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Final Version of IFRS 9 Slated for Summer Publication

April 10, 2014

The IASB’s much-watched update to its financial instruments accounting standard is on track to be published by late June or early July. The final version of IFRS 9 is expected to be published as a single package of requirements for classification and measurement, credit losses, and hedge accounting.

The standard considered the IASB’s chief response to the financial crisis is expected to be finalized and published by the end of June or early July, IASB member Sue Lloyd plans to tell IFRS Foundation Trustees at their meeting in Sydney on April 10, 2014.

IFRS 9, Financial Instruments, which originally was slated for publication in the second quarter of 2014, will be issued as a single package of requirements for classification and measurement, credit losses, and hedge accounting. The standard will replace IAS 39, Financial Instruments, and is considered “central to the reform of IFRS following the global financial crisis,” says an agenda paper released in advance of the meeting.

The classification-and-measurement part of the upcoming standard is expected to require businesses to assess the nature of the instruments’ cash flows and the way they are managed. Depending on the assessment, instruments would be measured at either amortized cost or fair value.

“This is in contrast to the existing requirements, which in many cases result in financial assets being measured on the basis of free choice,” the agenda paper says.

The impairment phase attempts to respond to concerns about the delayed recognition of credit losses that were identified during the financial crisis as a key weakness in accounting standards. Banks and other financial businesses will be required to consider potential future losses on loans and other instruments and set aside reserves accordingly. Current IFRS and U.S. GAAP, in contrast, require losses to be recognized after they already have happened, which investors and regulators have criticized as useless.

The plan promotes a single impairment model that applies to all financial instruments, regardless of their structure.

“This reduces the complexity of current IAS 39 accounting, which features different impairment models and can result in different impairment amounts being recognized on identical financial instruments simply due to the classification of the instrument,” the agenda paper says. “This was a major source of criticism in the financial crisis.”

The hedge accounting portion attempts to address complaints about IAS 39, which critics have said is too complex, rules-based, and inconsistent with risk management practices.

“The new requirements will significantly reduce the accounting considerations that currently affect risk management decisions and provide users of financial statements with more useful information about hedging activities, including the cost of such activities, resulting in better economic decision making,” the agenda paper says.

The IASB isn’t finished with its amendments to hedge accounting. The requirements in IFRS 9 will deal with what’s called general hedge accounting, which aligns a business’s financial reporting for derivatives with its risk management. The second phase of hedge accounting, called macro hedging, is used by banks when they manage interest rate risk between deposits and loans. The accounting board is preparing a discussion paper to help develop a macro hedging standard.

Until the macro hedging guidance is finalized, which may take several years given the issue’s complexity, businesses can apply the hedge requirements in IAS 39 or IFRS 9.

The IASB staff plans to ask board members to review two rounds of internal drafts of IFRS 9 to ensure that the final standard has been sufficiently reviewed, according to the agenda papers.

Regulators, banks, and investors urged the IASB and FASB to cooperate on a single, global standard for financial instruments, but the U.S. standard-setter and the international board could not agree on key issues. The FASB in August 2012 broke off from negotiations on the impairment model and in December 2013 released Proposed Accounting Standards Update (ASU) No. 2012-260, Financial Instruments—Credit Losses (Subtopic 825-15).

The FASB doesn’t want to distinguish between healthy assets and those that are deteriorating, which is a central part of the IASB’s plan. Under the FASB model, banks and other businesses would have to consider all facts in the foreseeable future in determining how to account for impairment. The IASB model calls for a 12-month forecast for good assets and then an estimate of the expected losses for assets that are losing value.

The FASB is deliberating feedback on the model and plans to publish a final standard in the second half of the year.

Similarly, the FASB carved out a separate path on classification and measurement after it determined in late 2013 that the plan it was writing with the IASB was too complex to justify an overhaul of U.S. GAAP. The U.S. board is contemplating targeted improvements to its standards and expects to finalize an amendment by the end of 2014.

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