Amortised cost
(one impairment
method)Contractual cash flow
characteristics
Business model test
FVO for
accounting
mismatch
(option)
Fair Value
(No impairment)
characteristics
All other Instruments:
• Equities
• Derivatives
• Some hybrid
contracts
Equities:
OCI presentation
available
(alternative)
Reclassification required when business model changes
81
Business model:
� objective of holding instruments is to collect
contractual cash flows rather than to sell prior to
contractual maturity to realise fair value changescontractual maturity to realise fair value changes
� not an instrument by instrument approach to
classification
� assess contractual terms of instruments within such
a business model
82
Contractual cash flow characteristics
� Payments represent solely principal and interest
� Interest is consideration for time value of money and
credit risk
� Prepayment/extension options may qualify� Prepayment/extension options may qualify
No ‘tainting’ rules for assets at amortised cost
� gains or losses from derecognising such items to be
presented separately with additional disclosures
83
Alternative presentation of fair value changes in other
comprehensive income (OCI)
Scope
� investments in equity instruments not held for
tradingtrading
Features
� alternative available instrument by instrument
� dividends recognised in P&L
� no recycling, impairment or change in presentation
84
Hybrid contracts
Financial host Non-financial host
Financial AssetsEmbedded derivatives
85
Financial host Non-financial host
IAS 39 guidance
retained
No separation –
part of classification
Fair value option available, if…
Accounting
mismatch
Managed on
fair value basisEmbedded
derivative(s)
Financial AssetsFair Value Option (FVO)
86
Not managed to
collect contractual
cash flows = FV
Hybrid contracts
with financial host
classified in
entirety
*Circumstances when FVO available is unchanged for financial liabilities
Unquoted equities and their derivatives
� Fair value measurement required
� Cost may be an appropriate estimate of fair value
• if more recent information not available or a
wide range of outcomes
Financial AssetsApplication guidance
wide range of outcomes
� Does not apply to equities held by financial
institutions and investment funds
Contractually linked and non-recourse instruments
� Detailed application guidance
� ‘Look through’ approach
87
IAS 39 IFRS 9
Classification Many categories each
with different
measurement methods
Two measurement bases:
Amortised cost and Fair Value
Measurement Irrevocable option at initial
recognition to present fair
value changes of some equity
Financial AssetsSummary of Key Changes
value changes of some equity
investments in OCI
Impairment Different impairment
rules depending on
category and
instrument type
Only debt instruments at
amortised cost are tested for
impairment
88
Financial AssetsSummary of Key Changes continued
IAS 39 IFRS 9
Tainting Tainting rules for held to
maturity investments
No tainting rules
Reclass-
ification
Some reclassifications
permitted/required
Reclassifications required if
and only if business model
changes
89
changes
Embedded
derivatives
Bifurcation of embedded
derivatives required in
some cases
No separation, same
classification approach (for
hybrid financial assets with
financial hosts)
FVO Available if specific criteria
are met
Available if eliminating or
significantly reducing an
accounting mismatch
90
Held for tradingFair value - with changes
recognised in profit or loss
90
Not held for trading
Fair value – irrevocable
choice of recognising
changes in profit or loss or
OCI
91
Held to collect contractual
cash flowsAmortised cost
(FVO available if criteria are met)
91
Not held to collect
contractual cash flows
Fair value through
profit or loss
92
Hybrid contract (as a
whole) has basic loan
features and is Held to
collect contractual CFs
Whole instrument at
amortised cost
92
All other hybrid contracts
with financial hosts
Whole instrument at fair
value through profit or loss
All financial
liabilities
Amortised
cost
FVO for
mismatch,
managed on
FV basis and
hybridsExcept:
Own
credit in
OCI
93
Except:
Held for trading
Fair value
through
P&L
• Hybrid financial liabilities are bifurcated
• No reclassification permitted
� What is ‘own credit’?
• fair value changes in liability arising from changes in the
issuer’s credit quality
� How is it measured?
• often measured as change in margin over a benchmark
interest rate
94
interest rate
� What is the concern?
• Gain when credit quality deteriorates, loss when credit quality
improves
• Reporting such gains and losses is not useful
� Board’s Request for Information on measurement of liabilities
� ED on classification and measurement
To address ‘own credit risk’
� Retain IAS 39 measurement requirements for financial liabilities:• held for trading � fair value through P&L• hybrid liabilities � bifurcation requirements in IAS 39• ‘vanilla’ liabilities � amortised cost• maintain FVO (with current eligibility conditions)• maintain FVO (with current eligibility conditions)
BUT
� Separate out ‘own credit risk’ for FVO
� ‘Own credit risk’ portion would be separated in a manner similar to that previously used in IFRS 7 for disclosure
95
Change in FV
attributable
to all factors
except ‘own
credit risk’
Change in FV
attributable
to ‘own
credit’
(not recycled)
Financial liability at FVOon statement of financial position at (full) fair value
Profit or Loss
Profit XXX
96
Mandatory for all liabilities at FVO unless this would create or
enlarge an accounting mismatch
Statement of Comprehensive
Income
Other Comprehensive
Income
XXX
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