Financial instrument reform – have you read it properly?
The IASB Chairman once quipped “If you understand IAS 39, you haven’t read it properly”. Will the fast-tracked IAS 39 replacement project fix the problem?
Who could have guessed even two years ago that by the end of 2009, the IASB would have issued the first instalment in its project to replace IAS 39 Financial Instruments: Recognition and Measurement and be on track for a complete rewrite by the end of 2010?
The global financial crisis precipitated a new round of blame shifting. Who was to blame? Was it the wrong type of regulation? Was it a lack of transparency? Some thought it was global accounting standards and a lack of convergence. Others argued blaming accounting standards was ‘shooting the messenger’. Debate raged.
Throughout 2008 and 2009, the push for rapid reform in accounting for financial instruments, and other related topics such as consolidation and securitisation, began to grow. The Group of Twenty (G20) politicised the argument with a public statement urging reform. The IASB and its sister standard setter in the United States, the Financial Accounting Standards Board (FASB), had been backed into a corner. They had to act, and act fast.
A plethora of hastily organised meetings, proposals, committees and so on ensued. The need to save the global IFRS experiment meant the end of 2009 deadline had to be met at any cost. And met it was, well technically – almost.
IFRS 9 Financial Instruments made its inglorious debut on the world accounting stage in November 2009, with the local Australian version, AASB 9, following soon afterwards in mid-December 2009. This standard will be progressively amended to introduce the remaining requirements so that it eventually forms a complete replacement for IAS 39.
How is the project being structured?
The IASB decided to split its core IAS 39 replacement project into multiple phases across many sub-projects, including:
- Classification and measurement – what ‘buckets’ financial instruments should be put into and how each ‘bucket’ should be measured, i.e. fair value or ‘amortised cost’ – IFRS 9 contains these requirements for financial assets, with financial liabilities put on hold pending further consideration of ‘own credit risk’ in measurement
- Impairment – moving towards a ‘expected loss’ model which anticipates the non-collectability of receivables at the time the loan is advanced – this seemingly innocuous change is causing headaches for financial institutions and other entities with significant portfolios of receivables, promising substantial implementation costs
- Hedging – streamlining and simplifying all hedging in a form that resembles the existing ‘cash flow hedging’ approach – it is unclear whether or not ‘ineffectiveness testing’ will continue to be as rigorous.
In addition, there are number of key related projects that tie into the above three core projects:
- Derecognition – when a financial asset or liability should be taken off the balance sheet (or more correctly, the ‘statement of financial position’). The initial proposals have not been well received and the IASB is currently reconsidering alternate approaches
- Consolidation – the IASB’s initial attempt to develop a ‘unifying’ model of which entities form part of a group for accounting purposes, was again not well received and it likely to be amended, and possibly re-exposed, prior to finalisation
- Fair value measurement – with ‘fair value’ being an ubiquitous concept in IFRS, the need for centralised guidance on how fair value is determined is considered long overdue by many. This project will also likely see expanded disclosure requirements in financial statements.
What are the timeframes?
IFRS 9 applies to annual reporting periods beginning on or after 1 January 2013, but can be applied earlier. Early adoption of the initial phase might be attractive in some cases depending on an entity’s circumstances – although with much uncertainty around future phases many entities are choosing to wait. The other phases are also likely to have the same start date, although some may be earlier depending upon when they are finalised.
In addition, the FASB is running a concurrent project on financial instruments and has come to different conclusions in a number of areas. The IASB and FASB are paying lip service to the need for ‘true convergence’ in this area (another demand from the G20) but this may turn into a real push for compromise and change – even the initial cut of IFRS 9 can therefore be considered in a state of flux.
The key message for companies trying to come with grips with these changes is to understand where the project is heading and maintain a close watch on elements that may have a significant impact, or offer opportunity, during what will no doubt be an interesting ride ahead.
- Deloitte press release 'New accounting standard creates winners and losers and a lot of unfinished business’
- IAS Plus Update Newsletter on IFRS 9 (PDF 226kb) (IAS Plus project page)
- IAS Plus Update Newsletter on impairment proposals (PDF 90kb) (IAS Plus project page)
- IAS Plus Update Newsletter on credit risk (PDF 72kb) (IAS Plus project page)
- IAS Plus Update Newsletter on consolidation (PDF 124kb) (IAS Plus project page)
- IAS Plus Update Newsletter on derecognition (PDF 148kb) (IAS Plus project page)
- IAS Plus project page on hedging