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Classification and measurement (IASB and FASB)

Date recorded:

At the May 2013 joint Board meeting, the IASB Staff presented a summary of the main points received in the comment letters and the outreach activities on ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9 (the “ED”). At that time, the IASB still had on-going outreach activities running. This session covered the feedback received from outreach activities not reported on in May. In addition the FASB Staff summarised some of the feedback received by the FASB on its proposed Accounting Standards Update, Financial instruments – overall (Subtopic), Recognition and Measurement of Financial Assets and Financial Liabilities (the “ASU”).

The IASB Staff presented their paper summarising the feedback received from the additional outreach activities, which included an online survey for and outreach meetings with users of financial statements and joint outreach with the FASB. The Staff explained that the outreach primarily focused on the proposed introduction of the mandatory FVOCI measurement category. However, views were also sought on the transition proposals and additional feedback more generally.

Most users that provided feedback supported mandatorily measuring some financial assets at FVOCI. Additionally, most users did not have different information requirements based on whether the legal form of the financial asset was a loan and receivable or a debt instrument. Whilst a majority of users agreed with measuring some debt instruments at FVOCI, views were divided nearly evenly in three broad groups:

  • Those who supported the introduction of the mandatory FVOCI measurement category as proposed in the ED
  • Those who agreed in principle with classifying some simple debt instruments at FVOCI but proposed something different to the ED
  • Those who disagreed with the proposed introduction of the third measurement category in to IFRS 9

However, there were a range of views within each of these groups.

One Board member noted that some respondents were in favour of measuring all assets at FVTPL, and asked the Staff if there had been any change in views amongst constituents. The Staff said that this had been consistent throughout the project. Another Board member noted the even spread of views, and wondered how they would respond to such feedback. At this point the chairman of the IASB interjected and said that this meant that the Board would have to show leadership.

The Staff paper included a specific section dealing with the feedback received from insurance analysts due to the interaction of the ED with the proposals for the insurance project. The views expressed by other user respondents fell in to the same three broad groups, but most insurance analysts expressed the view that measuring simple debt instruments at FVOCI would provide useful information when considered in combination with the proposal for the presentation of interest expense on insurance contract liabilities. Over half supported the FVOCI category as proposed by the ED,  almost half supported a FVOCI category with a variation, and only a few did not support the FVOCI category. One Board member asked whether on the assumption that all respondents were in favour of reducing mismatches, if the concerns of those who did not agree with the proposals as per the ED related to any remaining mismatches, and if any of the alternatives proposed would eliminate those mismatches.

The Staff also noted that most of the users who expressed a view on the transition proposals supported the early application of just the ‘own credit’ requirements for financial liabilities. Some specifically requested that the ‘own credit’ requirements are incorporated in IAS 39 so they can be adopted as early as possible. Finally, before handing over to the FASB staff, the IASB staff emphasised that the key messages received from users by the FASB were consistent with those received by the IASB.

The FASB Staff then presented a detailed paper summarising the feedback received by the FASB on the ASU. The comment period on the ASU ended on 15 May and the FASB had received 142 letters and had over 40 formal outreach meetings, in which the IASB Staff also participated. Respondents generally supported the notion of classifying financial assets on the basis of the cash flow characteristics of the instrument and the entity’s business model for managing these instruments.

However, many of the respondents raised concerns regarding the complexity and restrictive nature of the solely payments of principal and instruments test, and suggested the retention of the existing clearly-and-closely-related bifurcation requirements be retained as an alternative. Most respondents expressed concern about the restrictive nature of the amortised cost business model because of the type of sales permitted from this classification category. The FASB Staff also presented feedback in other areas.

In closing, the FASB Staff said that they would begin there re-deliberations in July, with a paper considering the cash flow characteristics test  and that they would hope to finish the re-deliberations before the end of the year.

No decisions were made during this session.

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