The “final” released standard on classification and measurement as released today is – not final. This is for the simple reason that financial liabilities have been specifically scoped out. The reason for this is simple – the IASB cannot figure out what do do about “own credit risk” on liability instruments. If you want a full(er) discussion on this, please have a look at my last post on this topic, here. Suffice to say they seem to have recognised that this is a problem they were not going to be able to solve in the time they had given themselves, so they dropped it.
I am not sure how they can claim to have completed the first phase when they have dropped part of it, but, given the number of projects I have been involved in that have had to drop deliverables to meet a self-imposed deadline I cannot say I am surprised.
Normally at this point I would link to the finished standard and then talk about it. This, however, I cannot do as the IASB, in line with normal practice, wants you to pay to get to the standard. So instead what I will do is copy the summary of significant decision and then talk about each one in order. Once I have a hard copy of the standard I will give a more rounded response. I am too cheap to pay for my own copy when I can get one in a day or so for nothing.
- Financial liabilities are not currently in the scope of IFRS 9. The
Board is committed to completing its work on financial liabilities
expeditiously and will include requirements for financial liabilities in
IFRS 9 in due course.
My take on this is above. Given that I would (forcefully) argue that own credit risk must not be counted in the fair value of financial liabilities I would agree that this needs a bit more time.
- The Board concluded that there will be no bifurcation of
an embedded derivative where the host is a financial asset. If the host
is a financial liability, or a non-financial item, the bifurcation
requirements in IAS 39 continue to apply.
This looks like a half-way house at the moment. I would expect the “no bifurcation” to be extended to all products when the final standard is made.
- The business model test is applied first in determining whether a
financial asset is eligible for amortised cost measurement. The Board
also rearticulated the business model objective of holding financial
assets in order to collect contractual cash flows rather than realising
cash flows from the sale of the financial assets.
This is a very sensible, common sense outcome. I am just looking forward to the discussions with the auditors.
- The Board confirmed that to be eligible for amortised cost
measurement an asset must have contractual cash flow characteristics
representing principal and interest. IFRS 9 includes examples of
the application of that principle to particular financial assets.
Again, sensible decision. I am not, though, entirely sure how the AAOIFI (Islamic accounting body) and the IFSB (the Islamic FS Board) are going to incorporate this. The interest requirement is problematic. According to this many Sharia FS products would have to be at fair value.
- Unlike the ED, if an entity acquires distressed debt that is managed
with the objective of collecting contractual cash flows, it would be
eligible for amortised cost measurement if it has the necessary
contractual cash flow features.
Again – consistent and sensible. This is getting to be a habit.
- Unquoted equity instruments (and derivatives over such instruments)
must be measured at fair value, however, in limited circumstances, cost
may be an appropriate estimate of fair value. IFRS 9 contains guidance
on when cost may be an appropriate estimate of fair value. However,
measurement of fair value will be subsequently addressed as part of the
fair value measurement project.
I am going to have to read the requirements in depth to see how this lot works. At the moment, I am not sure.
- An entity can elect on initial recognition to present the fair value
changes on an equity investment that is not held for trading directly
in other comprehensive income (OCI). The dividends on such investments
must be recognised in profit and loss but gains or losses are not
Again – sensible.
- If and only if an entity’s business model changes, it is required to reclassify affected financial assets.
Basing it around the business model is a good idea, I am just not sure how this will work in practice. The pressure on auditors to effectively sign off on the business model means, again, I will be interested to see how the negotiations with the auditors go during the first few 2013 audits.
- If a financial asset is eligible for amortised cost measurement, an
entity can elect to measure it at fair value if it eliminates or
significantly reduces an accounting mismatch.
This looks like a step to making hedge accounting easier – but all it is doing is effectively bringing forward a similar provision in IAS 39.
- If an entity holds a tranche in a waterfall structure it must
determine the classification of that tranche by looking through to the
assets ultimately underlying that portfolio and assess the credit
quality of that tranche compared with the underlying portfolio. If an
entity is unable to look through, then the tranche must be measured at
Clearly a reference here to the CDOs and similar instruments that gave us all a few headaches (!) over the last 18 or so months. Again, sensible.
- An entity shall apply IFRS 9 for annual periods beginning on or
after 1 January 2013. Early adoption is permitted. To facilitate early
adoption, an entity that applies IFRS 9 before financial reporting
periods beginning before the first of January 2012 is not required to
This is the carrot to early adopt – if you are thinking of doing so, do it in the last report prior to mandatory, not before. Being the first to go means your audit is likely to be expensive and long as your auditors try to get up to speed. Remember – they will normally have exactly as much experience on this as you have.
That will have to do for the moment – I will put together much more over the coming weeks and, after more mature reflection, I may need to change some of my judgements. Given that the final decisions mostly look fairly sensible I am hopeful that some of the “interesting” proposals in the latest ED will be rectified prior to being incorporated into the final standard.