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BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION: Classification of financial assets

In IFRS 9 as issued in 2009 the IASB aimed to help users to understand the
financial reporting of financial assets by:

  1. reducing the number of classification categories and providing a clearer rationale for measuring financial assets in a particular way that replaces the numerous categories in IAS 39, each of which has specific rules dictating how an asset can or must be classified;
  2. applying a single impairment method to all financial assets not measured at fair value, which replaces the many different impairment  methods that are associated with the numerous classification categories in IAS 39.
  3. aligning the measurement attribute of financial assets with the way the
    entity manages its financial assets (‘business model’) and their contractual cash flow characteristics, thus providing relevant and useful information to users for their assessment of the amounts, timing and uncertainty of the entity’s future cash flows.

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION

The IASB believes that IFRS 9 both helps users to understand and use the financial reporting of financial assets and eliminates much of the complexity in IAS 39. The IASB disagrees with the assertion made by a dissenting IASB member that IFRS 9 does not meet the objective of reducing the number of classification categories for financial assets and eliminating the specific rules associated with those categories. Unlike IAS 39, IFRS 9 provides a clear rationale for measuring a financial asset at either amortised cost or fair value, and hence helps users to understand the financial reporting of financial assets.

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION

IFRS 9 aligns the measurement attribute of financial assets with the way the entity manages its financial assets (‘business model’) and their contractual cash flow characteristics. In so doing, IFRS 9 significantly reduces complexity by eliminating the numerous rules associated with each classification category in IAS 39. Consistently with all other financial assets, hybrid contracts with financial asset hosts are classified and measured in their entirety, there eliminating the complex and rule-based requirements in IAS 39 for embedded derivatives. Furthermore, IFRS 9 requires a single impairment method, which replaces the different impairment methods associated with the many classification categories in IAS 39. The IASB believes that these changes will help users to understand the financial reporting of financial assets and to better assess the amounts, timing and uncertainty of future cash flows.

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION: This Basis for Conclusions accompanies, but is not part of, IFRS 9. IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement. When revised in 2003 IAS 39 was accompanied by a Basis for Conclusions summarising the considerations of the IASB as constituted at the time, in reaching some of its conclusions in that Standard. That Basis for Conclusions was subsequently updated to reflect amendments to the Standard. For convenience the IASB has incorporated into its Basis for Conclusions on IFRS 9 material from the Basis for Conclusions on IAS 39 that discusses matters that the IASB has not reconsidered. That material is contained in paragraphs denoted by numbers with the prefix BCZ. In those paragraphs cross-references to the Standard have been updated accordingly and minor necessary editorial changes have been made. In 2003 and later some IASB members dissented from the issue of IAS 39 and subsequent amendments, and portions of their dissenting opinions relate to requirements that
have been carried forward to IFRS 9. Those dissenting opinions are set out in an appendix after this Basis for Conclusions.

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION: The scope of IAS 39 was not raised as a matter of concern during the global financial crisis and, hence, the IASB decided that the scope of IFRS 9 should be based on that of IAS 39. Consequently, the scope of IAS 39 was carried forward to IFRS 9. It has been changed only as a consequence of other new requirements, such as to reflect the changes to the accounting for expected credit losses on loan commitments that an entity issues (see paragraph BC2.8). As a result, most of paragraphs in this section of the Basis for Conclusions were carried forward from the Basis for Conclusion on IAS 39 and describe the IASB’s rationale when it set the scope of that Standard. Loan commitments
BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION: 2 Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. In the IAS 39 implementation guidance process, the question was raised whether a bank’s loan commitments are derivatives accounted for at fair value under IAS 39. This question arises because a commitment to make a loan at a specified rate of interest during a fixed period of time meets the definition of a derivative. In effect, it is a written option for the potential borrower to obtain a loan at a specified rate.
BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION: .3 To simplify the accounting for holders and issuers of loan commitments, the IASB decided to exclude particular loan commitments from the scope of IAS 39. The effect of the exclusion is that an entity will not recognise and measure changes in fair value of these loan commitments that result from changes in market interest rates or credit spreads. This is consistent with the measurement of the loan that results if the holder of the loan commitment exercises its right to obtain financing, because changes in market interest rates do not affect the measurement of an asset measured at amortised cost (assuming it is not designated in a category other than loans and receivables).1
BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION:4 However, the IASB decided that an entity should be permitted to measure a loan commitment at fair value with changes in fair value recognised in profit or loss on the basis of designation at inception of the loan commitment as a financial liability through profit or loss. This may be appropriate, for example, if the entity manages risk exposures related to loan commitments on a fair value basis.
BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION.5 The IASB further decided that a loan commitment should be excluded from the scope of IAS 39 only if it cannot be settled net. If the value of a loan commitment can be settled net in cash or another financial instrument, including when the entity has a past practice of selling the resulting loan assets shortly after origination, it is difficult to justify its exclusion from the requirement in IAS 39 to measure at fair value similar instruments that meet the definition of a derivative.

BASIS FOR CONCLUSIONS ON IFRS 9 CLASSIFICATION

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