November 2012

Exposure Draft

Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

This snapshot provides a brief introduction to the proposed limited amendments to the classication and measurement requirements for nancial instruments that have been published for public comment by the International Accounting Standards Board (IASB).
Project objective: With these proposals, the IASB aims to: reduce the differences between IFRS and US GAAP in the accounting for nancial instruments; consider the interaction with accounting for insurance contracts; and clarify the existing classication and measurement requirements for nancial assets. Project stage: This Exposure Draft (ED) proposes limited amendments to the classication and measurement requirements for nancial instruments. The IASB invites comments from interested parties and will undertake outreach during the comment period. Upon completion of these consultations, the IASB will redeliberate the proposals and expects to complete this project along with the Impairment and General Hedge Accounting phases during 2013. Comment deadline: The ED is open for public comment until 28 March 2013.

Next steps:

Reform of nancial instrument accounting

Classication and Measurement
(b) The clarication of a narrow range of application questions, such as the amount/ frequency of sales that would be consistent with a hold to collect business model and how to apply the contractual cash ow characteristics assessment when there is an interest rate mismatch or the interest rate is leveraged. (c) The reduction of key differences between the IASBs requirements for classication and measurement of nancial instruments and the tentative classication and measurement model considered by the US Financial Accounting Standards Board (FASB), thereby achieving increased comparability internationally in the accounting for nancial instruments.

IAS 39

Impairment
Forthcoming ED

General Hedge Accounting*

Review draft complete

*Macro hedge accounting is being deliberated separately from this project

The IASB is undertaking its reform of accounting for nancial instruments in phases. This ED is the result of the Classication and Measurement phase of that project. The IASB published the new requirements for classifying and measuring nancial instruments in IFRS 9 Financial Instruments (issued October 2010). This ED proposes some limited amendments to those requirements.

Why revise the requirements for classication and measurement?

The IASB had three primary objectives for publishing the ED and limited the discussions to matters consistent with those objectives: (a) The consideration of the interaction between the classication and measurement of nancial assets and the accounting for insurance contract liabilities. The IASB stated that the interaction between IFRS 9 and the Insurance Contracts project would be considered once the insurance contract model was developed sufciently.

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Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

IFRS 9

IFRS 9 (2010) + ED of limited amendments

Why only limited-scope amendments?

The IASB believes that IFRS 9 is fundamentally sound. In particular the IASB believes that, when classifying nancial instruments, using a basis that focuses on the information provided to users of nancial statements about future cash ows is the right one. Consequently, the ED does not fundamentally change these concepts in IFRS 9. The IASB is also mindful of the need to complete the entire project on nancial instruments in a timely manner and to minimise the cost and disruption to entities that have already applied IFRS 9 or who have undertaken signicant preparations to apply IFRS 9.

Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

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Proposed revisions to the requirements for classication and measurement

Classication determines how nancial assets and nancial liabilities are accounted for in nancial statements and, in particular, how they are measured on an ongoing basis.

IAS 39
Rule-based Complex and difcult to apply Four classication categories for nancial assets Multiple impairment models Own credit gains and losses recognised in prot or loss

IFRS 9 (2010)
Principle-based Classication driven by business model and nature of cash ows Two measurement bases One impairment model Own credit gains and losses presented in OCI Interaction with insurance contracts to be considered

IFRS 9 (this ED)

As for IFRS 9 (2010), plus Claried hold to collect business model Improved contractual cash ow test FVOCI measurement category

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Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

IFRS 9 applies one classication approach for all types of nancial assets, including those that contain embedded derivative features. Two criteria are used to determine how nancial assets should be classied and measured: (a) Contractual cash owsare the contractual cash ows solely payments of principal and interest? (b) What is the objective of the business model within which the nancial assets are held? The ED builds on that structure.

Cash ow characteristics
The ED proposes to clarify when contractual cash ows are still considered to consist of principal and interest when the interest rate is leveraged or is reset for a period that does not match the rate used (for example, the interest rate is reset every month to a three-month interest rate). The ED proposes that the nancial asset has cash ows that are solely payments of principal and interest if the effect of such a leverage or mismatch feature could not be more than insignicant when compared with the cash ows of an instrument that does not contain such a feature but that is otherwise identical.

Business model assessment

The IASB believes that information about amortised cost is useful when simple debt instruments (such as simple loans and bonds) are held in a business model with the objective of collecting contractual cash ows. IFRS 9 already includes a hold to collect business model, but the IASB was asked when sales of debt instruments classied as such can be considered consistent with that business model. The ED proposes to clarify the business model criteria by providing additional application guidance on both the types of business activities and the frequency and nature of sales that could qualify for amortised cost measurement. The frequency and signicance of past sales, the reasons for those sales and the expectations for future sales need to be considered to decide when future cash ows are expected to arise from contractual cash ows or from the proceeds of sales.

Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

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Proposed revisions to the requirements for classication and measurement continued...

Fair value through other comprehensive income
The IASB believes that both amortised cost and fair value information (the market value of an asset) are useful when simple debt instruments are managed both to collect contractual cash ows and for sale, because performance of a business model with these mixed objectives is affected by both the collection of contractual cash ows and realisation of fair values. IFRS 9 does not currently include this business model but some interested parties, including insurance companies, said that they needed such a business model to properly reect their activities. The ED proposes the introduction of a fair value through other comprehensive income (FVOCI) measurement category for simple debt instruments. In this measurement category, the balance sheet (statement of nancial position) will reect the fair value carrying amount while amortised cost information is presented in prot or loss. The difference between the fair value and amortised cost information will be recognised in other comprehensive income (OCI). Amortised cost information will be provided by calculating interest and impairment in the same way as for nancial assets measured at amortised cost. In addition, when nancial assets are removed from an entitys balance sheet (derecognised), the fair value gains or losses accumulated in OCI will be reclassied (recycled) to prot or loss to result in the same gains or losses that would have been recognised if the assets were measured at amortised cost.

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Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

Process for deciding measurement

Current IFRS 9 Classication and Measurement
Instruments within the scope of IFRS 9/IAS 39

Amendments proposed in this ED

Contractual cash ows are solely principal and interest Yes Held to collect contractual cash ows Yes Fair value option? No Amortised cost
* Presentation option for equity investments to present fair value changes in OCI

No

No

Held to collect contractual cash ows and for sale? No Yes Fair value option?

Yes Fair value through P&L*

Yes

No

Fair value through OCI

Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

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Proposed revisions to the requirements for classication and measurement continued...

Own credit gains or losses
Interested parties had raised concerns about the volatility that occurs in prot or loss for non-derivative nancial liabilities that are measured in accordance with the fair value option. IFRS 9 requires the changes in value caused by changes in an entitys own credit risk (own credit) to be recognised in OCI. However, in order to adopt this treatment for own credit in IFRS 9, an entity must at the same time apply the new requirements for nancial assets. The IASB continued to receive requests to accelerate the application of the requirements for the presentation of own credit gains or losses, because markets continue to be volatile and own credit gains or losses remain signicant. To address these concerns the ED proposes that once the completed version of IFRS 9 is issued, an entity can elect to early apply only the own credit requirements in IFRS 9. In effect, for those wanting to apply only the own credit requirements early, accounting for nancial instruments would continue as in IAS 39 Financial Instruments: Recognition and Measurement except for changes in the accounting for own credit gains or losses.

Transition
Currently, entities can elect to apply the completed phases of IFRS 9 from different dates before the mandatory effective date of the Standard (for example, an entity could choose only to apply the changes to nancial asset accounting for a specic reporting period and only apply the changes to nancial liability accounting in a later reporting period, or it could apply both from the same date). The ED proposes to improve the comparability for users of nancial statements by eliminating this phased early application of IFRS 9. Early application of IFRS 9 would continue to be permitted, but once IFRS 9 is nalised, except for own credit as outlined above, all phases of IFRS 9 (Classication and Measurement, Impairment and General Hedge Accounting) must be applied from the same date. Previous versions of IFRS 9 would no longer be available for early application.

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Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

What is the impact of the proposed limited amendments?

The proposed limited amendments are intended to improve the ability of users of nancial statements to understand how cash ows from nancial assets will be realised and the amount, timing and uncertainty of those cash ows.
The IASB believes that the proposals in the ED, in conjunction with the related requirements in IFRS 9, will: continue to enhance the provision of information that is useful for decision-making, and that is based on the business model within which assets are held; result in more consistent application of the hold to collect business model that results in amortised cost measurement for simple debt instruments; more closely align the measurement of nancial assets with the way in which nancial assets are managed and cash ows are realised, ie to collect contractual cash ows, for sale or both; address the interaction between the classication and measurement of nancial assets and the accounting for insurance contract liabilities by reducing the mismatch between the measurement of nancial assets and the related insurance contract liabilities because some fair value gains and losses on both would be recognised in OCI; and increase comparability with the FASBs tentative classication and measurement model. In particular, both the ED and the model as currently tentatively agreed by the FASB will base classication of nancial assets on both whether the contractual cash ows consist solely of principal and interest and on an entitys business model. In addition, the objective of the hold to collect and hold to collect or sell business models are aligned and for both boards the fair value through prot or loss measurement category is the residual.

Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

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How can I comment on the ED?

The ED includes questions on the proposals. Respondents are invited to comment on any or all of those questions and to comment on any other issue that the IASB should consider in nalising the proposals. The IASBs redeliberations of the proposals will take place in public meetings as announced on the IASB website. The deadline for comments on the ED is 28 March 2013. To view the ED and submit your comments, visit www.ifrs.org. To stay up to date with the latest developments on IFRS 9 sign up for email alerts on the project homepage on www.ifrs.org.

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Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

Important information
This Snapshot has been compiled by the staff of the IFRS Foundation for the convenience of interested parties. The views expressed within this document are those of the staff who prepared the document. They do not purport to represent the views of the IASB and should not be considered as authoritative. Comments made in relation to the application of IFRSs or US GAAP do not purport to be acceptable or unacceptable application of IFRSs or US GAAP. Ofcial pronouncements of the IASB are available in electronic form to eIFRS subscribers. Printed editions of IFRSs are available for ordering from the IASB website at http://go.ifrs.org/Limited-Amendments-to-IFRS-9.

Exposure Draft | Snapshot: Financial Instruments: Classication and Measurement (Limited Amendments to IFRS 9)

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