Notes from the London financial instruments roundtable

  • Comprehensive Revision to IAS 39 Image

12 Sep 2009

The IASB conducted a Roundtable on Financial Instruments – Classification and Measurement at the Board's offices in London on Thursday 10 September 2009. Board member Robert Garnett chaired the sessions, and Board members Stephen Cooper, Amaro Gomes, Jim Leisenring, John Smith, and Wei-Guo Zhang, and FASB Chairman Robert Herz, were at the table.

Presented below are the preliminary and unofficial notes taken by Deloitte observers at the Roundtable. Our project summary is Here.

Notes from the Financial Instruments Roundtable - 10 September 2009, London

Overall comments

There was broad agreement with the mixed measurement model proposed by the IASB, and with the 'business model' overlay. The FASB approach (all financial instruments at fair value on the balance sheet; with some changes recognised in profit and loss, others in other comprehensive income) did not receive much support. The political realities facing the IASB were acknowledged, and participants were largely supportive of the IASB's efforts to address financial instrument accounting on a timely basis-although this did potentially compromise short-term convergence with the FASB.

Items that must be measured at fair value through profit and loss

There was a genuine consensus that the IASB's choice of a mixed measurement model was the appropriate one, at least at this stage. Participants also agreed that both the terms of the instrument and the entity's business model were important considerations in determining the appropriate accounting. However, there were divergent views about whether one should have primacy over the other.

Many participants supported the IASB's proposals, at least for financial assets, but some expressed concerns about the consequences for liabilities. Many supported fair value as the default measurement attribute, with the onus on the entity to prove that the criteria for amortised cost measurement were met; although some were less enthusiastic and wanted a wider role for amortised cost.

Many participants were concerned about how the IASB had defined the amortised cost category, in particular about how operational the 'basic loan features' and 'managed on a contractual yield basis' attributes were (more guidance was requested); but views were mixed about whether the proposed cut would lead to more or fewer instruments being measured at fair value.

The proposed elimination of the concept of embedded derivatives was criticised and some participants would support a simplified approach to bifurcating embedded derivatives. However, there was also significant support for eliminating embedded derivatives altogether.

Some participants challenged the IASB's conclusions that distressed debt could not have basic loan features, noting that the distressed debt example illustrated the need for the IASB to identify the principles underlying 'basic loan features', rather than trying to illustrate their intentions through examples. However there was general agreement that leverage in an instrument was not a basic loan feature.

The 'other' measurement category

The roundtables discussed how an instrument should be measured if it is not measured at fair value through profit and loss. The IASB has proposed that the other category should be amortised cost; the FASB has proposed fair value through other comprehensive income.

Bob Herz introduced the FASB's proposed alternative, noting that the FASB had opted for a fair value approach because, in their opinion, amortised cost was not as relevant as a current measure. In addition, by requiring fair value on the balance sheet, the FASB sought to ensure that quarterly and annual earnings releases reported the fair value of financial instruments, rather than waiting for the financial statement footnote disclosure.

Participants did support achieving a converged answer on this issue, although not all agreed what this should be. There was a concern that neither the IASB nor the FASB had a clear understanding of what should be recognised in OCI and why; and whether items recognised in OCI could or should be reclassified to profit and loss. Participants from certain industries (for example, fund management and some insurers), wanted the ability to use OCI to reflect their long-term management of a portfolio of items while retaining the ability to reclassify realised gains and losses to profit or loss.

Some participants were supportive of the FASB's 'balance sheet at fair value' approach, but others did not support this – especially measuring liabilities at fair value. In addition, there was concern about the extent to which the fair value adjustment was recognised in profit or loss, although others were equally concerned that interest and impairment might not always be recognised in profit and loss (this applies particularly to the IASB's proposals on equity instruments).

Exceptions to the general principles

Equity instruments

There was significant criticism for the IASB's proposal that some equity instruments not held for trading should be measured at fair value with subsequent changes in fair value recognised in other comprehensive income. A significant number of participants supported an alternative approach that would retain the current 'available for sale' category for equity instruments only, with a simplified impairment test (lower of cost and current market value) with the requirement that subsequent reversals up to original cost should be recognised.

A few participants suggested retaining the 'cost' exception for unquoted equities. In response, other participants noted that considerable progress had been made in recent years in measuring private equity instruments, especially given the growth in private equity financing. There are reasonably robust models available.

Some participants, notably from Europe, were concerned many of the instruments in the fair value through profit and loss category also had a significant level of measurement uncertainty attached to them, and encouraged the IASB to explore whether it would be possible to reflect the measurement uncertainty in other comprehensive income (although they did not suggest how this might be achieved).

Securitisation transactions

Participants in both sessions discussed securitisation transactions in the context of multiple tranche or 'waterfall' transactions. The proposed application guidance states that 'any tranche that provides credit protection to other tranches in any situation does not have basic loan features.' Many participants suggested that it was preferable to have a two-step approach to determining whether a tranche had basic loan features. This involved 'looking through' the securitisation vehicle to the underlying assets and cash flows. 'Looking through' was difficult, but it was possible in many situations. If it was not possible to look through, fair value should be required.

IASB members around the table challenged participants, especially those from the investment banks, about whether it was possible to look through a securitisation transaction: the IASB had previously been told by some that it was not operational, now it seemed it was.


A significant number of participants stated that, should the business model 'overlay' be retained, reclassification should be mandatory if the business model changed. Participants noted that 'business model' was not a euphemism for 'management intent', but went to the core of the business; its fundamental purpose; how it was run; etc. Consequently, changes in the business model would likely be very infrequent.

This summary is based on notes taken by observers at the roundtable and should not be regarded as an official or final summary.


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