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Exposure Draft on measurement of financial liabilities

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11 May 2010

The IASB has published for public comment an exposure draft (ED) proposing to amend the way the fair value option in IAS 39 Financial Instruments: Recognition and Measurement is applied with respect to financial liabilities.

Many investors and others have said that volatility in profit or loss resulting from changes in an entity's own credit risk is counter-intuitive and does not provide useful information – except for value changes relating to derivatives and liabilities held for trading (such as short sales). The IASB is proposing, therefore, that all gains and losses resulting from changes in 'own credit' for those financial liabilities that an entity chooses to measure at fair value should be recognised as a component of 'other comprehensive income' (OCI), not in profit or loss. Such gains or losses would be presented using a 'two-step approach':
  • As a first step, an entity would present the full change in fair value in profit or loss.
  • In the second step, the portion relating to changes in an entity's own credit risk would be presented as an offsetting entry in profit or loss and presented in OCI.

The ED does not propose any other changes for financial liabilities. Consequently, the proposals will affect only those entities that elect to apply the fair value option to their financial liabilities. Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so. That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the 'own credit' issue that these proposals cover.

The proposals in the ED are presented as a self-contained issue for public comment. However, any finalised requirements would be included in IFRS 9 Financial Instruments in the chapter on classification and measurement of financial liabilities. Also, any guidance in IAS 39 or IFRS 7 Financial Instruments: Disclosures that is still relevant to the finalised requirements would be moved to IFRS 9 as well.

Comment deadline on ED/2010/4 Fair Value Option for Financial Liabilities is 16 July 2010. Click for IASB Press Release (PDF 100k). Link to IAS Plus Project Page.

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