Ernst & Young's "IFRS Vane" introduces the latest progress in the International Financial Reporting Standards (IFRS), including the International Accounting Standards Board (hereinafter referred to as "IASB" or "Council") standard development project status updates, IASB discussion priorities, the potential impact of proposed standards or revisions, etc., to help you grasp the future trend of IFRS.
Theme of this issue: Post-Implementation Review of Financial Instrument Standards—Classification and Measuring
Project Background
According to the "Procedure Manual" of the International Financial Reporting Standards Foundation, the post-Implementation Review is a project by which the IASB is to evaluate the effect of the implementation of a major revision of a new standard or standard.
"International Financial Reporting Standards No. 9 - Financial Instruments" (hereinafter referred to as "IFRS 9" or "New Financial Instruments Standards") will take effect in the financial year starting on January 1, 2018. The IASB divides the development of the new financial instrument standards into three stages, namely classification and measurement, impairment and hedging accounting. Therefore, its post-implementation review is also carried out in stages. The first phase of the review of classification and measurement has been completed and is currently in the second phase of analytical feedback. The Council will decide whether to take the next step (if any) based on the evidence collected.
One of the more eye-catching topics in classification and measurement of this issue is that when an enterprise meets certain conditions, it can choose to include changes in the fair value of equity instruments into other comprehensive income rather than profit or loss, but it is not allowed to reclassify from other comprehensive income to profit or loss in the future (referred to as the "FVOCI presentation option").
At the Council meeting in June 2022, the IASB staff (hereinafter referred to as "staff") showed the feedback received on the topic so far, but did not ask the Council to make any decision. The Council will consider how to respond to these feedbacks in future meetings.
Feedback Review
Staff divide opinions into three categories when summarizing feedback:
► Is the application of FVOCI presentation option as expected by the Council?
► Request to expand the scope of application of FVOCI presentation option
► Request to expand the scope of application of FVOCI presentation option
► The application of the FVOCI presentation option is as expected by the Council
. When formulating new financial instrument standards, the Council acknowledged that under normal circumstances, the fair value of the equity instrument can provide the most useful information, but also realized that for some equity instruments, reporting fair value changes as profit and loss does not truthfully reflect the performance of the company. Therefore, the Council allows changes in fair value of certain equity instruments that meet the conditions (such as those held for transaction purposes) to be included in other comprehensive income and may not be reclassified to profit or loss in the future.
Overall, many feedbackers said that the FVOCI presentation option works well in practice and fulfilled the original intention of the Council when formulating guidelines. They did not find significant challenges in practice. Some feedbackers believe that the inclusion of fair value changes in other comprehensive income is consistent with the purpose of holding these instruments, because fair value changes during the holding period are only "suspended" to the performance of the company.
Some feedbackers noticed that when the guidelines were formulated, there were stakeholders concerned that the requirement that the future cannot be reclassified to profit and loss may weaken the company's willingness to invest in the long term, but they said that they did not actually observe that the guidelines affect the company's investment decisions.
However, some feedbackers also expressed their strong desire to reconsider the post-period reclassification to profit and loss. They believe that the fair value changes are included in other comprehensive income during the holding period, while reclassification to profit and loss at disposal provides the most useful information. Holders of nearly all of these views also agree that if reclassification is allowed, the Council needs to consider new impairment requirements to prevent losses from being reflected only at the end of disposal.
Request to expand the scope of application of FVOCI presentation options
Many feedbackers asked the Council to consider expanding the scope of application of FVOCI presentation options.IFRS 9 requires that this option is only applicable to the instruments that meet the definition of equity instruments in IAAS 32-Financial Instruments: Presentation. From the feedback, the staff roughly identified several types of financial instruments. Their common feature is that they may not meet the definition of equity instruments, but they also show the characteristics of some equity instruments. These types of financial instruments include:
- indirect investment in equity instruments, such as the fund shares held, and the fund mainly invests in equity instruments, related derivatives and necessary cash.
- repurchase instrument, the holder has a contractual right to require the issuer to repurchase or redeem the instrument in cash or other financial assets.
- gives the holder the right to obtain the net assets of the company in proportion to the liquidation of the company.
Fair value measurement exemption for non-listed equity instruments
Some feedbackers expressed their opinions on the practice of allowing the use of cost measurement to IFRS 9 to cancel the exemption of fair value measurement for investments in certain equity instruments when fair value cannot be measured reliably. They believe that the cancellation of exemptions is not in line with the principle of cost-effectiveness, and for certain equity investments, such as startups, the cost of evaluating fair value is too high. They therefore called on the Council to consider reintroducing this fair value measurement exemption.
Council discusses
Council noted that the FVOCI presentation options were generally working well and expressed their opinions on some topics. [1]
Many directors expressed concerns about reconsideration of allowing reclassification to profit and loss. These concerns mainly include several aspects:
- allows reclassification not simply delete the requirement that reclassification cannot be reclassified, but adds a new classification of financial instruments, which is a major revision of the principles in the existing guidelines, and its impact may be more significant than imagined;
- Many considerations supporting reclassification opinions have been discussed in the formulation of IFRS 9;
- allows reclassification to force the Council to consider new impairment requirements, and in IFRS The predecessor of 9, "International Accounting Standards No. 39 - Financial Instruments", the impairment requirements under the classification of available-for-sale financial assets are complex and the practical application lack consistency;
- did not find that investors expressed dissatisfaction with the information provided under the existing standards.
Regarding the scope of application of FVOCI presentation options, the directors expressed different views. Some directors agreed that some tools could be considered in the scope of applicable options, while some directors believed that they should be cautious.
Note: [1]. This article attempts to summarize these discussions, but please note that if you want to know the specific details of the Council discussion, you need to log in to the IFRS website to watch the video. Secondly, these discussions have not yet reached a conclusion, and we do not make predictions about the future direction of the project after implementation.
This article is written for the purpose of providing general information and is not intended to be a reliable accounting, taxation, legal or other professional advice. Please get specific comments from your consultant.
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