Classification and measurement: limited amendments to IFRS9

Comments from ACCA to the International Accounting Standards Board, March 2013.

Q1.   Do you agree that a financial asset with a modified economic relationship between principal and consideration for the time value of money and the credit risk could be considered, for the purposes of IFRS9, to contain cash flows that are solely payments of principal and interest? Do you agree that this should be if and only if the contractual cash flows could not be more than insignificantly different from the benchmark cash flows


We agree that instruments which in substance have cash flows that consist of interest and principal should be allowed to pass the first test for amortised cost or fair value through other comprehensive income (FVOCI).

IFRS seem to be employing the concept of “not more than insignificant” and there is insufficient explanation of this concept in relation for example to “material” or “trivial”.

Q2. Do you believe that this exposure draft proposes sufficient operational application guidance on assessing a modified economic relationship?

No. The benchmark cash flows needs further exploration as does the application for example to bonds with stress features issued by banks, as an increasingly widespread phenomenon. 

Q3.  Do you believe that this amendment to IFRS9 will achieve the IASB’s objective of clarifying the application of the contractual cash flow characteristics assessment of financial assets that contain interest rate mismatch features?

Yes subject to our comments to Q2 above.

Q4.  Do you agree that financial assets that are held within a business model in which assets are managed both in order to collect contractual cash flows and for sale should be required to be managed at fair value through OCI such that:

  • interest, revenue, credit impairment and any gain or loss on derecognition are recognised in profit or loss and
  • all other gains and losses are recognised in OCI?

We agree that there should be a FVOCI category, especially to allow insurance companies the flexibility to match the discount rate changes on their liabilities with some of the changes in the value of the assets backing those liabilities.

However there needs to be an overall rationale in IFRS for the treatment of items in OCI rather than in P&L. We understand that this will be part of the revision of the conceptual framework scheduled for an exposure draft this year, which would be welcome. However this amendment reinforces the point that such a rationale is needed urgently because consequential revisions to IFRS (including this part of IFRS9 for example) may be needed from any such rationale being agreed.

So with that in mind we think that the use of FVOCI should be on the basis only of avoiding accounting mismatches. We believe this would deal with the most pressing cases, but would avoid creating a third category of business model (held to collect and for sale) that is also going to create significant problems of proper identification – both from held to collect amortised cost category when there are occasional sales and from the default FVPL category, as set out in the alternative views.

Q5.  Do you believe that the ED proposes sufficient operational application guidance on how to distinguish between the three business models, including determining whether the business model is to manage assets both to collect contractual cash flows and to sell?

We think this will be difficult and our expectation is that if this proposal is applied there will be entities that use all three for different lines of businesses or even pools of assets. There may also be more frequent changes in business model than might be currently expected – for example with insurance companies in developing economies which have been not long-established.

As noted in our response to Q4 the practical difficulties in distinguishing properly the three different business models is one reason why we have suggested an accounting mismatch approach.

Q6. Do you agree that the existing fair value option in IFRS9 should be extended to financial assets which would otherwise be mandatorily measured at fair value through OCI?


Q7. Do you agree that an entity that chooses to early apply IFRS9 after the completed version of IFRS9 is issued should be required to apply the completed version of IFRS9 (ie including all chapters)?

Yes. This will help with comparability albeit at a time when there is scope for significant variation in accounting for financial instruments.

Q8. Do you agree that entities should be permitted to choose to early apply only the ‘own credit’ provisions in IFRS9 once the completed version of IFRS9 is issued? 

Yes. There has been significant concern over the existing treatment of these effects from stating liabilities at fair value, so that early adoption in this will help. We do not see a significant issue from adopting this ahead of other parts of IFRS9 as liabilities are little otherwise affected by it.

Q9. Do you believe there are considerations unique to first-time adopters that the IASB should consider for the transition to IFRS9?

No. We consider the changes already made to IFRS1 are adequate.