| This summary of Accounting Standards Board (AcSB) projects has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further deliberations by the AcSB. Decisions to publish Handbook material are final only after a formal ballot process. |
Status: The AcSB expects to issue the final standards shortly after the IASB in mid-2011. The IASB encourages interested parties to respond to the FASB Exposure Draft, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.” Comments are due September 30, 2010. Background
Activities to Date
Next Steps
Related Information
Contact Information Background - The IASB has commenced a multi-phase project to replace IAS 39 Financial Instruments: Recognition and Measurement. The three phases are intended to address the following criticisms of IAS 39:
- the complexity and lack of comparability created by classifying financial assets and liabilities into one of several possible categories;
- a concern that the impairment requirements delay identification and recognition of problems; and
- the hedge accounting requirements are complex and confusing.
A related project will revise the derecognition disclosure requirements of IFRS 7 Financial Instruments: Disclosures. Activities to Date Phase 1: Classification and measurement
IFRS 9 Financial Instruments, published in December, 2009, provides new requirements for the classification and measurement of financial assets. It is effective for fiscal years commencing on or after January 1, 2013 with earlier application permitted. Under IFRS 9, financial assets will be measured at amortized cost if they are managed to collect contractual cash flows and those cash flows are payments of principal and interest, calculated as compensation for time value of money and credit risk. All other financial assets currently in the scope of IAS 39 will be measured at fair value. Fair value measurement may be elected at initial recognition if doing so avoids an accounting mismatch. In May 2010, the IASB issued the Exposure Draft, “Fair Value Option for Financial Liabilities,” to complete the first phase of the project. This Exposure Draft proposes a modification to the application of the fair value option for financial liabilities. Financial liabilities would otherwise be classified and measured as required by IAS 39. For a financial liability classified using the fair value option, the entity would recognize the effect of changes in its credit risk in other comprehensive income. This amount would also be presented as a deduction from the total change in fair value in the income statement. The credit risk portion of the gain or loss would be measured in accordance with guidance in IFRS 7. On July 16, 2010, AcSB staff submitted a comment letter responding to the IASB’s Exposure Draft. The letter does not support the IASB’s proposal because the IASB and FASB proposals in this area are not converged. As well, the proposal requires the increased use of other comprehensive income without articulating a principle that distinguishes between items to be recognized in net income and those to be recognized in other comprehensive income. The AcSB staff letter posted by the IASB is available here. Phase 2: Impairment methodology
In January 2010, the AcSB issued the Exposure Draft, “Financial Instruments: Amortized Cost and Impairment,” proposing to revise IFRS 9. This Exposure Draft proposes that the effective interest rate determined on initial recognition of a financial asset would include expectations of future credit losses. By recognizing interest using this rate, an allowance for credit losses equal to expected credit losses is built over the life of the asset. The Exposure Draft also proposes that revenue or interest income related to the financial asset would be presented both as currently required and net of the change in allowance for doubtful accounts. Changes in expectations about future credit losses would result in recognition of either bad debt expense or recovery. The Exposure Draft does not propose a method for estimating future losses. An Expert Advisory Panel is working with the IASB staff to develop guidance. To solicit the views of stakeholders on the IASB’s proposals, AcSB staff held a roundtable discussion in Toronto on April 30, 2010. Such discussions assist the AcSB in developing an informed comment letter to the IASB and provide participants with the opportunity to share their views prior to finalizing their own comment letters. AcSB staff also consulted with other stakeholders on the proposals. On June 29, 2010, the AcSB submitted a comment letter responding to the IASB’s Exposure Draft. The letter does not support the IASB’s proposal to require that an entity’s expectations about future credit losses on a financial asset measured at amortized cost should be incorporated into the asset’s effective interest rate with subsequent changes in expectations recognized in profit and loss immediately. The AcSB thinks that the proposal does not meet the IASB’s and the FASB’s objective of developing a single global standard for financial instruments that reduces the complexity in current standards and produces financial statements that are more easily understood. The AcSB letter posted by the IASB is available here. Phase 3: Hedge accounting
The third phase of the project will address the requirements for hedge accounting. The IASB continues to discuss this topic. FASB proposals
Because financial instrument accounting is part of the global convergence project, both the IASB and the FASB are interested in comments on the FASB’s Exposure Draft, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.” The FASB proposes more extensive use of fair value measurement. Although the change in fair value for some financial instruments could be reported in other comprehensive income, net income would differ from that calculated using IFRS 9 and the subsequent exposure draft proposals described below. The FASB also proposes to accelerate recognition of impairment by removing the probability of loss requirement. This contrasts with the expected loss model proposed by the IASB in Phase 2 of their project. Next Steps The AcSB expects to issue the final standards shortly after the IASB in mid-2011, with effective dates that provide for an appropriate implementation period. Related Information
Contact Information
Questions or comments on this project should be directed to: Kate Ward, CA
Principal, Accounting Standards
Telephone: +1 (416) 204-3437
Fax: +1 (416) 204-3412
Canadian Accounting Standards Board
277 Wellington Street West
Toronto ON M5V 3H2 Canada |
