option elections if an accounting mismatch no longer exists at initial application of the amended classification and measurement requirements. Entities would be permitted to apply the fair value option to new accounting mismatches created by the initial application of the amended classification and measurement requirements.

The IASB tentatively decided that once the limited amendments to IFRS 9 or the impairment project are finalised, entities would no longer be permitted to early apply previous versions of IFRS 9. Those entities which applied a previous version of IFRS 9 prior to the publication of the complete version of IFRS 9 would be permitted to continue applying that version until the mandatory effective date of IFRS 9.

The IASB also tentatively decided that early application of the entire IFRS 9 would be permitted once all of the requirements are issued.

Finally, the IASB tentatively decided to reaffirm that restatement of comparative classification and measurement information would not be required. Entities would be permitted to restate comparative information only if the information is available without the use of hindsight.

Disclosure

The IASB also discussed presentation and disclosure requirements due to the proposed limited amendments to IFRS 9 and the interaction of proposed disclosures in the classification and measurement project with disclosures proposed in the impairment project.

Regarding the amended contractual cash flow characteristics assessment, the IASB staff recommended:

  • The judgement involved in the assessment of contractual cash flow characteristics should be added to IAS 1 Presentation of Financial Statements as an example of a judgement that could have a significant effect on the amounts recognised in the financial statements.
  • Quantitative disclosures should be required when judgements about modified principal and interest have a significant effect consistent with the requirements of paragraph 122 of IAS 1. The staff believed that the following quantitative disclosures could provide useful information to enable a user to assess the impact on financial statements: the carrying value of financial assets (split by amortised cost and FVTOCI); for financial assets measured at amortised cost, the respective fair value; and for financial assets measured at FVTOCI, the respective gain or loss recognised in OCI for the period.

Relating to the proposed addition of a FVTOCI category for eligible debt instruments, the IASB staff recommended:

  • No new requirements should be added related to the presentation of gains or losses arising from the derecognition of debt instruments measured at FVTOCI.
  • The impairment disclosures for debt instruments measured at FVTOCI should be consistent with those for assets measured at amortised cost, including disclosure of an accumulated impairment amount.
  • Presentation of an allowance balance on the face of the statement of financial position should be prohibited for debt instruments measured at FVTOCI.
  • No allowance rollforward should be required for FVTOCI debt instruments.

Board members generally agreed with the recommendations outlined by the staff. However, two concerns were expressed with the staff recommendations.

First, regarding the amended contractual cash flow characteristics assessment, many Board members believed that quantitative disclosures should not be required when the assessment of contractual cash flow characteristics could have a significant effect on the amounts recognised in the financial statements. Board members questioned the significance of modifications to the principal and interest.

Secondly, relating to the proposed addition of a FVTOCI category for eligible debt instruments, many Board members did not support the staff recommendation that no allowance rollforward should be required for FVTOCI debt instruments. Board members saw value in separating the fair value adjustment for FVTOCI debt instruments between market movements and movements in expected losses in order to establish an overall fair value carrying amount.

When put to a vote, Board members tentatively supported staff recommendations as outlined above, with the exception that quantitative disclosures should not be required when the assessment of contractual cash flow characteristics could have a significant effect on the amounts recognised in the financial statements and an allowance rollforward should be provided for FVTOCI debt instruments.

Next steps

The IASB is expected to discuss due process considerations at a future meeting and intends to publish an exposure draft in the fourth quarter of 2012.

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