The future of IFRS financial instruments accounting

20 Pages·2013·1.81 MB·English

Issue 14, July 2013
IFRS NEWSLETTER
FINANCIAL INSTRUMENTS
We welcome the IASB’s
tentative decision to defer
the mandatory effective date
of IFRS 9 but also to allow
early application of the
‘own credit’ requirements
in isolation. This should
give entities greater
confdence that they will
have suffcient time to
prepare for adoption
of the fnal standard
while enabling a
The future of IFRS fnancial
quicker and more
focused response instruments accounting
to the ‘own credit’
This edition of IFRS Newsletter: Financial Instruments highlights
issue.
the discussions of the IASB in July 2013 on the fnancial
instruments (IAS 39 replacement) project.
Andrew Vials
KPMG’s global IFRS Highlights
fnancial instruments Classifcation and measurement
leader
l    The IASB tentatively decided to allow early application of the own credit requirements
before the completed version of IFRS 9 is issued.
l    The IASB also tentatively decided to defer the effective date of IFRS 9 to an unspecifed date
pending the fnalisation of the impairment and classifcation and measurement phases of the
project.
Impairment
l    The IASB and the FASB (the Boards) considered feedback received on their respective exposure
drafts.
l    The staff will provide a more detailed analysis of feedback received on specifc issues and a
complete analysis of the fnal results from the IASB feldwork during the September meeting. In
addition, the staff are expected to provide a roadmap for the project going forward.
Macro hedge accounting
l    The forthcoming discussion paper (DP) will consider the alternative of presenting the revaluation effect
from dynamic risk management in other comprehensive income (OCI) rather than through proft or loss.
l    The forthcoming DP will consider the types of disclosures that may be required.
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WORK CONTINUES TO ASSESS CONSTITUENT
FEEDBACK
The story so far ... What happened in July 2013?
Since November 2008, the IASB has been working to The IASB discussed a project plan for joint redeliberations
replace its fnancial instruments standard (IAS 39 Financial with the FASB on classifcation and measurement. The IASB
Instruments: Recognition and Measurement) with an confrmed that it will defer the effective date of IFRS 9 from
improved and simplifed standard. The IASB structured its 1 January 2015 to a date yet to be determined and allow
project in three phases: entities to early adopt only the own credit requirements in
IFRS 9. This will be achieved by including amendments in the
Phase 1: Classifcation and measurement of fnancial
forthcoming version of IFRS 9 that will incorporate the new
assets and fnancial liabilities
general hedging model.
Phase 2: Impairment methodology
The Boards also discussed the main messages received in the
Phase 3: Hedge accounting. comment letters and feedback from the outreach activities
on the exposure draft Financial Instruments: Expected
In December 2008, the FASB added a similar project to
Credit Losses (impairment ED) and the proposed Accounting
its agenda; however, the FASB has not followed the same
Standard Update Financial Instruments – Credit Losses (FASB
phased approach as the IASB.
impairment proposals), but did not make any decisions on this
The IASB issued IFRS 9 Financial Instruments (2009) and topic.
IFRS 9 (2010), which contain the requirements for the
In addition, the IASB continued its series of education
classifcation and measurement of fnancial assets and
sessions on macro hedge accounting. The Board discussed an
fnancial liabilities. Those standards have an effective date
alternative of presenting the revaluation effect from dynamic
of 1 January 2015. In November 2012, the IASB issued
risk management in OCI rather than proft or loss, as well as
an exposure draft (ED) on limited amendments to the
the types of disclosures that may be required.
classifcation and measurement requirements of IFRS 9
(the C&M ED).
The Boards were working jointly on a model for the
impairment of fnancial assets based on expected
credit losses, which would replace the current incurred
loss model in IAS 39. The Boards previously published
their own differing proposals in November 2009 (the
IASB) and in May 2010 (the FASB), and published a joint
supplementary document on recognising impairment in
open portfolios in January 2011. However, at the July 2012
Contents
joint meeting the FASB expressed concern about the
direction of the joint project and in December 2012 issued
an ED of its own impairment model, the current expected
credit loss model. Meanwhile, the IASB continued to
develop separately its three-bucket impairment model,
and issued a new ED in March 2013 (the impairment ED).
The IASB has split the hedge accounting phase into two
parts: general hedging and macro hedging. It issued a
review draft of a general hedging standard in September
2012, and is working towards issuing a fnal standard on
general hedging and a DP on macro hedging in 2013.
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CLASSIFICATION AND MEASUREMENT
What was discussed during the July meeting?
At their previous joint meetings in May and June 2013, the IASB and the FASB (the Boards)
discussed a summary of the feedback received from respondents to the C&M ED and the
FASB’s proposed Accounting Standards Update Financial Instruments – Overall (Subtopic 825-
10): Recognition and Measurement of Financial Assets and Financial Liabilities (the FASB R&M
proposals). No tentative decisions were made at these meetings.
During the July 2013 meeting, the staff announced that a plan for joint redeliberations has been
developed which refects the differing scope of each Board’s proposal – i.e. some topics will
be redeliberated jointly, from September 2013 onwards, whereas others will be redeliberated
separately – and the topics for joint redeliberation were outlined. The staff anticipated that the
IASB’s redeliberations, including those with the FASB, would be substantially complete by the end
of 2013.
The technical matters raised in the July meeting were:
• whether the own credit requirements in IFRS 9 should be made available for early application
before the completed version of IFRS 9 is issued; and
• whether the effective date of IFRS 9 should be deferred to an unspecifed date pending the
fnalisation of the impairment and classifcation and measurement phases.
Early application of own credit requirements
The IASB What’s the issue?
tentatively The own credit requirements, added to IFRS 9 in 2010, require that when a fnancial liability is
decided to allow designated as at fair value through proft or loss (FVTPL) under the fair value option, the change in
the fair value of the liability that is attributable to changes in the entity’s credit risk (i.e. ‘own credit’)
early application
should be recognised in OCI. Amounts presented in OCI cannot subsequently be transferred to
of the own credit proft or loss. Currently, an entity is permitted to early apply these requirements only if it also early
requirements applies all of the other classifcation and measurement requirements in IFRS 9 (2010).
before the The C&M ED proposed allowing entities to early apply the own credit requirements in isolation
completed once the completed version of IFRS 9 (i.e. including the classifcation and measurement,
version of IFRS 9 impairment and general hedge accounting chapters) is issued.
is issued.
What did the staff recommend?
The staff considered the feedback received on the proposal in the C&M ED.
Support for the application of own credit requirements in isolation
Feedback received
Nearly all respondents supported the proposal that entities would be permitted to early apply
the own credit requirements in IFRS 9 in isolation. Most suggested incorporating these
requirements into IAS 39, considering that the effective date of IFRS 9 is likely to be deferred.
A limited number of respondents did not support making the own credit requirements available
for early application as it could result in reduced comparability between entities.
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Support for the application of own credit requirements in isolation
IASB staff consideration
The staff noted that the IASB’s proposal was based on the expectation that there would not be
a signifcant time lag compared to modifying the early application guidance in IFRS 9 (2010) and
later versions of IFRS 9.
Also, in spite of the feedback received, the IASB staff considered it inappropriate to amend
IAS 39 because:
• that standard is being replaced by IFRS 9;
• such an amendment would require care to ensure that there were no unintended
consequences because the new own credit requirements were drafted in the context of
IFRS 9, not IAS 39;
• due process requirements would result in further delay; and
• creation of new versions of IAS 39 could result in complexity and confusion.
Recommendation
Considering the feedback received to make the requirements available as soon as possible,
the staff believed that the early application guidance in IFRS 9 should be amended to permit
entities to early apply only the own credit requirements when the IASB adds the general hedge
accounting chapter to IFRS 9 (expected in the next few months).
Reclassifcation of own credit gains and losses
Feedback received
Some respondents stated that recycling own credit gains and losses from OCI into proft or loss
should be required when the liability is derecognised. This would be consistent with:
• the accounting for fnancial liabilities at amortised cost – because when those liabilities are
derecognised, any own credit gain or loss is part of the gain or loss recognised in proft or loss;
• the FASB R&M proposals, which propose that the accumulated own credit gains or losses
are recycled when the fnancial liability is derecognised; and
• the proposals in the C&M ED to require recycling of gains and losses for investments in debt
instruments mandatorily measured at fair value through OCI.
IASB staff consideration
The staff believed that the IASB should not consider the recycling of own credit gains and
losses because:
• this was not exposed for comment as part of this C&M ED;
• the question of the use of OCI and recycling remains open and is covered in the recent A
1
Review of the Conceptual Framework for Financial Reporting discussion paper (conceptual
framework DP); and
• although the FASB’s proposals include recycling, the Boards are seeking only to reduce key
differences in particular areas of classifcation and measurement.
1 For more information, refer to the IASB’s Discussion Paper: A Review of the Conceptual Framework for
Financial Reporting
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Reclassifcation of own credit gains and losses
The staff also noted that the IASB has always been mindful of the need to minimise the extent
of change to IFRS 9 and therefore the C&M ED proposed only limited amendments to IFRS 9.
Recommendation
The staff recommended that the IASB should not consider the recycling of own credit gains and
losses.
What did the IASB discuss?
Some Board members asked whether the outcome of decisions taken on the conceptual
framework project could result in a reconsideration of prohibition on recycling own credit gains and
losses – for example, if a decision was taken in the conceptual framework project to recognise a
gain when a liability is bought back and a gain is realised. The staff responded that it was a broader
question for the IASB to consider, as standards in addition to IFRS 9 could also be impacted by the
decisions taken by the IASB in the conceptual framework project.
A few Board members saw some advantages in incorporating the own credit requirements into
IAS 39 and expediting the associated due process for its approval. However, most Board members
disagreed with amending IAS 39 and suggested amending IFRS 9, as proposed by the staff, to
avoid any further delays.
What did the IASB decide?
The IASB agreed with the staff recommendation and tentatively decided that the early application
guidance in IFRS 9 should be amended to permit entities to early apply only the own credit
requirements in IFRS 9 when the IASB adds the hedge accounting chapter to IFRS 9. The IASB
also agreed with the staff recommendation not to reconsider further whether own credit gains and
losses should be recycled on derecognition.
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The IASB Deferral of mandatory effective date
tentatively
What’s the issue?
decided to defer
The mandatory effective date of 1 January 2015 was intended to apply to all phases of IFRS 9, but
the effective
the IASB has made slower than expected progress towards fnalising the standard.
date of IFRS 9 to
Many respondents to the C&M ED asked the IASB to confrm that the mandatory effective date
an unspecifed
of IFRS 9 would be deferred, particularly considering the lead time needed to implement the
date pending the
2
proposals on expected credit losses . These respondents noted that, even if the remaining phases
fnalisation of the
of IFRS 9 were completed by the end of 2013, there would not be suffcient time to adhere to the
impairment and IASB practice of allowing a minimum of 18 months between the fnalisation of a standard and
the mandatory effective date. Some respondents, notably insurers and standard setters, also
classifcation and
requested that the mandatory effective date be aligned with the mandatory effective date of a new
measurement
3
insurance contracts standard .
phases of the
project. What did the staff recommend?
The staff noted that the C&M ED did not specifcally ask for feedback on the mandatory effective
date of IFRS 9, whereas the impairment ED, published in March 2013, explicitly requested
feedback regarding the lead time that would be required.
The staff also noted that it would not be possible to recommend an appropriate mandatory
effective date for IFRS 9 before fnalising details of the expected credit loss approach. The IASB
will only be able to determine an exact mandatory effective date after the redeliberations on
impairment and classifcation and measurement have been completed, and the issue date of the
fnal version of IFRS 9 is known.
The staff recommended that the IASB confrm that the current mandatory effective date of
1 January 2015 will be deferred when the forthcoming hedge accounting chapter of IFRS 9 is
issued, and include an explanation in the basis for conclusions that the mandatory effective date
will be determined once the outstanding phases of IFRS 9 have been completed. The staff also
recommended that the likely lead time to be allowed following the issuance of the fnal version of
IFRS 9 should be indicated. The staff suggested that this lead time should be about three years.
What did the IASB discuss?
One Board member expressed concern regarding a lead time of three years from fnalising the
standard to its effective date. The staff responded that this was merely a suggestion and not
intended to be specifc. It was requested that the staff refrain from expressing an estimated
permissible lead time – such as the suggested three years – and instead state that suffcient time
will be allowed.
What did the IASB decide?
The IASB agreed with the staff recommendation and tentatively decided that the current
mandatory effective date of 1 January 2015 will be deferred and that the mandatory effective date
should be left open pending the fnalisation of the impairment and classifcation and measurement
requirements.
2 The feedback received in response to the impairment ED indicated that preparers would need at least
three years to implement the proposed expected credit loss model.
3 For more information on the new Insurance ED, refer to our In the Headlines – Insurance Contracts.
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IMPAIRMENT
What’s the background?
The IASB’s exposure draft Financial Instruments: Expected Credit Losses (the impairment
ED) published on 7 March 2013 proposes replacing the current ‘incurred loss’ model with an
‘expected loss’ approach, which means that a loss event would no longer need to occur before an
impairment allowance is recognised.
In general, the proposed expected loss model uses a dual measurement approach, as follows.
12-month Transfer Lifetime
expected if the credit risk on the financial expected
credit losses* asset has increased significantly credit losses
since initial recognition
Move back
if transfer condition above is no
longer met
* 12-month expected credit losses are defned as the expected credit losses that result from those default events
on the fnancial instrument that are possible within the 12 months after the end of the reporting period.
Accordingly, under the impairment ED, at initial recognition and subsequently, assets would
attract a loss allowance equal to expected credit losses associated with the possibility of default
over the next 12 months. However, if the credit risk on the asset has increased signifcantly since
initial recognition, the loss allowance would be increased to refect the full lifetime expected credit
losses on the asset.
The proposals in the impairment ED are different from the proposals in the FASB proposed
Accounting Standards Update Financial Instruments – Credit Losses (FASB impairment proposals)
published in December 2012. The FASB proposals include a single measurement objective of
recognising full lifetime expected credit losses.
What has happened since the impairment ED was issued in
March 2013?
The comment period for the impairment ED closed on 5 July 2013, with 175 comment letters
submitted to the IASB. The comment period for the FASB impairment proposals closed on 31 May
2013, with 362 comment letters submitted to the FASB. The Boards have also conducted outreach
meetings with interested parties including preparers, auditors, regulators, standard setters and
users of fnancial statements. In addition, the IASB is conducting detailed feldwork to understand
the potential impact of the proposals. Fifteen participants are involved in the feldwork which is still
ongoing.
What happened in July?
The staff provided the Boards with a summary of the main messages received in the comment
letters and feedback from the outreach activities on the IASB impairment ED and the FASB
impairment proposals.
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The Boards What feedback did the Boards receive?
considered
Feedback on the IASB impairment ED
feedback
received on The messages presented in the July 2013 meeting regarding the feedback received on the IASB
impairment ED included the following.
their respective
exposure drafts.
Issue Summary of feedback/results
The IASB The vast majority of the respondents – including the majority of non-
proposals US users that participated in the outreach meetings – supported the
for a dual expected credit loss approach outlined in the impairment ED. In general,
measurement respondents believed that the approach achieves an appropriate balance
approach to between faithful representation of the underlying economics and the costs
expected credit of implementation.
losses that
Most respondents agreed with the relative approach in the proposals (i.e.
depends on
that the evaluation as to whether an increase in credit risk is signifcant
deterioration
would be assessed relative to the credit risk of the instrument at initial
in credit risk
recognition rather than against an absolute scale). Most also agreed that
since initial
the assessment of when to recognise lifetime expected credit losses
recognition
should only consider changes in credit risk (based on probability of
default occurring) rather than changes in expected credit losses (or in loss
given default).
However, many of the respondents who supported the IASB model
(including users, regulators and standard setters) also recommended
providing more detailed and specifc guidance on when assets should
move to the lifetime expected losses measurement category to reduce
subjectivity in application.
Many respondents agreed with the decision not to defne ‘default’ – on
the basis that the point of default varies between different products.
In contrast, many other respondents (including many preparers)
recommended including more guidance on what would constitute a
default event.
Only a small number of comment letters – but the majority of US users
that participated in the outreach meetings – supported a model that always
recognises lifetime expected credit losses from initial recognition – i.e. one
similar to that proposed by the FASB.
In addition, a small number of respondents supported neither the IASB nor
the FASB model and suggested other alternatives instead.
Most of the respondents who supported the IASB model over the FASB
model took this view because they believed that the IASB model better
refects the economics of a lending transaction (since the initial credit loss
expectations are priced into the assets when originated or purchased).
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Issue Summary of feedback/results
Scope of the Financial assets mandatorily measured at FVOCI
proposals
Most respondents agreed that fnancial assets mandatorily measured at
fair value through other comprehensive income (FVOCI) – as proposed
in the C&M ED – should be in the scope of the proposals, and supported
having a single impairment model for all fnancial instruments – including
the FVOCI category.
However, some respondents proposed including practical expedients
for these fnancial assets. Several practical expedients were suggested,
including the FASB’s proposal that entities could elect not to recognise a
loss allowance if the fair value of the fnancial asset is greater than or equal
to its amortised cost and the expected credit losses are insignifcant.
Loan commitments
The vast majority of the respondents agreed that loan commitments
should be in the scope of the proposals.
However, many respondents supported measuring expected credit
losses over the behavioural life of the instrument, rather than over the
contractual life of the instrument as suggested in the impairment ED – i.e.
based only on the period for which the entity has a present contractual
obligation. They believe that the approach in the impairment ED does not
refect the actual losses resulting from these instruments or credit risk
management policies.
Low credit risk Respondents had mixed views on the suggested simplifcation that
simplifcation a fnancial instrument is not considered to have suffered a signifcant
deterioration in credit risk if it has low credit risk – e.g. instruments with an
‘investment grade’ credit rating.
Most respondents agreed with the simplifcation, but many of these
respondents also requested additional clarifcations on applying this
simplifcation – e.g. on the interaction between external and internal ratings.
Some respondents – including many regulators – did not agree with the
simplifcation, because they believed that the signifcant deterioration
criterion should be applied consistently across all instruments.
30-day Most respondents agreed with the proposed rebuttable presumption that
rebuttable the signifcant deterioration in credit risk criterion would be met when
presumption contractual payments are more than 30 days past due.
Some respondents – in particular regulators and standard setters – did not
agree with the 30-day rebuttable presumption, arguing that delinquency
is a lagging indicator and that this presumption may therefore result in the
recognition of lifetime expected credit losses being delayed.
In addition, some respondents were concerned that this presumption
would be applied as a ‘bright line’ and so would, in some cases, be
inconsistent with applying the general signifcant deterioration principle.
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Issue Summary of feedback/results
Discount rate Most respondents did not agree with the proposals that the discount rate
used for the used for the calculation of expected credit losses could be any reasonable
calculation of rate between the risk-free rate and the effective interest rate (EIR); they
expected credit recommended that only the EIR should be used to discount expected
losses credit losses.
Many respondents (including preparers, regulators and standard setters)
considered the suggested range of interest rates to be too broad and
argued that there is insuffcient guidance on the appropriate rate to use
within the range.
This represents a change from the responses received in the past from
preparers to the supplementary document to the exposure draft Financial
Instruments: Amortised Cost and Impairment, which was issued in January
2011, in which respondents generally agreed with the proposal to allow the
use of a range of interest rates for operational reasons.
Interest revenue The impairment ED proposed that interest revenue would usually be
calculated using the EIR method on the gross carrying amount of the
fnancial asset – i.e. the carrying amount before deducting the allowance
balance. However, for fnancial assets that have objective evidence of
impairment at the end of the reporting period, interest revenue would
be calculated on the net carrying amount – i.e. after deducting the
allowance balance.
Respondents had mixed views on this proposal. The vast majority of
respondents agreed that, conceptually, interest revenue should be
calculated on the net basis for fnancial assets that have objective
evidence of impairment. However, most of these respondents suggested
alternatives that they believed would be easier to apply:
• some respondents proposed calculating interest income on the gross
carrying amount for all fnancial assets; while
• others proposed a non-accrual approach, as included in the FASB
impairment proposals – which is also similar to regulatory requirements
in some jurisdictions – under which interest would not be accrued
on fnancial assets for which the entity does not expect to collect
substantially all of the principal and interest.
In the feedback received from users and preparers during outreach, users
generally supported the change in the calculation of interest revenue when
assets have objective evidence of impairment. Conversely, preparers
expressed mixed views on the proposal. Those that did not support the
proposal expressed a preference for a non-accrual approach.
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