Financial instruments: recognition and measurement
The Board continued its discussion aimed at replacing IAS 39 Financial Instruments: Recognition and Measurement. The discussion centred on classification criteria and impairment.
At the March joint meeting, the Board and the US Financial Accounting Standards Board (FASB) decided tentatively to consider three potential measurement methods for financial instruments:
At this 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 decided tentatively to use as a starting point the classification approach for financial instruments in the forthcoming IFRS for small and medium-sized entities (SMEs). This approach distinguishes between:
- basic financial instruments that qualify for amortised cost measurement; and
- other financial instruments that are measured at fair value.
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.
The Board set a timetable that calls for the publication for public comment of an exposure draft on the classification and measurement of financial instruments by July 2009 and issue a standard in time for 2009 year-end financial statements.
That exposure draft will not deal with hedge accounting, which the Board intends to address in a separate exposure draft to follow shortly thereafter before the end of this year.
Impairment of financial assets
The Board held an educational session on the impairment of financial assets under an amortised cost measurement method, discussing the following approaches to impairment, without seeking decisions:
- expected loss;
- incurred loss; and
- fair value.
The staff provided a summary of the outcome of various meetings held with interested parties to discuss the features and operationality of an expected loss approach to impairment. The staff indicated that, in the light of those discussions, both the Board and those
parties would benefit from a wider consultation before the Board considers making any proposals. The staff also noted that two further educational sessions will be held at the IASB meeting on 15-19 June, at which a large bank will discuss how it would operationalise an expected loss approach to impairment, and the Bank of Spain will present its statistical provisioning model.
The Board decided tentatively that, following the education session in June, it would ask for views from interested parties by way of a website posting. The Board plans to publish proposals on the impairment of financial assets in October 2009, including consideration of an expected loss model.
Credit risk in the measurement of liabilities
The Board discussed a staff draft of a discussion paper dealing with the role of credit risk in current measurements of liabilities. In December 2008, the Board concluded that this was a cross-cutting issue that affected many topics and directed the staff to prepare a discussion document. At this meeting, the Board directed the staff to finalise the draft as a staff document with an IASB wraparound seeking comments.