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IASB proposes limited changes to IFRS 9 classification and measurement requirements

New category of financial assets could increase volatility for some financial institutions

29 Nov 2012

By Richard Crump

Hans Hoogervorst IASB chairman

LIMITED CHANGES to international accounting rule governing the classification and measurement requirements of financial instruments have been proposed by the IASB.

The global standard setter is proposing changes to IFRS 9 as part of a wider project with US counterpart FASB to reform accounting rules for financial instruments.

The IASB published new classification and measurement requirements for financial assets in 2009 and for financial liabilities in 2010. However, in January 2012 the IASB decided to consider limited amendments in order to clarify a narrow range of application questions, reduce the differences with FASB's model and take into account the interaction between the classification and measurement of financial assets and the accounting for insurance contract liabilities.

The IASB said changes were kept to a minimum because IFRS 9 is "fundamentally sound" and some entities have already adopted, or prepared to adopt the standard as previously published.

"We were clear when IFRS 9 was introduced in 2009 that it would be necessary to consider revisiting the interaction between IFRS 9 and the insurance contracts project once the insurance contract model was developed sufficiently," said Hans Hoogervorst, chairman of the IASB [pictured]. "In addition, this limited-scope review has given us an opportunity to propose aligning IFRS and US GAAP more closely, in this important area of financial reporting."

The exposure draft, which is open for comment until 28 March 2013, proposes the introduction of a fair value through other comprehensive income (FVOCI) measurement category for debt instruments that would be based on an entity's business model.

Some financial assets that an entity previously expected to measure at amortised cost under the existing IFRS 9 model may have to be classified in this new category, which could increase volatility in reported equity and, for financial institutions, regulatory capital.

"The new category will be welcomed by many in the insurance industry, as it is intended to dovetail with the IASB's tentative decision that changes in insurance liabilities driven by changes in discount rates also should be excluded from P&L. However, the debate will continue as to whether the IASB has found the best overall package to try to minimise accounting mismatches," said Chris Spall, partner in KPMG International Standards Group.

"Companies, in particular financial institutions, should start re-looking at their financial assets and at how the proposed amendments might impact them. Although these amendments are labelled ‘limited', they could have far-reaching implications for an entity's financial reporting," he added.

 

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