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IFRS 9/IFRS 5 — Discontinuation of hedge accounting and business model assessment when a subsidiary is held for sale

Date recorded:

IFRS 9 Financial instruments/IFRS 5 Non-current Assets Held for Sale and Discontinued Operations — Discontinuation of hedge accounting and business model assessment when a subsidiary is held for sale — Agenda paper 8

Background

This was a new item and compriseds two issues, both of which related to the application of IFRS 9 requirements when a subsidiary is classified as held for sale.

Issue 1

This was about a subsidiary that applies cash flow hedge accounting to forecast transactions that are anticipated in the subsidiary. The forecast transactions are expected to occur after the expected date of disposal of the subsidiary. The submitter asked whether the group should discontinue hedge accounting in the consolidated financial statements from the date the subsidiary is classified as held for sale.

Issue 2

The submitter described a situation in which a subsidiary classified as held for sale holds financial assets with the objective of collecting contractual cash flows. The question was whether these financial assets should be considered as being held within a ‘hold-to-collect’ or ‘hold-to-sell’ business model in the group’s consolidated financial statements.

Staff analysis

Issue 1

View 1 — discontinue hedge accounting on the date the subsidiary is classified as held for sale. Supporters of this view believe that the assessment of a qualifying hedging relationship should be performed from the group’s perspective (as opposed to the subsidiary’s perspective) based on whether the transaction is highly probable and could affect the group’s (as opposed to the subsidiary’s own) profit or loss. Given that the forecast transactions are expected to occur only after the expected date of disposal of the subsidiary, these transactions are no longer expected to occur from the group’s perspective as soon as the subsidiary is classified as held for sale. Accordingly, they are no longer eligible hedged items and the group should discontinue hedge accounting from the date the subsidiary is classified as held for sale.

View 2 — discontinue hedge accounting on the date the subsidiary is sold. The forecast transactions are designated as hedges at the transaction level per IFRS 9.6.3.1 and they are still expected to occur from the subsidiary’s perspective. Supporters of this view therefore believe that the group should continue to apply hedge accounting in the absence of any factors requiring its discontinuation in accordance with IFRS 9.

Issue 2

View 1 — ‘hold-to-sell’. Similar to issue 1, supporters of this view believe that the assessment of the business model should be made from the group’s perspective (as opposed to the subsidiary’s perspective). As the group has made a strategic decision to sell the subsidiary, from the group’s perspective the business model for the subsidiary’s financial assets is ‘hold-to-sell’.

View 2 — ‘hold-to-collect’. IFRS 9.B4.1.2 states that ‘[a]n entity’s business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective…. Consequently, classification need not be determined at the reporting entity level…’. Accordingly, proponents of this view believe that it would be appropriate to assess the financial assets of a subsidiary from the latter’s perspective, which is still under a ‘hold-to-collect’ business model.

Staff recommendation and next step

The Staff supported view 1 for both issues for the reasons stated above.

The Staff intended to seek feedback from the IC during this meeting and to take the issue to the Board for deliberation.

Discussions

The majority of IC members believed that this was a broader issue which might affect current accounting under IAS 39, and strongly suggested that the Staff perform outreach to assess how entities were accounting for these issues under IAS 39. Although the IC members could follow the Staff’s analysis, many of them believed that in practice, entities are not arriving at the Staff’s proposed view. Some members also suggested that the Staff identify other issues which might have similar implications so that the Board could debate this issue more holistically.

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