IASB October 2008
As part of its annual improvements project, the Board discussed two issues in IAS 39 Financial Instruments: Recognition and Measurement. The issues relate to the definition of a derivative and the effective interest method.
Definition of a derivative
The Board considered comments received on the amended definition of a derivative proposed in the exposure draft Improvements to International Financial Reporting Standards, published in 2007. The definition in IAS 39 excludes contracts linked to non-financial variables that are specific to a party to the contract. The exposure draft proposed to delete this exclusion.
The Board tentatively decided not to proceed with the proposed amendment in the annual improvements project but will consider addressing this issue in a future project.
Effective interest method
Earlier this year, the IFRIC received a request for guidance on the application of the effective interest method to a financial instrument with future cash flows linked to changes in an inflation index. The IFRIC did not add the issue to its agenda but recommended that the Board should consider clarifying or expanding the relevant guidance in IAS 39.
At this meeting, the Board decided tentatively as follows:
- For the effective interest method, a floating rate financial instrument is an instrument with contractual variable cash flow amounts arising from changes in market variables. The Board will not define the term market variable but may provide examples.
- Expectations (and changes in expectations) of future cash flows are not considered when calculating the effective interest rate for floating rate instruments.
The Board asked the staff to prepare a draft of the proposed amendments.