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IFRS 9: Financial Instruments

IASB meeting summaries and observer notes


 IASB / FASB February 2012


 

 

The boards discussed the cash flow characteristics assessment and held an education session on the business model assessment in their respective classification and measurement models for financial instruments.

Proposed approach to the contractual cash flows characteristics assessment

The boards tentatively decided that a financial asset could be eligible for a measurement category other than fair value through profit or loss (FVPL) (depending on the business model within which it is held) if the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest (P&I) on the principal amount outstanding. Interest is consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time. Principal is understood as the amount transferred by the holder on initial recognition.

  • If the financial asset contains a component other than these three components: principal, the consideration for the time value of money and the credit risk of the instrument, the financial asset must be measured at FVPL.
  • If the financial asset only contains components that are principal and the consideration for the time value of money and the credit risk of the instrument, but the relationship between them is modified (for example, the interest rate is reset and the frequency of the reset does not match the tenor of the interest rate), an entity needs to consider the effect of the modification when assessing whether the cash flows on the financial asset are still consistent with the notion of being solely P&I.
  • If the financial asset only contains components that are principal and the consideration for the time value of money and the credit risk of the instrument, and the relationship between them is not modified, the financial asset could be eligible for a measurement category other than FVPL (depending on the business model within which it is held). For the IASB, this is a minor amendment to the application guidance in IFRS 9 Financial Instruments. For the FASB, this is an amendment to the cash flow characteristics assessment in the tentative classification and measurement model. All IASB and FASB members voted in favour of the proposed approach.

Contingent cash flows

The boards tentatively decided that a contractual term that changes the timing or amount of payments of principal and interest would not preclude the financial asset from being eligible for a measurement category other than FVPL as long as any variability only reflects changes in the time value of money and the credit risk of the instrument.

In addition, the boards tentatively decided that the probability of contingent cash flows that are not solely P&I should not be considered. Financial assets that contain contingent cash flows that are not solely P&I must be measured at FVPL. An exception will, however, be made for extremely rare scenarios.

For the IASB, this does not represent a change to IFRS 9. For the FASB, the guidance will be included as part of the contractual cash flow characteristics assessment. All IASB and FASB members voted in favour of the decision.

Assessment of economic relationship between P&I

The boards tentatively decided that an entity would need to compare the financial asset under assessment to a benchmark instrument that contains cash flows that are solely P&I to assess the effect of the modification in the economic relationship between P&I. An appropriate benchmark instrument would be a contract of the same credit quality and with the same terms, except for the contractual term under evaluation.

The boards tentatively decided that if the difference between the cash flows of the benchmark instrument and the instrument under assessment is more than insignificant, the instrument must be measured at FVPL because its contractual cash flows are not solely P&I.

For the IASB, this is a minor amendment to the application guidance in IFRS 9. However, the IASB believes that this change will address application issues that have arisen in the application of IFRS 9. For the FASB, the guidance will be included as part of the contractual cash flow characteristics assessment. Thirteen IASB members and all FASB members voted in favour of the decision. One IASB member voted against.

Prepayment and extension options

The boards tentatively decided that a prepayment or extension option, including those that are contingent, does not preclude a financial asset from being eligible for a measurement category other than FVPL as long as these features are consistent with the notions of solely P&I.

For the IASB, this does not represent a change to IFRS 9. For the FASB, the guidance will be included as part of the contractual cash flow characteristics assessment. All IASB and FASB members voted in favour of the decision.

 

Financial instruments: classification and measurement: education session

The boards discussed the business model assessment in their respective classification and measurement models for financial instruments. No decisions were made at the education session. At a future meeting, the boards will discuss whether and how they may be able to reduce differences between their business model assessments.


 

Date: 2/28/2012