Sunday 21 March 2010

Phase I - Classification and measurement

On 12 November 2009 the IASB published IFRS 9 Financial Instruments, completing phase 1 of the current project to replace IAS 39.

Please scroll down the page, or click the links below to go to a specific part of this page:

Overview – pre exposure draft

Other Issues

Exposure draft

Redeliberations – post exposure draft

Summary of significant final decisions for publication of IFRS 9

Financial liabilities – post publication of IFRS 9

Overview - pre exposure draft

At the March 2009 joint meeting, the Board and the US Financial Accounting Standards Board (FASB) decided tentatively to consider three potential measurement methods for financial instruments:

fair value - as defined in FASB Statement 157 Fair Value Measurements and as will be defined in the forthcoming IASB exposure draft on fair value measurements,
another remeasurement method; and
amortised cost.

At the May 2009 meeting, the Board adopted a working premise to proceed with a two- measurement-category approach that would measure financial instruments at either:

fair value; or
amortised cost.

The Board indicated that under this working premise it would:

retain a fair value option so that entities could elect to measure at fair value financial instruments that qualify for amortised cost measurement if, for example, fair value better reflects the entity’s business purpose for holding the instrument. The Board did not discuss whether to constrain the use of the option.
prohibit reclassifications between the fair value and amortised cost categories.
allow presentation of fair value changes for particular financial instruments in other comprehensive income, but without any subsequent transfers to profit or loss (either on disposal or otherwise). This would eliminate the need to test these instruments for impairment.
eliminate existing ‘tainting’ rules that limit the further use of amortised cost after disposal of other financial instruments measured at amortised cost. Instead, entities would be required to present separately gains and losses on such disposals.

At the June 2009 meeting the Board continued to discuss its plan to issue an exposure draft (ED) in July 2009 on the classification and measurement of financial instruments as part of the project to replace IAS 39 Financial Instruments: Recognition and Measurement. The Board plans to issue further EDs on the impairment of financial assets (see below) later in 2009 and hedge accounting in 2010.

The classification and measurement approach being developed would measure almost all financial assets and financial liabilities at either amortised cost or fair value. If financial instruments have only basic loan features and are managed on a contractual yield basis, they would be measured at amortised cost. All other financial instruments would be measured at fair value, except some items discussed below under ‘other issues’. The existing categories of loans and receivables, held-to-maturity investments and available-for-sale financial assets would be eliminated.

The Board made the following tentative decisions:

If the host contract of a hybrid contract is within the scope of IAS 39, the proposed classification approach would apply to the entire hybrid contract and the host contract would not be separated from the embedded derivative(s). If the hybrid contract contains an embedded derivative that is a basic loan feature, such as a cap, floor or collar that could switch the interest rate of the instrument from fixed to floating, that hybrid contract (as a whole) would still qualify for amortised cost classification.
The application guidance would address how to apply the classification approach to investments in structured investment vehicles with a ‘waterfall’ feature.
If the host contract of a hybrid contract is not within the scope of IAS 39, it would be measured using the existing requirements for embedded derivatives in IAS 39, pending a review of the scope of IAS 39 in a later phase of this project.
A fair value option would be retained. Thus entities could elect to measure at fair value financial instruments that qualify for amortised cost measurement if the use of that option eliminates or significantly reduces a measurement or recognition inconsistency. (IAS 39 provides the fair value option in two other cases, but the Board’s other proposals would make them unnecessary: (a) if an entity manages assets or liabilities on a fair value basis, they cannot qualify for amortised cost measurement because the entity is not measuring them on a contractual yield basis; (b) embedded derivatives would no longer be separated.)
Entities could elect to present fair value changes for an investment in equity instruments (other than those investments that are held for trading) in other comprehensive income (OCI). The amounts recognised in OCI would not be recycled to profit or loss on disposal or in any other circumstances. Thus, there would be no impairment testing for these assets. Entities could make this presentation election for each holding of an instrument at initial recognition and the election would be irrevocable for that holding. An entity need not make the same election for each holding of an instrument. Dividends on those investments would also be recognised in OCI, with no subsequent recycling.

Transition

The Board reaffirmed its tentative decision to propose retrospective application but decided tentatively to propose specific transition provisions in some areas:

the assessment of whether an instrument is ‘managed on a contractual yield basis’ should reflect the circumstances at the date of adoption.
an entity could designate any financial instruments otherwise measured at amortised cost into the fair value option at the date of adoption if the eligibility criterion is met at the date of adoption.
an entity would be permitted (or required if the eligibility criterion is no longer met) to dedesignate any financial instrument out of the fair value option at the date of adoption
if a hybrid instrument is measured at fair value in its entirety, but the fair value of the hybrid instrument has not been determined in previous periods, the sum of the fair values of the components is deemed to be the fair value.
if retrospective application of the impairment requirements in IAS 39 is impracticable, the fair value of the instruments measured at amortised cost should be used to determine any impairment loss in comparative periods.
if unquoted equity instruments and related derivatives were previously measured at cost, the fair value measurement requirements should be applied to them prospectively from the date of adoption with any differences recognised in retained earnings at that date.
any required dedesignations of hedge accounting should be accounted for as a discontinuation of hedge accounting.
early adopters would be required to provide limited additional disclosures.
the designation date option in IFRS 1 First Time Adoption of International Financial Reporting Standards would remain.

Other issues

The Board decided tentatively not to propose changes in the forthcoming exposure draft on:

the treatment of ‘day one differences’; and
the measurement requirements in IAS 39 for financial guarantee contracts, loan commitments and financial liabilities with demand features.

The Board also considered the interaction between this project and the annual improvements project. The Board tentatively decided to

defer finalising the amendment to paragraphs AG7, proposed AG7A and IG B24 of IAS 39, on the effective interest rate.
finalise an amendment to AG33 of IAS 39, on the separation of an embedded foreign currency derivative.

The Board also discussed an alternative approach that would use the classification model as described above but vary the approach to measurement. Under this alternative approach there are two variations. Under the first approach:

those assets would be eligible for measurement at amortised cost if they are loans and receivables, as defined in IAS 39:
if they are not loans and receivables, an entity would:
(a) measure them at fair value in the statement of financial position.
(b) present them on an amortised cost basis in profit or loss (including recognition of impairment using the incurred loss impairment requirements in IAS 39)
(c) present in OCI any difference between that amortised cost amount and the fair value change .
There would be no recycling between profit or loss and OCI but impairments would be reversed in profit or loss.

The second approach discussed differs from the first approach in that any difference between the amortised cost amount and the fair value change (for those instruments that have basic loan features and are managed on a contractual yield basis, but do not meet the IAS 39 definition of loans and receivables) would be separately presented in profit or loss instead of OCI.

The Board decided tentatively that the exposure draft should describe these different approaches, and ask specific questions about them. In addition, the Board tentatively decided that the exposure draft would also refer to any proposed classification and measurement model the US Financial Accounting Standards Board (FASB) develops.

Exposure draft

On 30 June 2009, the IASB approved for publication an exposure draft Financial Instruments: Classification and Measurement . Click here to view this document.

Redeliberations – post exposure draft

September Board meeting (16-18 September)

In July 2009 the IASB published an exposure draft (ED) Financial Instruments: Classification and Measurement. At this meeting the Board considered an overview of comments received on the ED, at the public round table meetings held in Tokyo, London and Norwalk (USA), and at the recent meeting of the IASB's Financial Instruments Working Group. The Board also considered feedback received from the extensive outreach programme that has been in place during the past few months. No decisions were made.

22 September 2009 (extra Board meeting)

The Board continued its discussions on responses received to its exposure draft on Classification and Measurement, published in July 2009.

IAS 39 Financial Instruments: Recognition and Measurement has an exception that requires an entity to measure at cost investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably determined (as well as derivatives that are linked to such equity instruments and which must be settled by delivery of them). The exposure draft proposed to remove that exception and require that such investments be measured at fair value.

The Board tentatively decided to provide guidance for when entities can use a simplified current measurement for equity instruments if determining fair value is impracticable. In addition, the Board tentatively decided to amend IAS 34 Interim Financial Reporting to allow an entity to carry forward that measure if there is no evidence of a significant change in that measure since the last reporting date.

29 September 2009 (extra Board meeting)

Scope

Some respondents to the ED suggested that the Board should limit the scope of this phase of the project to the classification and measurement of financial assets. The Board tentatively decided that the scope of this phase of the project should continue to include financial liabilities.

The Board will consider at subsequent meetings issues such as accounting for hybrid liability contracts and whether the re-measurement of particular financial liabilities should reflect changes in the issuer's own credit risk.

Classification conditions
The Board considered the classification conditions proposed in the ED and comments received in relation to those proposals both from comment letters and the extensive outreach undertaken by the staff and Board members. The Board tentatively confirmed that classification should be based on:

how an entity manages its financial instruments; and
the contractual terms of the instrument.

In developing the condition related to how an entity manages its financial assets the Board also tentatively decided to replace the phase 'managed on a contractual yield basis.' Many respondents expressed support for the way the Board explained the business model in the basis for conclusions to the ED. The basis stated that 'the objective of an entity's business model is to hold the instruments to collect (or pay) contractual cash flows rather than to sell (or settle) the instruments prior to their contractual maturity to realise fair value changes'. The Board will look to use similar wording in the final standard. The staff also observed that this wording is also very close to the wording currently being proposed by the US FASB for this classification condition.

The final standard will also have more examples than were included in the exposure draft.

The Board will discuss other issues relating to the two conditions, such as the order in which they should be applied, at a subsequent meeting.

Cost exception

IAS 39 Financial Instruments: Recognition and Measurement contains a cost exception for equity instruments (and related derivatives) that do not have a quoted market price, and for which fair value cannot be reliably determined. The exception requires an entity to measure these investments on a cost basis. On 22 September 2009, the Board tentatively decided to replace the cost exception with guidance on when entities could use a simplified current measurement for equity instruments, if determining fair value is impracticable.

At this meeting the Board reviewed that decision on the basis of practical difficulties the staff had identified with implementing such an approach. The matter will be brought back to a future Board meeting at which a variation of the existing cost exception will be considered.

6 October 2009 (extra Board meeting)

Interaction between the two classification conditions

On 29 September 2009, the Board tentatively confirmed the proposal in the ED that classification should be based on:

the entity’s business model for managing its financial instruments; and
the contractual cash flow characteristics of the instrument.

At this meeting the Board tentatively:

confirmed that an instrument must meet both of these conditions to be measured at amortised cost.
decided that the IFRS should discuss the business model condition first. For those instruments that meet the business model condition, the IFRS would then discuss the condition related to the contractual cash flow characteristics of the instrument. The Board emphasised that the two conditions are equally important.

Amortised cost

The ED proposed a two-measurement-category approach, which would measure financial instruments at either fair value or amortised cost. At this meeting, the Board tentatively confirmed, as it proposed in the ED, that amortised cost provides relevant and decision-useful information if both of the classification conditions are met.

The Board tentatively decided not to require fair value information on the face of the statement of financial position. In reaching this decision, the Board noted that it may explore this issue further at a later date, possibly as part of its convergence process with the US FASB.

Fair value option

Following the Board’s confirmation that particular instruments would be measured at amortised cost in particular circumstances, the Board also confirmed the proposal in the ED that an entity be permitted to designate an instrument at fair value through profit or loss by electing to use the fair value option, if that designation eliminates or significantly reduces a measurement or recognition inconsistency.

Own credit risk for financial liabilities not measured at amortised cost

On 29 September 2009, the Board tentatively decided that the scope of this phase of the project should continue to include financial liabilities. At this meeting the Board considered issues such as accounting for hybrid liability contracts. The Board also considered whether the re-measurement of particular financial liabilities should reflect changes in the issuer’s own credit risk, in light of the responses received both to the ED and to the IASB discussion paper Credit Risk in Liability Measurement.

At this meeting the Board discussed specific issues relating to own credit risk for financial liabilities not measured at amortised cost. The Board tentatively decided:

to require a frozen credit spread measurement method for all financial liabilities that are
- not eligible for amortised cost, but
- are managed as part of a contractual cash flow business model.
(it follows that this measurement would not apply to financial liabilities held for trading, including derivatives, and financial liabilities for which the entity uses the fair value option)
to provide a default method to isolate the initial credit spread for relatively simple financial liabilities, but not prescribe a method.
to require disclosures about the methods and inputs used to isolate the initial credit spread.
to continue to require fair value disclosures in accordance with IFRS 7 Financial Instruments: Disclosures for financial liabilities measured using a frozen credit spread method.

Embedded derivatives

Following its decision to address own credit risk for financial liabilities not measured at amortised cost, the Board tentatively decided to eliminate embedded derivative accounting for hybrid contracts, if the host is within the scope of IAS 39 Financial Instruments: Recognition and Measurement. The entire hybrid contract would be classified under the proposed classification model.

Cost exception

IAS 39 contains a cost exception for equity instruments (and related derivatives) that do not have a quoted market price, and for which fair value cannot be reliably determined. The exception requires an entity to measure these investments on a cost basis. The ED proposed to eliminate this exception.

15 and 16 October 2009 (extra Board meeting)

Unquoted equity instruments: elimination of cost exception

IAS 39 contains a cost exception for investments in unquoted equity instruments (and some related derivatives) for which fair value cannot be determined reliably. The exception required that these instruments be measured at cost (less impairment). The ED proposed to eliminate this exception.

The Board tentatively decided to eliminate the cost exception. All equity instruments currently covered by the exception will be measured at fair value. The final standard will contain guidance on how to determine fair value for these instruments when they are difficult to value because of little or no timely or relevant information (including when cost might be representative of fair value).

Reclassification

The ED proposed to prohibit reclassification between the amortised cost and fair value categories.

The Board tentatively decided to require reclassification between fair value and the other measurement categories when there is a change in the entity’s business model. Reclassification would be prohibited in all other circumstances. The Board noted that such reclassifications would be expected to occur infrequently, if ever.

The Board tentatively decided that all reclassifications would be accounted for prospectively.

If an instrument is reclassified from another category to fair value, the instrument should be remeasured at fair value on that date, and any difference between the carrying amount and fair value would be recognised in profit and loss.
If an instrument is reclassified from fair value to amortised cost, the fair value of the instrument on the date of reclassification becomes its new carrying amount.

The Board tentatively decided to amend IFRS 7 Financial Instruments: Disclosures to include disclosures for all reclassifications between measurement categories.

Instruments measured at fair value through other comprehensive income

The ED proposed a presentation option for investments in equity instruments except for those held for trading. Under the proposal, an entity can make an irrevocable election at initial recognition to present all fair value changes for these equity investments in other comprehensive income.

The Board tentatively confirmed the proposal in the ED. However, as a change to the ED proposal, the Board tentatively decided to require recognition of dividends received from these investments in profit or loss, so long as they represent a return on investment (as opposed to a return of investment). The Board tentatively reconfirmed that recycling of gains and losses between profit or loss and other comprehensive income will be prohibited.

The Board tentatively decided to retain all disclosures proposed in the ED. In addition, the Board tentatively decided to require disclosure of dividends presented in profit or loss related to investments measured at fair value through other comprehensive income.

Concentrations of credit risk

The ED addressed the accounting for concentrations of credit risk created by using multiple contractually linked and subordinated interests (ie tranches). The ED stated that the most senior tranche would be eligible for measurement at amortised cost (if the other classification criteria are met), while all other tranches would be measured at fair value through profit or loss.

The Board tentatively decided to require separate assessment of the classification criteria by the issuer of the contractually linked instruments that affect concentrations of credit risk.

The Board tentatively decided to require a ‘look through’ approach for holders of tranches to determine their measurement. The holder would look through the underlying instruments pool until the assets generating (and not only passing through) the cash flows were identified.

The Board tentatively decided that to qualify for measurement at amortised cost, the underlying instruments pool can contain instruments that:

have only basic loan features;
change the cash flow variability of the instruments with basic loan features in accordance with the ‘basic loan features’ criterion; and/or
align the cash flows (eg for interest rates or currencies) of the issued instruments with the underlying instrument pool.

Measurement at fair value will be required if the underlying instruments pool contains any instrument used to create additional leverage or any non-financial items. Reassessment of the underlying instruments pool is not permitted. However, if the underlying instruments pool can change subsequent to initial recognition in a manner that would prohibit classification at amortised cost, this would prohibit measuring any of the issued instruments (ie tranches) at amortised cost.

Financial assets acquired at a discount that reflects incurred credit losses

The Board tentatively decided that the fact that an asset is acquired at a discount that reflects incurred credit losses does not in itself disqualify it from being measured at amortised cost.

October Board meeting (19-23 October)

Gains or losses related to Level 3 fair value measurements

The Board discussed whether entities should be required to present on the face of the statement of comprehensive income total gains or losses on financial instruments for the period for fair value measurements in Level 3 of the fair value hierarchy. Such amounts are already required to be disclosed IFRS 7, but not on the face of the statement of comprehensive income.

The Board tentatively decided that the forthcoming IFRS on classification and measurement should not include a requirement to disclose this information on the face of the statement of comprehensive income. However, there was support to discuss this matter again at the joint meeting with the FASB in the week beginning 26 October as part of the Financial Statement Presentation project.

Scope of the IFRS

The Board tentatively decided to exclude financial liabilities from the scope of the forthcoming IFRS. In the short term, the requirements of IAS 39 would continue to apply to financial liabilities. The Board asked the staff to further consider the accounting for financial liabilities and will address this issue in the near future.

Effective date and transition

The Board tentatively decided:
that the effective date will be 1 January 2013 for the finalised guidance on classification and measurement of financial instruments.
to permit early adoption of the final IFRS. In addition, the Board tentatively decided to require transition disclosures by all entities adopting the new IFRS, as proposed in the ED.
to clarify the guidance in the ED on the 'date of initial application'.
to permit, but not require, restatement of comparative periods by entities that implement the standard in 2009 or 2010. Comparative information will be required if an entity adopts the final guidance after 2010.
to finalise the guidance on impracticability of retrospective application, as proposed in the ED.

Accordingly, if it is impracticable for an entity to apply retrospectively the effective interest method or the impairment requirements for a financial instrument, the entity shall determine the amortised cost of the financial instrument, or any impairment on a financial asset, in each period, determined by using its fair value at the end of each comparative period.

not to permit the continuation of separate accounting (bifurcation) for those hybrid contracts embedded in financial hosts that were bifurcated in accordance with the existing IAS 39.
to remove the specific transition provisions on hedge accounting from the ED.
that if an entity adopts the IFRS resulting from any phase of this project before its effective date, the entity (a) shall adopt all earlier phases before then, but (b) need not adopt later phases before their effective date.
to finalise all other transition provisions as proposed in the ED.

Transitional insurance issues

The Board noted that insurers may face particular problems if they apply the new IFRS on classification and measurement of financial instruments before they apply the IFRS resulting from phase 2 of the project on insurance contracts. The Board tentatively decided:

not to create a temporary exception permitting insurers to maintain the available-for-sale category temporarily until the phase 2 IFRS is available.
to consider, in developing the transitional requirements for the phase 2 IFRS, whether to create a transitional option for an insurer to revisit the classification of financial assets when the insurer adopts the phase 2 IFRS. The Board noted that it had included such an option in IFRS 4 Insurance Contracts for reasons that are likely to be equally valid for phase 2.
not to make any consequential amendments to IFRS 4 relating to shadow accounting for insurance contracts or for financial instruments containing a discretionary participation feature.

Non-recourse arrangements

The Board discussed the interaction between proportionate non-recourse instruments and instruments creating concentrations of credit risk (where the holder has to assess whether it is leveraged relative to the underlying pool and must look through to the nature of the underlying instruments in order to determine whether the 'contractual cash flow characteristics' criterion is met).

The Board tentatively decided that a holder of a proportionate non-recourse instrument must look through to the ring-fenced instruments. The ring-fenced instruments will be used to determine whether payments arising from the contract meet the 'contractual cash flow characteristics' criterion.

Joint IASB and FASB Meeting (26-28 October)

Financial Instruments

The boards discussed the presentation and disclosures of particular financial instruments that are not measured at fair value through profit or loss. The boards also discussed the impairment methods to be used for financial assets that are not measured at fair value.

Summary of significant final decisions for publication of IFRS 9

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.
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.
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.
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.
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.
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.
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 recycled.
If and only if an entity’s business model changes, it is required to reclassify affected financial assets.
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.
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 fair value.
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 restate comparatives.

Financial liabilities – post publication of IFRS 9

December Board Meeting (18 December)

Financial Liabilities

While financial liabilities are not within the scope of IFRS 9 Financial Instruments as issued in November 2009, the Board committed to addressing the issue of classification and measurement of financial liabilities expeditiously. At this meeting, the Board discussed feedback received during outreach activities related to several possible approaches to address the issue of 'own credit risk' in the remeasurement of financial liabilities (see Agenda paper 14).

The financial liabilities being discussed are those that i) are managed with the objective of collecting contractual cash flows but ii) do not have contractual cash flow characteristics that represent principal and interest. The IASB discussed four possible approaches during its outreach activities:

The financial liability would be on the balance sheet at full fair value but the effect of changes in own credit would be separated out and recognised in OCI;
The financial liability would be on the balance sheet at an adjusted fair value excluding the effect of changes in own credit (the ‘frozen credit spread’ approach);
Bifurcation (either based on the IAS 39 model or based on IFRS 9); or
Amortised cost measurement for such financial liabilities with parenthetical disclosure of fair values on the face of the balance sheet.

No decisions were made.

Joint IASB and FASB Meeting (20 January)

Financial Liabilities

The boards reviewed their respective prior discussions related to the classification and measurement of financial liabilities. No decisions were made.

Joint IASB and FASB extra Meeting (10 February)

The boards began their discussion of how to measure financial liabilities.

The boards affirmed their previous tentative decisions that financial liabilities that are not held to pay contractual cash flows should be measured at fair value through profit or loss.

The IASB tentatively decided that financial liabilities that are held to pay contractual cash flows and have ‘non-vanilla’ contractual cash flow characteristics should be bifurcated into a host and the embedded features. Those components would be separately measured. That tentative decision responds to issues raised about recognising gains or losses arising from changes in an entity’s own credit risk.

The FASB did not make any decisions about financial liabilities that are held to pay contractual cash flows that contain embedded derivatives and would be required to be measured at fair value with changes in fair value recognized in net income under the FASB’s current tentative model. The FASB will first consider whether and how to address changes in an entity’s own credit risk for financial liabilities with ‘vanilla’ contractual cash flow characteristics that would be required to be measured at fair value with changes in fair value recognized in other comprehensive income under the FASB’s current tentative model.

Joint IASB and FASB Meeting (15-19 February)

Both boards were present for the discussions; however, only the IASB was asked to take any tentative decisions.

The tentative decisions described below, coupled with the tentative decisions made on 10 February 2010, effectively retain the measurement requirements in IAS 39 Financial Instruments: Recognition and Measurement for financial liabilities, except for the proposed changes to the fair value option described below. The IASB’s tentative decisions about financial liabilities respond to issues raised about recognising gains or losses arising from changes in an entity’s own credit risk.

Amortised cost measurement

The IASB tentatively decided that financial liabilities should be measured at amortised cost if they are not held for trading and do not have embedded derivative features that would require bifurcation under IAS 39.

Bifurcation

At a previous meeting, the IASB tentatively decided to bifurcate financial liabilities which are held to pay contractual cash flows and have ‘non-vanilla’ contractual cash flow characteristics. At this meeting, the Board tentatively decided that the bifurcation requirements in IAS 39 should be retained to respond to issues raised about recognising gains or losses arising from changes in an entity’s own credit risk.

Fair value option

The IASB tentatively decided to retain the fair value option (FVO) and carry forward the three eligibility conditions in IAS 39.

However, to respond to issues raised about recognising gains or losses arising from changes in an entity’s own credit risk, the Board also tentatively decided that for all financial liabilities designated under the FVO, an entity would be required to

recognise the total fair value change in profit or loss; and
recognise the portion attributable to changes in own credit risk in other comprehensive income (OCI) (with an offsetting entry to profit or loss).

Amounts recognised in OCI would never be recycled into profit or loss.

Related information

Exposure draft Financial Instruments: Classification and Measurement [PDF]
Snapshot on Exposure draft Financial Instruments: Classification and Measurement [PDF]
IFRS 9 Financial Instruments [PDF, eIFRS subscribers only]
Feedback statement IFRS 9 [PDF]

Project contacts

Sue Lloyd
Senior Technical Consultant
email: slloyd@iasb.org

Liz Figgie
Senior Project Manager
email: efiggie@iasb.org

Jens Berger
Practice Fellow
email: jberger@iasb.org