Exposure Draft on Financial instruments: Amortised Cost and
Impairment

Comment Deadline: 30 June 2010

The IASB has published an exposure draft on amortised cost measurement and impairment of financial instruments. The objective of this exposure draft is to establish principles for themeasurement at amortised cost of financial assets and financial liabilities that will present useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of future cash flows. This exposure draft was prompted by a number of factors which include users views that IAS 39 is too complex and does not accommodate changes in reporting factors such as the global recession. It proposes requirements for how to include credit loss expectations in the amortised cost measurement of financial assets. The proposed requirements would use more forward looking information than the incurred loss model. They would also result in early recognition of credit losses because they avoid the delay resulting
from the “loss event” threshold of the incurred loss model. The principles in this exposure draft complement the principles for recognising, classifying, measuring, presenting and providing disclosures about financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. Both IFRSs and US generally accepted accounting principles (GAAP) currently use an incurred loss model for the impairment of financial assets. An incurredloss 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. Under the proposals expected losses are recognised throughout the life of the loan (or other financial asset measured at amortised cost), and not justafter 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 exposure draft can be downloaded at www.iasb.org

IASB completes first phase of financial instruments accounting reform

The IASB has issued a new IFRS 9 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 39 Financial Instruments: Recognition and Measurement with a new standard— IFRS 9 Financial 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. The 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 9c improves comparability and makes financial statements easier to understand for investors and other users. The effective date for mandatory adoption of IFRS 9 Financial Instruments is 1 January 2013. Early adoption is permitted for 2009 year-end financial statements. IFRS 9 is available at www.iasb.org for eIFRS subscribers.

IASB simplifies requirements for disclosure of related party transactions

The IASB has issued a revised version of IAS 24 Related Party Disclosures which simplifies thedisclosure 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 concerns by:

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.