Post-implementation review of IFRS 9 – working as intended!

IASB publishes its review of classification and measurement requirements relating to financial instruments, announced a recent release.

Here are some extracts:

  • Feedback from stakeholders and research undertaken as part of the PIR show that the requirements set out in IFRS 9 are working as intended and provide useful information to the users of financial statements.
  • In response to feedback, the IASB has also identified areas for research and standard-setting to further enhance information provided to users of financial statements.
  • The IASB has initiated a standard-setting project focused on a company’s assessment of the contractual cash flow characteristics of financial assets with ESG-linked features and on electronic cash transfers as settlement of a financial asset or liability.
  • This will also include:
    • clarification of the application of contractual cash flow characteristics assessments to contractually linked instruments; and
    • improvements to disclosures of fair value changes relating to equity instruments a company has presented in other comprehensive income rather than in profit or loss (OCI presentation election).
  • An exposure draft setting out proposed amendments from this project will be published in Q1 of 2023.
  • A research project has also been added to the IASB’s work plan to explore whether it can clarify requirements for applying the effective interest method to financial instruments measured at amortized cost and requirements for modifications of financial instruments.
  • The PIR sought feedback from companies, investors, auditors, standard-setters, regulators and academics. The IASB received 95 comment letters and attended more than 40 meetings with stakeholders from around the world.

The PIR provides the following overall comments on classification and measurement:

  • Most respondents reported that the requirements generally work well in practice. A company that applies the requirements measures its financial instruments in a way that provides users of financial statements with useful information about the amount, timing and uncertainty of the company’s future cash flows.
  • Respondents expressed mixed views:
    • on whether the principle-based approach in IFRS 9 Financial Instruments increased or reduced complexity compared to the approach in IAS 39 Financial Instruments: Recognition and Measurement; and
    • on whether the benefits achieved from the classification approach in IFRS 9 outweighed the costs incurred to apply the new requirements.
  • Some respondents said that, generally, the change from IAS 39 to IFRS 9 had not resulted in extensive changes to how they classified financial assets. However, some companies incurred substantial costs and effort when making the transition to IFRS 9.

Of course, in the absence of further detail, it’s possible that some of the companies in that latter group just didn’t have the right people on board. Anyway, to provide a bit more detail on some of those items, the PIR indicates that the issues relating to the application of contractual cash flow characteristics include (a) whether a financial asset has non-recourse features; (b) whether a company needs to consider the cash flows arising from bail-in legislation; (c) whether interest rates that are contractually adjusted for inflation introduce leverage; (d) whether interest rates including a government-imposed leverage factor are regulated interest rates; (e) whether a prepayment feature includes reasonable compensation for the early termination of the contract; and (f) whether particular types of interest rates include a modified time value of money element.

The issue on electronic cash settlements was discussed a while ago by IFRIC, as we covered here. Some respondents raised issues with the IFRIC discussion, leading to the following element of the upcoming exposure draft:

  • To reduce diversity in practice and assist with the consistent application of the derecognition requirements in IFRS 9, the IASB decided to clarify that for the derecognition of financial assets (except for ‘regular way’ transactions) and financial liabilities, an entity applies settlement date accounting. The IASB also decided to develop an accounting policy choice to allow an entity to derecognize a financial liability before it delivers cash on the settlement date when specified criteria are met.

Here are some of the issues to be explored in the research project relating to amortized cost:

  • how to reflect uncertainty that arises from conditions attached to the contractual interest rate, for example, a reduction in the contractual rate based on the borrower’s performance in meeting lending or ESG-linked targets
  • how to account for subsequent changes in estimates of future contractual cash flows
  • the meaning of a ‘floating rate’ financial instrument …and whether this refers to the overall contractual rate or only a component of that rate
  • the meaning of ‘movements in market rates of interest’ … and whether this includes any adjustments to the contractual interest rate set out in the contract
  • the effect on the effective interest rate of a financial instrument following a modification of contractual cash flows, for example, when the basis of calculation of interest changes from a fixed to a floating rate or vice versa
  • the accounting for any unamortized transaction costs and any fees received as part of a modification of contractual cash flows
  • the meaning of ‘fees and costs incurred’ … and whether this includes fees received, fees paid and costs paid by both the lender and the borrower.

Overall, the document suggests that the post-implementation review was a diligent and worthwhile effort. IFRS 9 is no doubt pretty easy to criticize on various fronts, if one is so motivated, but the PIR suggests there’s no real reason to be!

The opinions expressed are solely those of the author

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