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It looks like the IASB is really interested in our opinion on the own credit risk issue. If you want to give them your opinion (and mine is pretty clear) then you need to become a registered user of the IASB website (come on – you know you are really interested and you do not have to admit it to anyone) and then email them at “”.

It would be worth doing if it gets them to a sensible position. Of course, many banks and other enterprises may find it “sensible” to allow the inclusion of own credit risk in the value of a liability – it would serve to reduce the disclosed value of the liabilities of the company, perhaps taking a failing enterprise to a position where they are then able to show a positive net worth. It would also improve the capital position of banks.

That would be a truly perverse outcome.

Once for the real financial accounting for financial instruments nerds*.

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments was released a few days ago. This is the interpretation designed to cover debt for equity swaps, where an entity gives up some equity in exchange for the extinguishment of some or all its liabilities.

There will be no surprises in the final decision(s) – when you issue equity then that equity forms part of the consideration for the extinguishment, the shares issued are measured at fair value unless fair value cannot be measured, in which case they are measured as a residual amount on the liabilities (which are measured at fair value) and any resulting differences are put through P&L in the current period.

All of this follows what was expected and, to be honest, good sense.

The more astute of you may look at this and note that I am supporting the measurement of financial liabilities at fair value in this case – and you would be right, I normally do not. In this case, though, the liabilities are being extinguished, rather than being measured, so using fair value is appropriate.

The questions I would like to ask from a theoretical view is on the equity side – IFRIC 19 is clearly canvassing a situation where equity instruments cannot be fair valued, yet the new IFRS 9 says they must be.

Am I the only one to see a conflict here? I would guess this IFRIC will lapse on full implementation of IFRS 9.

Oh – and if the AASB can get a version of both of these up there soon I (and many others) would appreciate it.


*I like it that “financial” can be in there twice. I tried to work out how to get rid of it, but I did not try too hard.

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. Read the rest of this entry »

There is a heck of a lot in this, so I have split this into two posts – one on the exposure draft (ED) on amortised cost (AC) and impairment and one on the (now released) “final” standard on classification and measurement – which is also long and will take a day or so. If you want to know why that is in scare quotes, go there when it appears.

As you can tell from the title, this is the one on amortised cost and impairment.

To read what the IASB has to say on this, go here for the press release and here for the content. As previously advised, I would suggest sticking to the basis for conclusions (BCs) as they are more readable, but if you want to submit a comment, you will need the exposure draft.

Having now read this a couple of times and listened to the webcast, I am still uncertain in a number of areas. I think this is going to take some work over the next couple of weeks to get sorted out and then the (now) three years’ implementation period to get roughly right.

That’s right – three years. As part of the release of this section the Board said that the earliest date for mandatory adoption will be 1 January 2013 – with early adoption permitted. This is apparently as they realise the complexity of this (I feel like saying no and a certain four letter word at this point) and to align with the prospective new insurance contracts standard. It may even be delayed past 2013 if that standard is delayed. In the webcast to night they were at pains to say they did not want to have insurance companies unduly inconvenienced by having a double change of standards.

I will work through the ED in the order in the BCs  as I have advised reading those. Where there is something in the ED that I find interesting I will cover it even if it is not mentioned in the BCs. Read the rest of this entry »

As I believe we are allowed to call it now, the IASB will be hosting another webcast tonight (Australian time). I will be attending to keep up, as prompted by bruce in comments. If you are interested in the standard, and can stand listening to discussions on accounting standards by highly technical accountants late at night, I would suggest attendance.

I will be holding back on a full summary of this part of the new standard until after that webcast as, to be frank, some of the parts of the draft standard look very odd, and I want to make sure I understand them properly before I rush to judgement. At first glance, though, it looks like being even more technical than the existing, with an enormous amount more disclosure – some of which is likely to be counterproductive. The stress-testing disclosures could fall into this category, for example.

Many other things about it appear, ummm, very “interesting”. One thing in particular is the likely mandatory date – some time in 2013, with early adoption permitted. I cannot see many choosing early adoption if it is as I understand it to be – something actually acknowledged in the BCs.

If this goes ahead as it is I think it will be a(nother) feeding frenzy for the accounting firms. I might try and get back in.

Oh – and if you want to get a copy for yourself, it is here. Unless you particularly like reading standards, I suggest downloading the BCs as they are a touch more readable and cover their actual reasons for the decisions.

A fairly late night for me – just finished this webcast (sorry, slides only ATM – they are releasing the webcast later). While the IASB were pitching this as a bit of a status update, they could not help but give some interesting pointers on where they are going and, as a result, what issues they feel fairly strongly about.

The main issues identified in the recent ED were:

  1. There seems to be a fair amount more clarity needed about the instruments that were to be allowed to be treated as amortised cost – the wording about “basic loan features” was considered a bit woolly.
    I would agree – but to me this should be able to be handled in some application guidance not in the main standard.
  2. There remain a number of questions around the own credit rating issue – if you fair value your own traded bonds you are implicitly including your own credit rating. This issue seems to be rather thorny. It may not go any further in any case as the IASB seem to be backing away from this, calling the method “not decision useful”.
    I would disagree – the issue is not difficult. An entity should not be able to recognise any possibility that it will not be able to meet its obligations as and when they fall due in any way, shape or form. This is a violation of the going concern principle.

Other issues covered were:

  1. Progress on the impairment model seems to be progressing – the use of an expected loss model seems to be one of the barrows the IASB are pushing, with the difficulties seen to be more around cost and practicality than general principles.
    They are proceeding to establish an experts advisory group to advise them on operational issues, application guidance needed and to facilitate field testing.
    I may have misunderstood here, but I do have a problem with this and on several levels. For anyone other than a very large corporate or a sizable bank this is not cheap to do. In Australia at least, this standard applies to all entities, so this is likely to be a significant cost.
    The other main problem I have is one of the whole principle. An EL model is inherently forward looking – yet a “Statement of Financial Position” is a point in time concept and an income statement is (by definition) backward looking. To me, the current impairment method is one of the strengths of IAS 39. Making it easier would be good. Violating the whole principle of financial statements is not. This seems to be one of the areas that the BIS would like to see in – but I have given my opinion on that before. I will be keeping a close watch here.
  2. Our old favourite of hedge accounting got a good look in as well, with an ED likely to come out in December. The changes here may well be extensive, with the IASB looking to simplify cash flow hedge accounting and making the fair value method more like the cash flow hedging. This could be achieved by changing it to have the hedged item left at amortised cost and changes in FV of the hedging instrument going through OCI.
    One word here – “yay”. If you want some more words – I have dealt with many clients that just gave up on this whole area – sometimes on my advice – as it was just too difficult. Changes here (the FAS 133 shortcut method, please and at first impressions I like the possible new FV method)  would be very good.

The other areas that were discussed were the likely effects on the upcoming insurance standard(s), particularly WRT to 2 above;  the possible removal of the cost exemption for instruments that are difficult or impractical to value and some consideration of what to do with these in interim accounts.

The IASB will be moving to weekly board meetings to try to get all this done in the timescales they have set themselves. Personally, I think this may be a sign that they are preparing to slip the deadlines.

The questions period was short – and the IASB wanted only process questions – but they could not really help themselves on a couple. The best question though, was on the convergence between IAS 39 and FAS 133, in that they both have very different timelines for releases but both are saying they want to converge. All I can say is “get on with it guys”. One standard (as long as it is simple and makes sense) is much, much better than two (or more).

Just for those particularly interested in where IAS 39 is going (OK – you do not need to admit it by putting your hands up). The IASB will be holding a webcast on how they are going:

On 23 September 2009 the staff of the IASB will present two identical webcasts on the project to replace IAS 39. The webcasts will be held at 11am and 5pm GMT. The webcasts will address the following:

•an overview of the feedback received on the Exposure Draft Financial Instruments: Classification and Measurement, the Request for Information – impairment of financial assets and the Discussion Paper Credit Risk in Liability Measurement ; and
•the next steps in the project to replace IAS 39 taking into account the discussions at the September Board meeting
Both presentations will be followed by a Q&A session where registered participants can submit questions via the online facilities.

If you are interested, try attending. It is unlikely to be too exciting*, but it may well be worthwhile.


* …by design – one thing you do not want is too much excitement when discussing accounting standards.

Thanks to financialart for the point at the BCBS’s response to the partial draft of the replacement to IAS 39.

Frankly, though – I am disappointed by their (the BCBS’s) response – which I shall refer to as “the document” from this point on. Overall it is a long wish-list which is in places self-contradictory and makes a couple of evident misunderstandings on the role of IAS 39. For a start, the document makes it look like IAS 39 is just for banks, when it applies to all IFRS reporting entities – and so it has to be able to work for everyone, not just banks.

Perhaps using the old “Good, Bad and Ugly” criteria would be useful – but in reverse order.

The Ugly (the Contradictory or Confusing Parts)

To make one thing clear up front – IAS 39 is an accounting standard, not a prudential standard. Its role is to provide accounting information to external users. Accounting, by its very nature, is (and should be) concerned with facts and (where possible) should avoid as far as possible the use of models to provide accounting information. At times this is not possible (for example in attempting to determine how much of a loan portfolio meets an IBNR classification) but where models must be used they should be very restricted in scope and the accompanying disclosures should be clear. Prudential standards, however, need to be forward looking to a much greater extent as they are designed to answer very different questions.

Accountants are meant to answer questions like “How much was that position worth on balance date?” and “What was the net profit for the year?”. Prudential rules need to be able to answer questions like “What is the probability of this bank failing over the next 12 months?” and “How much liquidity is enough?”. These are very different questions – but the BCBS seems to be trying to have an accounting standard that does both.

The document is also asking (and I agree with it) for a simpler set of standards – they devote a whole section to this request – and then in subsequent sections they ask for what could only be provided through increased complexity. For example, a move from an incurred loss model to a more prudential style one would effectively mandate that every single publisher of financial information using IFRS (i.e. every company in Australia) would need a prudential loss model for their creditors. The new standard would also have to spell out how that was to be done and this would represent an enormous increase in complexity, particularly for smaller banks and non-banks. If this is not to apply to everyone then we would need at least two (differing) impairment models, increasing complexity even further.

The document is also calling for the new Standard to be introduced with a timetable consistent with “financial stability”. This is nonsense. A new standard takes years to write and consult about – this one up until 2012 – so trying to time its introduction is just silly. If it is a better standard it will improve reporting, and so will enhance stability. If it is not, it will hurt and so should not be introduced. Either way, trying to time the end of a multi-year process to enhance “financial stability” is just silly.

I would also add the last sentence of an otherwise Good first section into here – the main point of accounting standards is to provide (as far as possible) “truth and fairness”. Increasing “market confidence” should only come from being respected, not from attempts to tweak the standards to hide the truth.

The Bad

The “tweaks” referred to above are in para 10 of the document, where there is a call to “de-link” the valuation from “certain aspects of income and profit recognition”. The call here is not clear at all and could result (if incorporated in the Standard) a significant role for management judgement in the valuation of difficult to value items. This element will always have to be there, but the sorts of language incorporated here is just dangerous.

Probably the worst misunderstandings in the document are in the area of fair value – with the writer of this letter mixing up the two related (but not identical) concepts of fair and market value. IAS 39 is pretty clear that there are differing ways to measure fair value and only the first (market value in an orderly, liquid market) is really discussed here. The author clearly confuses the two – witness point 4(b) in the document, where the author says that “the new standard should…recognise that fair value is not effective when markets become dislocated or are illiquid”. Ahem – the current standard does that, as does the new draft.

Another Bad bit is directly above – an accounting standard should not “…reflect the need for earlier recognition of loan losses…” than the current standard does – that is a prudential standards’ role. Doing it here would just go back to the old system where management were (to an extent) allowed to put whatever they liked into the provision for doubtful debts. The current method, while at times complex, at least is less susceptible to manipulation.

The Good

To be fair, though, I should recognise the excellent parts of the document. The first section is a combination of motherhood and useful statements (except for the last sentence). The call for more meaningful disclosures is good, and one I have made before. IFRS 7 is both overly complex and too simplistic simultaneously – a good trick at the best of times. The call in the letter to have it revised is timely – the suggestion to make the disclosures in a more standardised format is a good one.

Section 2 and 3 are good – but are contradicted (as covered before) by (inter alia) paras 12 onwards. The rest is broadly good – but mostly just covers areas that are self-evident anyway.

Overall, if this were given to me by a new graduate attempting to write a wishlist for the new IAS 39 I would hand it back with a few complimentary notes on it applauding their efforts. Coming from a major regulator (never mind the peak banking body) I can only shake my head.

The paper from the IASB on the changes to IAS 39 are both more and less interesting than they first appeared. There are a lot of possible changes in there, but at the moment (and as you would expect) they are heavily hedged with questions and possibilities.

First – a word about the process from here. This part of the draft covers only the classification and measurement of financial instruments – so nothing on impairment or hedging, but perhaps there are some hints on the way they are headed. Comments on the draft are due by September 14 and they seem to be hoping to have a finalised new IFRS on this area only by the end of the year. Ambitious, perhaps, but given the relatively focussed nature of the questions in here, possible.

The other sections of IAS 39 will then be progressively deleted as the relevant sections of it are replaced by the new IFRS. The Board expects to have all this finished, with a shiny brand new IFRS that completely replaces IAS 39 to be mandatorily adopted by January 2012, with early adoption permitted. Given work has been progressing for years on this having a further 2 and a half years to bed down the transition is probably enough.
Read the rest of this entry »

I will be going through the exposure draft of the revised IAS 39 (AASB 139 in Australia) and the relevant Basis for Conclusions over the next day or so, but on first impressions it is a distinct improvement on the old, unduly complex, standard. Those who like their accounting updates a little shorter and sweeter, try the Snapshot version.

The cut in the number of categories from four (fair value through income statement, fair value through equity, held to maturity and amortised cost) to two (fair value through income statement and amortised cost) should reduce complexity. The use of the holder’s intent as the basis for accounting for the holding should also be a good step.

As they say, though, the devil is in the detail, so I will read through it. Unlike the old one (at close to 200 pages) this one is only short, at 37 pages plus the BC at 27, so I hope to have a measured response in a day or so.

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