Planned reform of financial instruments reporting (Second of four parts)

KPMG CORNER - Armin M. Rau and Reinhard Klemmer () - November 30, 2010 - 12:00am

Later we will discuss in more detail the new accounting requirements for financial instruments in accordance with IFRS 9 Financial Instruments: Classification and measurement. As mentioned earlier the International Accounting Standards Board (IASB) is also working on other projects which have an impact on financial instrument reporting. In the following we summarize the status of these projects.

Status of other projects with an impact on financial instruments reporting:

• Balance sheet netting of derivatives and other financial instruments

In early 2010, as a response to stakeholder concerns, the IASB and the Financial Accounting Standards Board (FASB) added a joint project to address differences between IFRSs and US GAAP for balance sheet netting of derivative contracts and other financial instruments that can result in material differences in financial reporting by financial institutions. In particular, netting can be applied more extensively under US GAAP resulting in very different leverage ratio for banks using US GAAP compared to banks using IFRS. This project is still in preliminary stages.

Expected milestone targets for this project as noted in the IASB work plan are:

• By the end of 2010 the Boards (IASB and FASB) plan to issue separate Exposure Drafts (ED) on converged requirements for balance sheet netting of derivative contracts and other financial instruments, including related disclosures.

• By the end of the second quarter of 2011, the Boards plan to publish final standards on this topic.

• Derecognition of financial assets

In March 2009, the IASB published an ED on derecognition of financial instruments which proposes new guidance on when a financial asset should be removed from an entity’s statement of financial position, and increased disclosure about transfers of assets. In May 2010, the IASB together with the FASB amended their strategy for the derecognition project and decided that in the near-term, their priority would be improving and converging US GAAP and IFRS disclosure requirements for financial assets transferred to another entity rather than a fundamental change of the derecognition criteria.

On 7 Oct. 2010, the IASB has finalized its derecognition disclosure project and amended IFRS 7 Financial Instruments: Disclosure to improve the disclosure associated with derecognition transactions. In addition on Oct. 28, 2010, the IASB has moved the existing derecognition requirements from IAS 39 across to IFRS 9.

As noted in the FASBs progress report, the IASB and the FASB will conduct additional research and analysis as a basis for assessing the need for any additional improvements of accounting standards in this area.

• Fair value measurement

In May 2009 the IASB published ED/2009/5 Fair Value Measurement which contains proposals to replace the fair value measurement guidance distributed across numerous IFRSs with a single, unified definition of fair value. The proposed guidance in the fair value measurement exposure draft also would apply to any measurements of the fair values of financial instruments under the IAS 39 replacement project. 

The IASB plans to publish a final standard in the first quarter of 2011.

In the following second part of this article we will take a closer look at the new standard IFRS 9 Financial Instruments.

IFRS 9 Financial Instruments – A summary of key aspects

1) Background of the Standard

As mentioned in part 1 of this article the International Accounting Standards Board (IASB) is revising its accounting requirements for financial instruments. IFRS 9 has been developed in response to concerns that IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) is difficult to understand, apply and interpret. The financial crisis and pressures from G20 leaders and others to address financial reporting of financial instruments has led to the IASB accelerating the timetable for the replacement of their standards on financial instruments. To ensure a timely response to calls to address concerns with IAS 39, the IASB has taken a phased approach to the development of a new Standard. The first phase deals with classification and measurement of financial instruments. The second and third phase of the project to replace IAS 39, currently in progress, are addressing impairment of financial instruments and hedge accounting. All phases are expected to be completed by the end of Q2 2011.

The IASB issued IFRS 9 Financial Instruments in November 2009. The following section summarizes the key aspects of the new standard:

2) Objective and Scope

The objective of the current IFRS 9 is to set out new principles for the classification and measurement of financial assets so that the financial statements convey relevant and useful information about such assets to assist users in their decision-making.

IFRS 9 seeks to simplify the classification of financial assets under IAS 39 by removing numerous classification categories and associated impairment methods that resulted in significant complexities in the reporting of financial assets.

As mentioned earlier on Oct. 28, 2010, the IASB issued requirements on the accounting for financial liabilities. These requirements will be added to IFRS 9 Financial Instruments and complete the classification and measurement phase of the IASB’s project to replace IAS 39. The new requirements address the problem of volatility in profit or loss arising from an issuer choosing to measure its own debt at fair value.

To be continued

(Armin M. Rau is a senior manager for Audit and Reinhard Klemmer is a Seconded Partner from KPMG Germany to Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of Manabat Sanagustin & Co., CPAs. For comments or inquiries, please email manila@kpmg.com or mquizon @kpmg.com)

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