International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASC Foundation or the IASB

IASC Foundation

Financial Instruments: Classification and

Measurement1-4 September 2009

September 2009

2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

TimetableOne project – three phases

2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

2

Project phase Exposure Draft Finalisation

1. Classification and Measurement

July 2009 In time for 2009 year end financial statements

2. Impairment methodology

October 2009 In 2010

3. Hedge accounting December 2009 In 2010

* The above is in addition to a project on derecognition of financial instruments. ED Derecognition was published in March 2009.

2009 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

3

Classification and MeasurementOverview of proposed approach

Fair Value(no impairment)

Amortised cost(one impairment method)Managed on a

contractual yield basis

Basic loan features

+ FVO for accounting mismatch

All other instruments:• Equities• Derivatives• Some hybrid contracts• …

Equities: OCI presentation

available

No reclassification

Classification and MeasurementAmortised cost criterion

• Basic loan features– Contractual terms that give rise to cash flow amounts that

represent both principle and interest– Interest represents consideration for:

– time value of money

– credit risk

• Managed on a contractual yield basis– Business model is to manage and evaluate based on collection

or payment of contractual cash flows generated when holding or issuing the instrument

– Not an instrument by instrument approach to classification

Classification and MeasurementOther features of proposed approach

• Embedded derivatives– For hybrid contracts with financial hosts > Entire hybrid

contract assessed using proposed classification and measurement model

– For hybrid contracts with non-financial hosts > Existing IAS 39 requirements retained

• Fair value option– Retained to address accounting mismatches

2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

6

Classification and MeasurementOCI presentation option

• Scope – investments in equity instruments not held for trading

• Other features: – option available instrument by instrument on initial

recognition– no recycling, impairment or change in presentation– dividends also recognised in OCI

Summary of key changes to IAS 39IAS 39 Proposed approach

Classification Many categories each with different measurement, presentation and impairment methods

Two measurement bases: Amortised cost (one impairment method) and Fair Value.

Measurement Irrevocable option at initial recognition to present fair value changes of some equity instruments in OCI.

Impairment Different impairment rules depending on category and instrument type

Only debt instruments at amortised cost are tested for impairment. One impairment method.

Tainting Tainting rules for held to maturity investments

No tainting rules for assets measured using amortised cost.

Reclassification Some reclassifications permitted/required

No reclassifications. Business model approach.

Embedded derivatives

Bifurcation of embedded derivatives required in some cases

No separation. Same classification approach (for hybrids with financial hosts)

FVO Available if specific criteria are met Available for an accounting mismatch

2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

8Classification and Measurement

Approach proposed for transition– Generally fully retrospective, but some transition relief will be provided

– Early adopters will be subject to disclosures in addition to IAS 8 disclosures

Effective date– Any final proposals will be available for voluntary application for 2009 year end

financial statements

– Mandatory date for adoption – not before 1 January 2012

• Comment deadline for exposure draft is 14 September 2009

Classification and MeasurementFASB proposed approach

• All financial instruments within the scope of the project would be measured on balance sheet at fair value with changes in net income or other comprehensive income

• Fair value through net income– Default category. Includes all equity investments, derivatives &

hybrid contracts that require separation.• Fair value through OCI

– Qualify if business strategy is to hold debt instruments with principle amounts for collection or payment(s) of contractual cash flows rather than to sell or settle the financial instruments with a third party

– Current period interest & impairment recognised in P&L.– Other changes in fair value recognised in OCI. – Recycling on derecognition.

Classification and MeasurementFASB FV-OCI presentation approach• Balance sheet

– present as separate line items in the balance sheet amortized cost and the necessary adjustment to arrive at fair value, and cumulative credit losses.

• Income/performance statement – One statement is mandatory with subtotals for net

income and total comprehensive income. (EPS based on net income).

– Net income to include interest and dividends, credit impairments, realized gains and losses.

– OCI to include entire change in fair value for qualifying instruments.

Classification and MeasurementFASB model other features

• Amortized cost option– Limited amortized cost option for certain financial liabilities

(own debt)

• Embedded derivatives– Current bifurcation criteria for hybrid financial instruments would

determine whether those instruments would be classified in FV-NI category or could be FV-OCI category.

– Clearly closely related could be at FV-OCI

– Not clearly closely related at FV-NI

– Non-financial hybrids would continue to follow current guidance related to bifurcation

2008 IASC Foundation  |   30 Cannon Street  |   London EC4M 6XH  |   UK  |   www.iasb.org

12Questions or comments?

Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.