Post-implementation Review (PIR) of IFRS 9 — Classification and Measurement

Date recorded:

Equity instruments and other comprehensive income (Agenda Paper 3A)

In June 2022, the IASB discussed feedback to Request for Information (RFI) Post-implementation Review of IFRS 9—Classification and Measurement on equity instruments and the other comprehensive income (OCI) presentation option.

At this meeting, the IASB was asked to decide whether, and if so when, to take further action to respond to these findings.

Staff recommendation

Based on the analysis of feedback against the PIR framework, the staff did not recommend any changes to the requirements in IFRS 9. However, to increase the usefulness and transparency of information provided about the overall performance of equity investments for which the OCI presentation election was made, the staff recommended amending paragraph 11A of IFRS 7 to require disclosure of the aggregated fair value of equity investments for which the OCI presentation option is applied at the end of the reporting period and changes in fair value recognised in OCI during the period.

IASB discussion

IASB members were overall supportive of the staff recommendation not to make any changes to the requirements in IFRS 9. IASB members were also supportive of the staff suggestion to amend IFRS 7 to include additional disclosures requirements. Two IASB members questioned whether the amendment should require the additional disclosure in a reconciliation format. However, other members stated that the requirements should not prescribe the format.

Business model assessment (Agenda Paper 3B)

The purpose of this paper was to ask the IASB to decide whether they agree with the staff recommendation to not take any further action on the matters identified with regards to the business model requirements.

Summary of general feedback

Most of respondents shared the view that generally the business model assessment achieves the IASB’s objective of providing users of financial statements. However, respondents expressed mixed views on its consistent application. Some respondents acknowledge that differences exist in how entities determine business model, however it doesn't necessarily reflect inconsistent application. Many respondents said that the business model assessment is not always being applied consistently and asked the IASB to provide additional application guidance and illustrative examples. Some respondents (particularly regulators, standard-setters and investors) expressed support for the IFRS 9 requirements for reclassification while some others (particularly preparers) said the requirements are too restrictive. These respondents suggested the IASB to change the requirements to be less restrictive in relation to specific circumstances such as loan syndications, factoring arrangements, internal transfers and changes in economic environments.

Key application questions

Overall, respondents expressed positive views on the business model requirements. Most respondents encourage the IASB to use the PIR as an opportunity to make targeted improvements to the classification and measurement requirements in relation to specific transactions, rather than fundamental aspects of IFRS 9.

Level at which business model is assessed

Questions were raised about the business model assessment in a consolidated group with multiple levels of subsidiaries. Respondents said that it is possible for the same asset to be managed by different entities within a consolidated group, which lead to different business model assessments. Those respondents asked the IASB to clarify how to determine the level at which to assess the business model both within an entity and a consolidated entity because the classification can be different depending on the level of aggregation.

The staff considered whether more application guidance would help to resolve any diversity in practice that arise from the application of the business model requirements and concluded that IFRS 9 already provides detailed application guidance. Therefore, the staff are not recommending further application guidance to be added.

How to consider sales in the business model assessment

Respondents asked for more application guidance concerning how to consider ‘sales’ in the determination of the business model for a portfolio of assets. A few respondents asked the IASB to explain sufficiently the terms ‘infrequent’ and ‘insignificant’, and even suggested providing a threshold for each in order to increase comparability. A few other respondents also said that the IASB should amend those requirements to include the rebalancing of portfolios for reasons other than changes in credit risk, for instance shifting of portfolios toward ESG investments or sales related to unexpected circumstances, such as the COVID-19 pandemic.

The staff acknowledged that judgement is involved based on relevant information available at the time when assessing the entity’s business model, and therefore adding a quantitative threshold of ‘sales’ to distinguish between business models, would not only be arbitrary, but also inappropriate considering the different ways entities conduct business and use financial assets to achieve their objectives.

Distinction between the business models

Questions were raised about the distinction between the ‘held to collect’ and the ‘held to collect and sell’ business models, and also about the difference between a ‘significant’ buying and selling activity in the ‘held to collect and sell’ business model and an ‘active’ buying and selling activity in another business model. A few respondents were of the view that users of financial statements would be best served with information from only two measurement categories (fair value through profit or loss (FVTPL) or amortised cost).

A few respondents said that sometimes it is difficult to determine the business model and asked for additional guidance. However, the staff found that feedback on the RFI and outreach did not suggest any evidence that matters are widespread. The staff therefore are of the view that there is no evidence that the benefits of removing the fair value through OCI (FVTOCI) category will outweigh the cost of maintaining the current three measurement categories.

Reclassification and consideration of management’s intention

A few respondents asked how to understand the difference between business models and management’s intention. Respondents said that the initial business model does not change easily because IFRS 9 permits reclassification only under rare circumstances. However, there are some situations where the business model (or management intention) has to be changed. They are of the view that sometimes a ‘held to collect’ business model would no longer reflect how financial assets are managed and how cash flows are expected to be realised at the reporting date if the financial assets are not reclassified.

The staff considered that it is not possible to develop a principle-based solution for when reclassifications should be required, other than for changes in the business model. This is because management’s intentions are affected and influenced by a wide range of factors and could change quite frequently. Requiring or permitting reclassifications in such cases would lead to frequent changes to the measurement basis of financial assets. This is something that users have said previously would not result in useful information. The staff therefore did not recommend any changes to be made to the reclassification requirements in IFRS 9.

Other application questions

The staff also analysed other application questions that were raised by respondents to the RFI related to features that expire with the passage of time, amending the reclassification accounting out of the FVTOCI measurement category into amortised cost, whether ‘reporting period’ includes interim reporting periods and business model assessment for assets and liabilities that are managed together.

The staff recommended no further action to be taken on those matters.

IASB discussion

IASB members were overall supportive of the staff recommendation not to take any further action on the matters identified with regards to the business model requirements.

Exploring possible narrow-scope amendments for electronic cash transfers (Agenda Paper 3C)

In September 2021, the IFRS Interpretations Committee (IFRS IC) published an agenda decision about the recognition of cash received via an electronic transfer (payment) system as settlement for a financial asset applying IFRS 9, recommending not to add a standard-setting project to the work plan.

In September 2022 the IASB tentatively decided to explore narrow-scope standard-setting as part of its post-implementation review (PIR) of IFRS 9—Classification and Measurement.

At this meeting, IASB members was asked whether they agree with the staff proposal to explore permitting the derecognition of financial liabilities before settlement date if specified criteria are met, and whether they have any other comments or suggestions to help direct the staff's further work.

Objectives of narrow-scope standard-setting

The staff noted that there is no evidence to suggest that a fundamental change to the derecognition requirements in IFRS 9 is justified or needed, which is consistent with the overall feedback to the PIR that the derecognition requirements in IFRS 9 work as intended, and with the Accounting Standards Advisory Forum (ASAF) feedback that, although questions arise in practice about the application of the derecognition requirements, these questions are not pervasive and therefore not a priority for the IASB to consider.

The staff think that there are two potential narrow-scope standard-setting avenues to explore:

  • Clarification of particular aspects of the derecognition requirements in IFRS 9
  • Development of an accounting policy choice to permit derecognition of a financial liability before the settlement date when specified criteria are met

Staff analysis on possible narrow scope of standard-setting

Clarification of particular aspects of the derecognition requirements of IFRS 9

The objective of such a potential clarification to IFRS 9 would be to clarify when the contractual rights to the cash flows from a financial asset expire or a financial liability is extinguished. Respondents to the IFRS IC’s tentative agenda decision said that determining the exact timing of the extinguishment of the liability and of expiry of the rights to the cash flows could be time-consuming, costly and may involve significant (legal) analysis.  They also said the legal analysis could identify a difference in timing between when a trade payable is extinguished and when the cash transferred as settlement for that trade payable is no longer available to the entity. 

The staff’s preliminary view is that clarifying the general derecognition requirements in IFRS 9 could have unintended consequences. It could potentially result in requiring a fundamental change to the existing requirements that would affect transactions beyond which concerns were raised. Also, considering such an amendment would go beyond a narrow-scope project. It would require consultation, time and resources and, therefore, could not be completed in a timely manner.

Accounting policy choice when specified criteria are met

The objective of this approach would be to explore whether derecognition could be permitted before the settlement date when specified criteria are met.  For the purpose of exploring potential narrow-scope standard-setting, the staff think it might be helpful to consider whether an entity has lost control of cash when initiating an electronic payment. A potential accounting policy choice would permit an entity to derecognise a financial liability before the settlement date when using an electronic transfer system, provided that:

  • The entity is irrevocably committed to the cash payment and therefore has effectively lost control of the cash
  • The initiation and completion of the cash transfer takes place within a short timeframe as established by market convention for such electronic payments
  • Completion of the cash transfer is subject only to an administrative process and not settlement risk of the entity

The staff’s preliminary view is that the introduction of an accounting policy choice for financial liabilities is the preferred option to pursue to ensure a timely and effective response to the concerns raised while avoiding unintended consequences.

IASB discussion

IASB members were overall supportive of the staff recommendation to introduce an accounting policy choice for financial liabilities. One IASB member questioned why the proposed accounting policy choice is limited to electronic cash transfers rather than a principle-based delimitation to include other forms of payments. The staff clarified that such scope widening would consume a significant amount of time. In benefit of time and provided that the Board agree with the criteria proposed, the staff suggested to consider what can be done in relation to the scope and present an adjusted proposal at the November IASB meeting. At that meeting, the IASB would be asked permission to include this proposal in the Exposure Draft (ED) related to SPPI, avoiding having two EDs running simultaneously.

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