This week, the IASB issued its exposure draft proposing limited amendments to IFRS 9 (2010), Financial instruments. The proposed amendments are intended to: (1) Address application issues that have arisen since the original issuance of IFRS 9 with regard to financial assets measured at amortized cost, (2) Consider the interaction with the IASB’s insurance project, and (3) Reduce differences between IFRS 9 and the FASB’s proposed classification and measurement approach. This In brief article provides an overview of the IASB's proposed amendments and what's next.
This week, the IASB issued its exposure draft proposing limited amendments to IFRS 9 (2010), Financial instruments. The proposed amendments are intended to:
The IASB finalized its guidance on classification and measurement of financial assets in 2009 and financial liabilities in 2010, while the FASB has continued to develop its approach. A year ago, the FASB and IASB agreed to conduct joint discussions on the topic. Those meetings were completed earlier this year. This exposure draft represents the IASB's proposed changes to its existing guidance resulting from the joint discussions. The FASB is currently drafting its exposure draft that it plans to issue for public comment in the first quarter of 2013.
A copy of the IASB's exposure draft is available on its website at www.ifrs.org.
The proposal focuses on the accounting for debt investments. IFRS 9 currently requires debt investments to be classified and measured at amortized cost if they meet the “contractual cash flows characteristics” test and are held in a business model where the primary objective is to hold to collect contractual cash flows. Other debt investments are measured at fair value with changes in fair value recognized in profit or loss.
Third measurement category added
The proposal adds a third measurement category for debt investments: fair value with changes in fair value recognized in other comprehensive income. A debt investment will fall in this category only if it meets the “contractual cash flow characteristics” test and is held in a business model that is managed both to collect contractual cash flows and for sale. These instruments will follow the same impairment and interest income recognition approach as debt investments measured at amortized cost. Amounts recognized in other comprehensive income will be recycled to profit or loss when the investment is derecognized.
Clarification of amortized cost measurement category
The proposal clarifies the primary objective of "hold to collect." Among other things, it provides additional application guidance on the types of business activities and the frequency and nature of sales that would allow debt investments to qualify for amortized cost. For example, a portfolio of debt investments that an entity would only sell in a "stress case," which is expected to be infrequent, would be consistent with the amortized cost business model.
Additional guidance for the "contractual cash flow characteristics" test
Debt investments are eligible to be measured at amortized cost under IFRS 9 if their contractual cash flows represent solely payments of principal and interest. In order to make this determination, the proposal requires an entity to assess contractual terms that could change an instrument's cash flows by reference to a benchmark instrument (i.e., an instrument with cash flows consisting purely of principal payments and compensation for the time value of money and credit risk). If the difference between the cash flows of the benchmark instrument and the instrument under assessment is more than insignificant, the debt investment will be measured at fair value with changes in fair value recognized in profit or loss.
The proposal focuses only on debt investments and is expected to be broadly consistent with the FASB's proposed approach. While not addressed by this proposal, the FASB and IASB also have broadly consistent approaches for financial liabilities. However, a number of differences still exist in other areas, such as the accounting for equity investments.
Any entity that holds financial assets is affected by the guidance in IFRS 9. Entities in the financial services sector are likely to be most impacted by the proposal.
The proposed changes would be effective at the same time that IFRS 9 is effective, which is January 2015. The proposal would also make some changes to the IFRS 9 transition provisions. One key proposal the FASB is also considering would allow an entity to early adopt only the requirements for the presentation of fair value gains or losses attributable to changes in the issuer's own credit risk.
The comment period for the IASB’s proposal ends on March 28, 2013. The FASB is expected to issue its proposal in the first quarter of 2013. In the coming weeks we will issue a Dataline summarizing what we expect to see in that FASB proposal.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).
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