The International Accounting Standards Board has published a new standard on classifying and measuring financial assets to determine whether an asset should be measured at amortized cost or fair value.
The new standard is the first part of a three-part effort to replace IAS 39, Financial Instruments: Recognition and Measurement, with a new International Financial Reporting Standard, known as IFRS 9, Financial Instruments. The IASB published proposals for the second part, on the impairment methodology for financial assets, earlier this month and put them out for public comment. Proposals on the third part, on hedge accounting, continue to be developed.
The IASB has been consulting with its U.S. counterpart, the Financial Accounting Standards Board, while developing the standards as the two boards aim for convergence by June 2011, and receiving suggestions from other constituents around the world. The IASB held a series of roundtable discussions in Europe, Asia and the U.S., in addition to interactive webcasts and hundreds of meetings with various groups in the past four months. Thus far, FASB has been taking a slightly different tack that favors fair value over historical cost, but the two boards aim to mesh their standards eventually.
We have delivered on our commitment to the G-20 and stakeholders internationally to provide an improved financial instrument standard for the classification and measurement of financial assets for use in 2009, said IASB Chairman Sir David Tweedie in a statement. Benefiting from unprecedented levels of consultation with stakeholders around the world, the IASB has made significant changes in its initial proposals to improve the standard, provide enhanced transparency and respond to stakeholder concerns.
The IASBs new IFRS 9 standard uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39.
The views expressed to the IASB during its consultations resulted in the proposals being modified to address concerns raised and to improve the standard. For example, IFRS 9 requires the business model of an entity to be assessed first to avoid the need to consider the contractual cash flow characteristics of every individual asset. It requires reclassification of assets if the business model of an entity changes. The IASB changed the accounting that was proposed for structured credit-linked investments and for purchases of distressed debt.
The IASB also addressed concerns expressed about the problems created by the mismatch in timings between the mandatory effective date of IFRS 9 and the likely effective date of a new standard on insurance contracts.
Furthermore, in response to suggestions made by some respondents, the IASB decided not to finalize requirements for financial liabilities in IFRS 9. The IASB has begun the process of giving further consideration to the classification and measurement of financial liabilities and it expects to issue final requirements during 2010.
The effective date for mandatory adoption of IFRS 9 is Jan. 1, 2013, but early adoption is permitted for 2009 year-end financial statements.
