Financial Instruments: Classification and Measurement

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Financial Instruments Classification and
Measurement

• 1-4 September 2009

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TimetableOne project three phases
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Project phase Exposure Draft Finalisation
1. Classification and Measurement July 2009 In time for 2009 year end financial statements
2. Impairment methodology October 2009 In 2010
3. Hedge accounting December 2009 In 2010
The above is in addition to a project on
derecognition of financial instruments. ED
Derecognition was published in March 2009.
2008 IASC Foundation     30 Cannon Street 
   London EC4M 6XH     UK     www.iasb.org
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Classification and MeasurementOverview of
proposed approach
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Amortised cost (one impairment method)
FVO for accounting mismatch
No reclassification
Fair Value (no impairment)

• All other instruments
• Equities
• Derivatives
• Some hybrid contracts

Equities OCI presentation available
2009 IASC Foundation     30 Cannon Street 
   London EC4M 6XH     UK     www.iasb.org
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Classification and MeasurementAmortised cost
criterion

• Basic loan features
• Contractual terms that give rise to cash flow
  amounts that represent both principle and
  interest
• Interest represents consideration for
• time value of money
• credit risk
• Managed on a contractual yield basis
• Business model is to manage and evaluate based on
  collection or payment of contractual cash flows
  generated when holding or issuing the instrument
• Not an instrument by instrument approach to
  classification

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Classification and MeasurementOther features of
proposed approach

• Embedded derivatives
• For hybrid contracts with financial hosts gt
  Entire hybrid contract assessed using proposed
  classification and measurement model
• For hybrid contracts with non-financial hosts gt
  Existing IAS 39 requirements retained
• Fair value option
• Retained to address accounting mismatches

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Classification and MeasurementOCI presentation
option
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• Scope investments in equity instruments not
  held for trading
• Other features
• option available instrument by instrument on
  initial recognition
• no recycling, impairment or change in
  presentation
• dividends also recognised in OCI

2008 IASC Foundation     30 Cannon Street 
   London EC4M 6XH     UK     www.iasb.org
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Summary of key changes to IAS 39
IAS 39 Proposed approach
Classification Many categories each with different measurement, presentation and impairment methods Two measurement bases Amortised cost (one impairment method) and Fair Value.
Measurement Many categories each with different measurement, presentation and impairment methods Irrevocable option at initial recognition to present fair value changes of some equity instruments in OCI.
Impairment Different impairment rules depending on category and instrument type Only debt instruments at amortised cost are tested for impairment. One impairment method.
Tainting Tainting rules for held to maturity investments No tainting rules for assets measured using amortised cost.
Reclassification Some reclassifications permitted/required No reclassifications. Business model approach.
Embedded derivatives Bifurcation of embedded derivatives required in some cases No separation. Same classification approach (for hybrids with financial hosts)
FVO Available if specific criteria are met Available for an accounting mismatch
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Classification and Measurement
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• Approach proposed for transition
• Generally fully retrospective, but some
  transition relief will be provided
• Early adopters will be subject to disclosures in
  addition to IAS 8 disclosures
• Effective date
• Any final proposals will be available for
  voluntary application for 2009 year end financial
  statements
• Mandatory date for adoption not before 1
  January 2012
• Comment deadline for exposure draft is 14
  September 2009

2008 IASC Foundation     30 Cannon Street 
   London EC4M 6XH     UK     www.iasb.org
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Classification and MeasurementFASB proposed
approach

• All financial instruments within the scope of the
  project would be measured on balance sheet at
  fair value with changes in net income or other
  comprehensive income
• Fair value through net income
• Default category. Includes all equity
  investments, derivatives hybrid contracts that
  require separation.
• Fair value through OCI
• Qualify if business strategy is to hold debt
  instruments with principle amounts for collection
  or payment(s) of contractual cash flows rather
  than to sell or settle the financial instruments
  with a third party
• Current period interest impairment recognised
  in PL.
• Other changes in fair value recognised in OCI.
• Recycling on derecognition.

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Classification and MeasurementFASB FV-OCI
presentation approach

• Balance sheet
• present as separate line items in the balance
  sheet amortized cost and the necessary adjustment
  to arrive at fair value, and cumulative credit
  losses.
• Income/performance statement
• One statement is mandatory with subtotals for net
  income and total comprehensive income. (EPS based
  on net income).
• Net income to include interest and dividends,
  credit impairments, realized gains and losses.
• OCI to include entire change in fair value for
  qualifying instruments.

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Classification and MeasurementFASB model other
features

• Amortized cost option
• Limited amortized cost option for certain
  financial liabilities (own debt)
• Embedded derivatives
• Current bifurcation criteria for hybrid financial
  instruments would determine whether those
  instruments would be classified in FV-NI category
  or could be FV-OCI category.
• Clearly closely related could be at FV-OCI
• Not clearly closely related at FV-NI
• Non-financial hybrids would continue to follow
  current guidance related to bifurcation

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Questions or comments?
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Expressions of individual views by members of
the IASB and its staff are encouraged. The views
expressed in this presentation are those of the
presenter. Official positions of the IASB on
accounting matters are determined only after
extensive due process and deliberation.
2008 IASC Foundation     30 Cannon Street 
   London EC4M 6XH     UK     www.iasb.org