Cover paper (Agenda Paper 16)

In March 2023, the IASB published Exposure Draft Amendments to the Classification and Measurement of Financial Instruments (ED). This paper addressed the feedback on Question 1 of the ED about the derecognition of a financial liability through electronic transfer and Question 5 on the disclosures relating to equity investments and other comprehensive income.

This paper was not discussed.

Feedback analysis—Derecognition of financial liabilities through electronic transfer (Agenda Paper 16A)

Question 1 of the ED asked for feedback on the proposed requirements regarding the derecognition of a financial liability through electronic transfer.

The IASB proposed, in paragraph B3.1.2A of the ED, to clarify that an entity is required to apply settlement date accounting when derecognising a financial asset or a financial liability. In addition, when meeting the proposed requirements in paragraphs 3.3.8-3.3.10 of the ED, an entity is permitted to deem a financial liability that is settled using an electronic payment system to be discharged before the settlement date.

Most respondents agreed with the proposal in paragraph B3.1.2A of the ED but said that further clarifications are needed to limit the risk of unintended consequences. The staff acknowledges that the reference to settlement date accounting might appear inconsistent to other requirements in IFRS 9. Therefore, to avoid any unintended consequences, the staff recommended adding an explanation that the settlement date refers to the date on which the right to receive or obligation to pay cash (or another financial asset) is established or extinguished.

In relation to the proposed criteria for derecognising a financial liability before the settlement date, some respondents suggested the scope should be expanded to include other payment methods. However, the staff concluded that this is a narrow-scope amendment and the settlement risk for other payment methods is insignificant. Some respondents asked for the scope to be expanded to financial assets. However, the staff believed this is not appropriate as there is no equivalent notion of having no practical ability to withdraw or cancel a payment.

Some respondents stated that the criteria would set too high a threshold to overcome in practice resulting in little practical benefit. The staff agreed and recommended making it clear that this relates to the practical ability to access the cash. However, the staff does not believe that the term ‘practical’ needs further explanation.

Staff recommendation

The staff recommended finalising the proposed amendments subject to:

• Deleting the reference to 'settlement date accounting' and instead replacing this with a reference to 'settlement date' in a revised version of paragraph B3.1.2A of the ED along with an explanation that settlement date refers to the date on which the right to receive or obligation to pay cash (or another financial asset) is established or extinguished
• Aligning the requirement in paragraph B3.3.8(a) with that of paragraph B3.3.8(b) of the ED so that both refer to ‘practical ability’

IASB discussion

Overall, IASB members were supportive of the staff’s paper and recommendations.

A few IASB members commented on the feedback on the scope of the project. The IASB had considered the scope in detail when the proposals were developed and the explanations in the paper on the rationale for the decisions made was reflected well in the paper. IASB members asked that the rationale for the scope was clearly explained in the Basis for Conclusions (BC).

In terms of including financial assets in the scope of the project, IASB members did not see enough evidence from the feedback that this needs to be addressed. However, one IASB member noted that he would like to understand the impact of this ED on the Interpretations Committee’s tentative agenda decision. Another IASB member highlighted that the tentative agenda decision was not approved by the IASB and therefore is not approved literature.

Feedback was received that it is not clear whether and how the exception to derecognising a financial liability would apply if a payment instruction would be settled by way of an overdraft or other similar facility with a negative balance. The staff noted in their paper that this was address by BC37 of the ED. However, an IASB member noted that it was addressed in a very subtle way in BC37 and asked the staff to make this more explicit.

As the requirement applies for all settlements made through the same electronic system, an IASB member asked if an exception could be made for intercompany payments. However, the staff commented that no exception for intercompany balances exists in the Standard and therefore thought this would be inappropriate.

IASB decisions

All 13 of the IASB members present (one member was absent) voted in favour of the staff recommendation.

Feedback analysis—Equity instruments and other comprehensive income (Agenda Paper 16B)

Question 5 of the ED asked for feedback on the proposed disclosure requirements for investments in equity instruments designated at fair value through other comprehensive income (OCI). This paper analysed the feedback and provided some recommendations.

As part of the feedback from the post-implementation review (PIR), some participants said that the prohibition of reclassification of amounts accumulated in OCI to profit or loss in IFRS 9, does not faithfully represent the performance of the equity investments on disposal. However, as part of the PIR the IASB found no evidence that recycling would necessarily result in more or better information. The IASB did however propose the following disclosure amendments:

• Amending IFRS 7:11A(c) to not require disclosure of the fair value of each investment at the end of the reporting period
• Adding IFRS 7:11A(f) to require an entity to disclose the changes in fair value presented in OCI during the reporting period, showing separately the amount of that change related to equity investments derecognised during the reporting period and the amount of that change related to equity investments held at the end of the reporting period

Most respondents welcomed the amendments to not require disclosure of the fair value of each equity investment, however noted that the requirement does not explicitly require disclosure of the aggregate fair value of these equity investments. The IASB intended for an entity to determine the appropriate level of aggregation. Therefore, to avoid any confusion, the staff recommends adding that the information is required by class of equity investment.

Some stakeholders suggested that a transfer to retained earnings of the cumulative fair value gains or losses relating to an equity investment that has been derecognised should be required. However, the staff believes this would be burdensome and beyond the scope of this project. On the other hand, the staff agrees that if an entity chooses to transfer any amounts within equity relating to the equity investments that were disposed of, it would be useful to readers to require disclosure of the amount being transferred and the component of equity it is being transferred to (i.e. include a disclosure requirement similar to IFRS 7:11A(e) in IFRS 7:11B).

Staff recommendation

The staff recommended that:

• The introduction sentence in IFRS 7:11A is amended to require disclosure of information in that paragraph per class of equity investment
• The proposed amendments to IFRS 7:11A(c) and the proposed addition of IFRS 7:11A(f) are finalised as drafted in the ED
• A disclosure requirement similar to that in IFRS 7:11A(e) is included in IFRS 7:11B

IASB discussion

Respondents acknowledged the IASB’s rationale and decision not to permit recycling of fair value gains or losses accumulated in OCI to profit or loss. The paper states that the IASB will monitor new information and further evidence when such information becomes available, especially from the insurance industry. An IASB member asked the staff to ensure they are continually doing so.

Some feedback suggested that disclosing changes in fair value of equity investments derecognised during the reporting period, separately from those still held by the entity at the reporting date, will result in additional costs. However, the staff believed this information would not cause any additional cost. The IASB discussed this point and while they concluded that there may be some additional cost involved, this cost would not outweigh the benefit of this disclosure.

For disclosures of changes in fair value, the staff paper makes it clear that there is no need for tracking fair value changes related to equity investments that have been disposed of during previous reporting periods. An IASB member noted that this was important information that should be included in the BC.

IASB decisions

All 13 of the IASB members present voted in favour of the staff recommendation.