IFRS amendments after financial crisis international financial reporting standards, and int. valuation stand. Supervised by: Yrd.Doç.Dr.:Müge Saltoğlu PhD program of Accounting and finance Prepared by: Mohammed Al Ashi Social science institute Marmara University 1
Before crisis. Objectives of IFRS 39 establish principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items Financial instruments classification A financial asset or financial liability at fair value through profit or loss Held-to-maturity investments Loans and receivables Available-for-sale financial assets. 2
an entity is precluded from reclassifying financial instruments into or out of this category. 3
Initial measurement of financial assets and financial liabilities When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. 4
New to Reclassifications permits an entity to reclassify non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the fair value through profit or loss category in particular circumstances. The amendment also permits an entity to transfer from the available-for-sale category to the loans and receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset had not been designated as available for sale), if the entity has the intention and ability to hold that financial asset for the foreseeable future. 5
After the crisis The Board intends that IFRS 9 will ultimately replace IAS 39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments should be improved quickly 6
Procedures after the crisis the Board divided its project to replace IAS 39 into three main phases. As the Board completes each phase, it will delete the relevant portions of IAS 39 and create chapters in IFRS 9 that replace the requirements in IAS 39. 7
continue procedures after the crisis Phase 1: Classification and measurement of financial assets and financial liabilities. Phase 2: Impairment methodology. Phase 3: Hedge accounting. 8
Phase 1: Classification and measurement of financial assets and financial liabilities. In November 2009 the Board issued the chapters of IFRS 9 relating to the classification and measurement of financial assets. Those chapters require all financial assets to be classified on the basis of the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. 9
Cont. Phase 1: Classification and measurement of financial assets and financial liabilities. Assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, particular transaction costs. Assets are subsequently measured at amortised cost or fair value. 10
In details Phase 1: Classification and measurement of financial assets and financial liabilities. In October 2010 the Board added to IFRS 9 the requirements related to the classification and measurement of financial liabilities. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. 11
In details Phase 1: Classification and measurement of financial assets and financial liabilities. Under IAS 39 most liabilities were subsequently measured at amortised cost or bifurcated into a host, which is measured at amortised cost, and an embedded derivative, which is measured at fair value. Liabilities that are held for trading (including all derivative liabilities) were measured at fair value. 12
so, we can say the Board decided to retain most of the requirements in IAS 39 for classifying and measuring financial liabilities because constituents told the Board that those requirements were working well in practice. Consistently with its objective to replace IAS 39 in its entirety, the Board relocated those requirements from IAS 39 to IFRS 9. 13
In details Phase 1: Classification and measurement of financial assets and financial liabilities. Consistently with the requirements in IFRS 9 for investments in unquoted equity instruments (and derivative assets linked to those investments), the exception from fair value measurement was eliminated for derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument. Under IAS 39, if those derivatives were not reliably measurable, they were required to be measured at cost. IFRS 9 requires them to be measured at fair value. 14
In details Phase 1: Classification and measurement of financial assets and financial liabilities. The requirements related to the fair value option for financial liabilities were changed to address own credit risk. Those improvements respond to consistent feedback from users of financial statements and others that the 15
Phase 2: Impairment methodology. In June 2009 the Board published a Request for Information on the feasibility of an expected loss model for the impairment of financial assets. This formed the basis of an exposure draft, Financial Instruments: Amortised Cost and Impairment, published in November 2009. 16
Phase 3: Hedge accounting. The Board is considering how to improve and simplify the hedge accounting requirements of IAS 39. It expects to publish proposals for a comprehensive new approach before the end of 2011. 17
In addition to the three phases Derecognition The Board published in March 2009 an exposure draft Derecognition (proposed amendments to IAS 39 and IFRS 7 Financial Instruments: Disclosures). However, in June 2010 the Board revised its strategy and work plan and decided to retain the existing requirements in IAS 39 for the derecognition of financial assets and financial liabilities but to finalise improved disclosure requirements. The new requirements were issued in October 2010 as an amendment to IFRS 7 and have an effective date of 1 July 2011. 18
In addition to the three phases Later in October 2010 the requirements in IAS 39 related to the derecognition of financial assets and financial liabilities were carried forward unchanged to IFRS 9. 19
Financial Instruments: Disclosures Amendments to the IFRS, issued in March 2009, require enhanced disclosures about fair value measurements and liquidity risk. These have been made to address application issues and provide useful information to users. 20
Financial Instruments: Disclosures Disclosures Transfers of Financial Assets (Amendments to IFRS 7), issued in October 2010, amended the required disclosures to help users of financial statements evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity s financial position. 21
New announcement. On 4 August 2011, the Board issued an exposure draft proposing to change the mandatory effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 rather than being required to apply them for annual periods beginning on or after 1 January 2013 as currently required. Early application of both would continue to be permitted. The comment period for the exposure draft closes on 21 October 2011. 22
Comparison between IAS 39 & IFRS 9 23
Classification of debt instruments Fair Value Through Profit & Loss (FVPL) Available-for-sale (AFS) Held-to-maturity (HTM) Loan and Receivable (LAR) Fair Value Through Profit & Loss (FVPL) Amortised Cost (AC) 24
Classification of equity instruments Fair Value Through Profit & Loss (FVPL) Available-forsale (AFS) Fair Value Through Profit & Loss (FVPL) Fair Value Through Other Comprehensive Income (FVOCI) 25
Basis of classificatio n Intention to hold till maturity, trading for short term profits, derivative, loan or receivable, or intentional designation subject to certain restrictions Classification based on business model and the contractual cash flow characteristics 26
Measurement - Debt Instruments Measured at amortised cost if classified as held-to-maturity or as loan or receivable. Other classifications are measured at fair value. Measured at amortised cost (AC) if business model objective is to collect the contractual cash flows and the contractual cash flows represent solely payment of principal and interest on the principal amount outstanding. Debt instruments meeting the above criteria can still be measured at fair value through profit or loss (FVPL) if such designation would eliminate or reduce accounting mismatch. If not, measured at fair value through profit or loss (FVPL) 27
Measurement - Equity Instruments Measured at fair value. Exception: Unquoted equity investments are measured at cost where fair valuation is not sufficiently reliable. Measured at fair value through profit or loss. An entity can irrevocably designate at initial recognition as fair value through other comprehensive income, provided the equity investment is not held for trading. 28
Reclassifications - Debt instruments Reclassification between the various four categories allowed under specific circumstances with the gain/loss being treated differently depending upon the movement between the classifications. Reclassification from held-tomaturity (HTM) is viewed seriously if does not fall within the permitted exceptions. If entity s business model objective changes, reclassification is permitted between FVPL and AC or vice versa. Such changes should be demonstrable to external parties and are expected to be very infrequent. 29
References: Maria Carmen Huian, IMPACT OF CURRENT FINANCIAL CRISIS ON DISCLOSURES ON FINANCIAL INSTRUMENTS, Al. I. Cuza University Iaşi /Romania Jamil khatri,akeel master, ifrs9: financial instrument s: the new avatar,bombay chartered accountant journal, February 2010 vincent y.y.,tsang, similarities and differences between FAS 157 and ifrs, society of actuaries. http://www.iasplus.com/standard/ifrs09.htm Interantional reporting standard 9:financial instrument 30