IASB issued IFRS 9 Financial Instruments

The International Accounting Standards Board (IASB) issued today a new International Financial Reporting Standard (IFRS) on the classification and measurement of financial assets. Publication of the IFRS represents the completion of the first part of a three-part project to replace IAS 39Financial Instruments: Recognition and Measurement with a new standard - IFRS 9Financial Instruments. Proposals addressing the second part, the impairment methodology for financial assets were published for public comment at the beginning of November, while proposals on the third part, on hedge accounting, continue to be developed.

he new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users.

The IASB has received broad support for its approach. This became evident during the unprecedented global scale of consultation and outreach activity it undertook in order to refine proposals contained within the exposure draft published in July 2009. Round table discussions were held in Asia, Europe and the United States. Interactive webcasts, each attracting thousands of registered participants, have been held, often on a weekly basis. In addition, more than a hundred meetings have been held with interested parties around the world during the past four months.

The views expressed to the IASB during its consultations resulted in the proposals being modified to address concerns raised and to improve the standard. For example, IFRS 9 requires the business model of an entity to be assessed first to avoid the need to consider the contractual cash flow characteristics of every individual asset. It requires reclassification of assets if the business model of an entity changes. The IASB changed the accounting that was proposed for structured credit-linked investments and for purchases of distressed debt. The IASB also addressed concerns expressed about the problems created by the mismatch in timings between the mandatory effective date of IFRS 9 and the likely effective date of a new standard on insurance contracts.

Furthermore, in response to suggestions made by some respondents, the IASB decided not to finalise requirements for financial liabilities in IFRS 9. The IASB has begun the process of giving further consideration to the classification and measurement of financial liabilities and it expects to issue final requirements during 2010.

A feedback statement providing comprehensive details of how the IASB has responded to comments received through the consultation process is available for download by clicking here.

The effective date for mandatory adoption of IFRS 9 Financial Instruments is 1 January 2013. Consistent with requests by the G20 leaders and others, early adoption is permitted for 2009 year-end financial statements.

Commenting on IFRS 9, Sir David Tweedie, Chairman of the IASB, said:

We have delivered on our commitment to the G20 and stakeholders internationally to provide an improved financial instrument standard for the classification and measurement of financial assets for use in 2009. Benefiting from unprecedented levels of consultation with stakeholders around the world, the IASB has made significant changes in its initial proposals to improve the standard, provide enhanced transparency and respond to stakeholder concerns.

IFRS 9 Financial Instruments is available for eIFRS subscribers from today.

Source : www.IASB.org

IASB and FASB reaffirm to improve IFRS and U.S.GAAP and to bring about their convergence

At their joint meeting last week, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) reaffirmed their commitment to improve International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP) and to bring about their convergence. The Boards also agreed to intensify their efforts to complete the major joint projects described in their 2006 Memorandum of Understanding (MoU), as updated in 2008.

Today, as a further affirmation of that commitment, the IASB and FASB issued a joint statement describing their plans and milestone targets for completing the major MoU projects in 2011. The statement, which is available by clicking here [PDF] also describes the values and principles underpinning the Boards’ collaboration and significant successes achieved thus far.

In affirming their commitment to developing a common set of high quality standards, the Boards took note of the support of the leaders of the Group of 20 nations, the Financial Crisis Advisory Group of the FASB and IASB, and the Monitoring Board of the International Accounting Standards Committee (IASC) Foundation for the joint convergence efforts underway.

Commenting on the update, Sir David Tweedie, chairman of the IASB, said:

The two boards are committed to improving financial reporting internationally by completing the convergence programme described in the Memorandum of Understanding. The statement published today describes a series of important and concrete steps that will help us to achieve our June 2011 targets.

Robert Herz, chairman of the FASB, said:

Our successful joint meeting with the IASB in late October demonstrated that improvements in financial reporting and convergence are very much on track. Our joint efforts have and will continue to produce significant benefits to investors and the economy at large. We will continue our dual objectives of working toward global convergence while addressing reporting issues of critical importance to U.S. investors and financial markets.

In the interest of timely and continued progress, the two Boards also committed to monthly joint meetings and to provide transparency and accountability by providing quarterly updates on their progress on convergence projects.

The IASB and the FASB will hold their next joint meeting via videoconference later this month.

The Trustees of the IASC Foundation and the Trustees of the FAF also issued a statement of support today available by clicking here [PDF].

Source : IASB.org

ED on the amortised cost measurement and impairment of financial instruments

The International Accounting Standards Board (IASB) today (5 Nov 2009) published for public comment an exposure draft on the amortised cost measurement and impairment of financial instruments. The proposals form the second part of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard, to be known as IFRS 9 Financial Instruments. Proposals on the classification and measurement of financial instruments were published in July, with a final standard expected shortly, while proposals on hedge accounting continue to be developed.

Both International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) currently use an incurred loss model for the impairment of financial assets. An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.
The global financial crisis has led to criticism of the incurred loss model for presenting an initial, over-optimistic assessment of no credit losses, only to be followed by a large adjustment once a trigger event occurs.

Responding to requests by the G20 leaders and others, in June 2009 the IASB published a Request for Information on the practicalities of moving to an expected loss model. The responses have been taken into account by the IASB in developing the exposure draft.

Under the proposals expected losses are recognised throughout the life of the loan (or other financial asset measured at amortised cost), and not just after a loss event has been identified. This would avoid the front-loading of interest revenue that occurs today before a loss event is identified, and would better reflect the lending decision. Therefore, under the proposals, a provision against credit losses would be built up over the life of the financial asset. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.

The IASB is aware of the significant practical challenges of moving to an expected loss model. For this reason an Expert Advisory Panel (EAP) comprising experts in credit risk management is being established to advise the board. An eight-month comment period has been provided to allow adequate time for entities to consider the impact of such a change within their organisation.

The IASB will continue the unprecedented level of outreach activity currently being undertaken in reforming the accounting for financial instruments. The IASB will also co operate closely with the US Financial Accounting Standards Board (FASB) with a view to agreeing a common approach to the impairment of financial assets.

Introducing the exposure draft, Sir David Tweedie, Chairman of the IASB, said:

Consistent with requests from the G20 and others, the IASB has moved swiftly to reform the accounting for financial instruments. These proposals on the impairment of financial assets measured at amortised cost form the second part of this project.

Although moving to a single impairment model significantly reduces complexity, the challenges of applying an expected loss approach should not be underestimated. For this reason the IASB will tread carefully and seek input from a broad range of interests before deciding how to proceed.

An IASB ‘Snapshot’, a high level summary of the proposals, is available to download free of charge from the IASB website - click here.

The proposals in the exposure draft Financial Instruments: Amortised Cost and Impairment are open for comment until 30 June 2010. After considering comments received on the exposure draft, the IASB plans to issue an IFRS in 2010 that would become mandatory about three years later with early application permitted. The exposure draft is available on the ‘Open for Comment’ section on the IASB website. Subscribers may also view the document in eIFRS.

Source : IASB.org

The revised version of IAS 24 Related Party Disclosures

The International Accounting Standards Board (IASB) issued today (4 November 2009) a revised version of IAS 24 Related Party Disclosures that simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. The revised standard is effective for annual periods beginning on or after 1 January 2011, with earlier application permitted.

IAS 24 requires entities to disclose in their financial statements information about transactions with related parties. In broad terms, two parties are related to each other if one party controls, or significantly influences, the other party.

The IASB has revised IAS 24 in response to concerns that the previous disclosure requirements and the definition of a ‘related party’ were too complex and difficult to apply in practice, especially in environments where government control is pervasive. The revised standard addresses these concern by :

(1) Providing a partial exemption for government-related entities. Until now, if a government controlled, or significantly influenced, an entity, the entity was required to disclose information about all transactions with other entities controlled, or significantly influenced by the same government. The revised standard still requires disclosures that are important to users of financial statements but eliminates requirements to disclose information that is costly to gather and of less value to users. It achieves this balance by requiring disclosure about these transactions only if they are individually or collectively significant.

(2)  Providing a revised definition of a related party. The IASB has simplified the definition and removed inconsistencies.

The softcopy of IAS 24 Related Party Disclosures is available to download for eIFRS subscribes from today.

Click here for IASB Press Release.