© 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

IFRS NEWSLETTERFINANCIAL INSTRUMENTS

Issue 6, October 2012

A new exposure draft on classification and measurement seems imminent – but there is still much to do on impairment.

Andrew Vials,KPMG’s global IFRS Financial Instruments leaderKPMG International Standards Group

The future of IFRS financial instruments accounting

This edition of IFRS Newsletter: Financial Instruments highlights the discussions and tentative decisions of the IASB in October

2012 on the financial instruments (IAS 39 replacement) project.

Highlights

Classification and measurement

l  The IASB has not proposed any further changes to the contractual cash flows characteristics assessment for interest rates in a regulated environment such as China.

l  The IASB expects to issue an exposure draft on limited amendments to IFRS 9 in the fourth quarter of 2012.

Impairment

l  The IASB considered feedback on the model it had jointly developed with the FASB. The IASB staff asked the Board for guidance on how to go forward.

Hedge accounting

General hedging

l  The IASB’s draft of its forthcoming IFRS on general hedge accounting remains available for review.

Macro hedging

l  Derivative hedging instruments would be measured at FVTPL, including the effects of credit risk and floating legs.

l  Actual loan commitments seem likely to be eligible for inclusion in the net risk position, but pipeline trades do not.

© 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.2

NO PROPOSED EXCEPTION FOR LOANS WITH REGULATED INTEREST RATES

The story so far...Since November 2008, the IASB has been working to replace its financial instruments standard (IAS 39 Financial Instruments: Recognition and Measurement) with an improved and simplified standard. The IASB structured its project in three phases:

Phase 1: Classification and measurement of financial assets and financial liabilities

Phase 2: Impairment methodology

Phase 3: Hedge accounting.

In December 2008, the FASB added a similar project to its agenda; however, the FASB has not followed the same phased approach as the IASB.

The IASB issued IFRS 9 Financial Instruments (2009) and IFRS 9 (2010), which contain the requirements for the classification and measurement of financial assets and financial liabilities. Those standards have an effective date of 1 January 2015. The IASB plans to propose limited amendments to the classification and measurement requirements of IFRS 9 to address application questions, and to provide an opportunity for the Boards to reduce key differences between their models. In September 2012, the IASB stated that it had completed its deliberations, and that an exposure draft (‘the ED’) is planned for the final quarter of 2012. The IASB’s decisions to date on its proposed limited amendments to IFRS 9 are summarised in Appendix A of our IFRS Newsletter: Financial Instruments – Issue 5.

The Boards were working jointly on a model for the impairment of financial assets based on expected credit losses, which would replace the current incurred loss model in IAS 39. The Boards previously published their own differing proposals in November 2009 (the IASB) and in May 2010 (the FASB), and published a joint supplementary document on recognising impairment in open portfolios in January 2011. However, at the July 2012 joint meeting, the FASB expressed concern about the direction of the joint project and began developing its own impairment model. The prospects for convergence in this area no longer look promising.

The IASB has split the hedge accounting phase into two parts: general hedging and macro hedging. It issued a review draft of a general hedging standard in September 2012, and is working towards issuing a discussion paper on macro hedging in the first half of 2013.

What happened in October?In October, the IASB was asked to consider the application of the classification and measurement requirements of IFRS 9 to loans with regulated interest rates. The IASB staff presented an agenda paper describing a scenario similar to that in China whereby interest rates on retail and commercial loans are reset based on their original maturities and rates published by the central bank. The paper argued that the loans would most likely fail to qualify as having cash flows that are solely payments of principal and interest. This would result in lenders classifying their loan assets as measured at fair value through profit or loss (FVTPL). The IASB did not decide to include any exception in the forthcoming ED on classification and measurement, but the IASB staff will obtain further information on the issue through the exposure draft process. This may be disappointing news for banks operating in China, and for banks operating in other jurisdictions where interest rates may be established by applicable laws, but there will be an opportunity to comment during the exposure period.

In the impairment project, the IASB considered feedback it received from the staff’s outreach to constituents on the three-bucket impairment model. The IASB indicated that it wishes to continue to press ahead with that approach and has asked the staff to suggest clarifications to the model to address constituents’ concerns. It also asked the staff to provide a refresher on why it had rejected previous alternative proposals. This should happen at the November meeting when, in addition, the FASB is scheduled to present details of the alternative model it has been developing – although this underscores the fact that the two Boards currently seem to be on differing paths, rather than indicating any immediate prospects for convergence.

The IASB also continued its discussions on macro hedging, but no decisions were reached.

Contents

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CLASSIFICATION AND MEASUREMENT

What happened in October?In September 2012, the IASB stated that it had concluded its deliberations on limited amendments to IFRS 9’s classification and measurement guidance and granted the IASB staff permission to start drafting the ED.

In October, the IASB staff brought an additional issue relating to regulated interest rates to the Board.

The IASB has not proposed any further changes to the contractual cash flows characteristics assessment for interest rates in a regulated environment such as China.

Regulated interest ratesThe IASB staff had received feedback that in a particular jurisdiction, the pricing of financial assets is extensively regulated by the central bank. Interest rates set by the central bank (‘official rates’) represent the basis for pricing for all retail and commercial loans denominated in the local currency in that jurisdiction. The staff understood that the government sets a one-year lending rate that applies to financial instruments with the following original maturities:

• 6 months

• 6–12 months

• 1–3 years

• 3–5 years

• More than 5 years.

The government stipulates that interest rates on all retail and commercial loans must be set with reference to the above structure of rates.1 Contractual terms of loan agreements also specify that the interest rate is reset according to the original maturity of the loan when the official rates are reset. The timings of interest rate resets are at the discretion of the central bank.

For example, a 5-year loan with a remaining maturity of one year will re-price to the new official rate set for 5-year loans, whereas a 3-year loan with a remaining maturity of one year will re-price to the new rate for 3-year loans.

Based on our experience, we think that the staff were referring to so-called ‘constant maturity’ loans in China.

What’s the issue?

In February 2012, the IASB affirmed the guidance under IFRS 9 that a financial asset is eligible for a measurement category other than FVTPL only if its contractual cash flows solely represent payments of principal and interest. ‘Interest’ is consideration for the time value of money and the credit risk associated with the principal amount outstanding during a particular period of time.

The IASB also tentatively decided to clarify that if a financial asset only contains components that are principal, and consideration for the time value of money and for credit risk, but the economic relationship between these components is modified (e.g. by an interest rate mismatch feature), then the financial asset may qualify for a measurement category other than FVTPL. However, it would only qualify if the ‘modified’ cash flows are not more than insignificantly different from the cash flows of a ‘benchmark’ financial asset that is otherwise identical except for the contractual term under evaluation. In the regulated interest rates scenario outlined above, financial assets with the same remaining maturity and reset period can have different (base) interest rates set depending on their original maturity. The staff stated that this means that the interest payable on the financial asset is disconnected from the term of the instrument, except at origination. In

1 Banks are allowed to adjust the rate for credit risk, subject to a floor to the interest rate that can be charged, but not to a ceiling.

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addition, because the interest rate reset always reflects the original maturity of the financial asset, the tenor of the interest rate is disconnected from the interest rate reset period. The staff also stated that comparison with a benchmark instrument would be problematic, given that:

• no such instrument really exists; and

• the cash flows from the financial asset would probably be considered to deviate more than insignificantly from the benchmark.

In other words, notwithstanding the proposed clarification to the contractual cash flow characteristics assessment under the proposed limited amendments to IFRS 9, the staff believed that all retail and commercial loans in that jurisdiction would have to be classified and measured at FVTPL.

The staff agenda paper, which was not discussed at the meeting, asked the IASB whether it wished to create a narrow-scope exception allowing an entity to classify a financial asset at other than FVTPL if the base interest rate is consistent with and required by a stated interest rate structure that:

• is set by the government or central bank; and

• represents the legal pricing basis for domestic currency transactions available in the jurisdiction.

What did the IASB decide?

The IASB noted that the IASB staff plan to gather more information on the issue of regulated interest rates through the exposure draft process. Although no formal IASB decision was made, it was reported that the ED:

• will include the proposed clarification about a modified relationship between principal and the consideration for the time value of money and credit risk; but

• will not suggest any further proposed amendments to the contractual cash flow characteristics assessment.

Next stepsThe IASB expects to issue an ED on limited amendments to IFRS 9 in the fourth quarter of 2012.

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IMPAIRMENT

What has happened since the July meeting?Until July 2012, the IASB and FASB were developing a joint impairment model with two measurement objectives for recognition of expected losses:

• 12-month expected losses; or

• lifetime expected losses, if the probability of not fully collecting principal and interest under the contract has both increased more than insignificantly since initial recognition and is at least reasonably possible.

This model also features a third stage of deterioration (i.e. incurred losses), which impacts the way in which revenue is presented, and therefore continues to be known as the ‘three-bucket model’.

In response to the feedback received from US constituents on the three-bucket model, the FASB decided in August 2012 to explore an alternative approach – the current expected credit loss (‘CECL’) model. The CECL model has a single measurement objective of estimating expected credit losses that are not limited to a specific time period, and therefore does not include criteria for transferring between different buckets.

In recent months, the IASB staff undertook outreach activities and asked some constituents – e.g. analysts, prudential regulators, audit firms, small and large banks, and some national accounting standard setters – for feedback on the jointly developed three-bucket impairment model. The primary purpose was to receive feedback on whether the three-bucket model would be operational, and whether the three-bucket model or a lifetime day-one loss model would provide more useful information.

The IASB considered feedback on the model it had jointly developed with the FASB. The IASB staff asked the Board for guidance on how to go forward.

What happened in October?At the October 2012 meeting, the IASB staff provided the Board with details of the feedback received. The messages presented included the following.

Message received with respect to

Summary feedback

General approach

Most respondents, including analysts, supported an impairment model that distinguishes assets that have deteriorated from those that have not. Many felt that this provides a better understanding of changes in credit than a lifetime day-one loss approach that they did not think reflected the economics of lending. Some argued that a lifetime day-one loss approach was attuned more to the objectives of prudential regulators rather than to those of general-purpose users, and that it would inappropriately discourage lending.

Some preferred a lifetime loss approach, because they felt that it better reflected the way business is done, or because it avoided the need for judgement around the transfer notion.

Transfer notion between 12-month and lifetime expected loss buckets

There was concern that the transfer criteria are currently unclear.

• The concept of ‘more than insignificant deterioration in credit quality’ should more clearly capture only deterioration that is substantive.

• There needs to be clarity as to the level of credit quality at which it is considered reasonably possible that contractual cash flows will not be paid in full. Some banks noted that it is always possible that a loan might default.

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Message received with respect to

Summary feedback

12-month expected loss objective

Many supported this measure but some were still confused by what is being measured. Others disagreed conceptually.

Cost/benefit trade-off

There was concern that having two objectives would add cost and complexity. The Board would need to ensure that the benefits of the information resulting from a distinction between assets that have deteriorated and those that have not exceed the costs of obtaining it. If the credit deterioration threshold for moving from 12-month to lifetime expected loss is set too low, then the benefit of the distinction will be reduced.

Retail loans Practical concerns were raised as to how the criteria could be applied to retail loans. Respondents asked whether a delinquency-based approach could be used to assess whether assets should move to lifetime losses, considering that:

• data on the probability of default, or similar data, may not be available; and

• retail loans are typically managed on a delinquency basis.

Previous models discussed

Some respondents questioned the conceptual merits of the three-bucket model – in particular, the 12-month expected loss measurement. In the absence of convergence with the FASB, they proposed that the IASB should go back to either:

• the supplement to ED/2009/12, Financial Instruments: Impairment (issued in October 2010)2 but without a floor, or minimum loss allowance, for the ‘good book’; or

• the expected cash flow model in the original IASB exposure draft, ED/2009/12 Financial Instruments: Amortised Cost and Impairment (issued in November 2009).3

If this was not possible, then some might prefer to keep the current incurred loss model, or to improve disclosures.

What did the IASB decide?The IASB noted that most outreach participants, including users, support a model that distinguishes between assets that have deteriorated in credit quality from those that have not. The Board asked the staff to explore ways to address constituents’ concerns over:

• requests for additional clarification and how to apply the criteria to retail loans; and

• whether the benefits of the information provided outweighed the costs of determining which assets have deteriorated – and, in particular, that if assets were to move too readily to a lifetime loss measurement (for example, on the basis of minor credit deterioration), then the costs of the model might not be justified.

2 Refer to KPMG’s publication New on the Horizon: Impairment of financial assets measured in an open portfolio (February 2011) for more information.

3 Refer to KPMG’s publication New on the Horizon: ED/2009/12 Financial Instruments: Amortised Cost and Impairment (November 2009) for more information.

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They requested that the staff suggest clarifications to the criteria at a future meeting.

During the discussion, some Board members felt it important to consider that:

• the degree of deterioration that triggers lifetime expected losses may be different for prime and subprime loans; and

• retail and commercial loans are managed differently, and different data are available for these types of loans.

The IASB indicated that it wishes to continue to pursue the three-bucket impairment model. However, the Board also asked the staff to prepare a paper summarising the feedback received on the supplement to ED/2009/12, as a reminder of why the IASB rejected that approach in favour of the three-bucket approach.

Next steps The IASB will discuss possible clarifications to the criteria for recognition of lifetime expected losses at its next meeting in November. The FASB plans to explain its CECL model in an education session at the next IASB meeting.

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HEDGE ACCOUNTING

The IASB’s draft of its forthcoming IFRS on general hedge accounting remains available for review.

General hedgingThe review draft of the IASB’s forthcoming IFRS on general hedge accounting is available on the IASB’s website until early December 2012, after which time the IASB intends to proceed to finalise the draft. The IASB is not seeking comments on the draft, but interested parties may provide comments to the IASB during this period.

For more information on the proposals in the review draft, see our publication New on the Horizon: Hedge Accounting (September 2012).

Macro hedging

What happened in October?

In October, the IASB continued its series of educational meetings on how banks manage interest rate risk and how those concepts might be incorporated into its tentative macro hedging model for interest rate risk. The two items discussed in October were:

• how fair value changes in hedging derivatives resulting from floating legs and credit risk would be treated under the new macro hedging model; and

• whether items not yet recognised on the statement of financial position could be included in the portfolio of items that are hedged for interest rate risk.

The IASB was not asked to make any decisions at this meeting.

Fair value changes related to credit risk and floating legs

Under IAS 39, a hedging relationship might not be 100 percent effective when the change in value of the derivative hedging instrument does not exactly offset the change in value of the hedged item caused by the hedged risk. For example, ineffectiveness may result when:

• the derivative hedging instrument has a floating rate that is fixed from one repricing date to the next, and therefore generates a change in fair value that is not present in the changes in fair value of the hedged item for the risk being hedged; or

• changes in own and counterparty credit risk affect the measurement of the derivative hedging instrument differently from the hedged item.

In October, the IASB discussed those situations and whether its tentative revaluation model for macro hedging should be designed to avoid profit or loss volatility in those situations.

Under the IASB’s tentative revaluation model for macro hedges, a revaluation adjustment for interest rate risk would be calculated for items whose interest rate risk is managed on an open portfolio basis. If the derivative hedging instrument is measured at fair value, then there may be a mismatch between the change in the fair value of the derivative and the revaluation adjustment. Further, if both the change in the fair value of the derivative and the revaluation adjustment on the hedged open portfolio are recognised in profit or loss, then such mismatches could result in profit or loss volatility.

One possible way to eliminate such volatility in profit or loss would be to require that the effects of credit risk and/or floating legs be excluded from the measurement of the derivative hedging instruments. That is, derivative hedging instruments would not be measured at FVTPL.

However, at the October meeting neither the staff nor the IASB expressed support for measuring derivative hedging instruments at anything other than at FVTPL. Instead, under the tentative revaluation model, derivative hedging instruments would remain at FVTPL, as required by IAS 39 and IFRS 9. Measuring the fair value of derivatives would be governed by IFRS 13 Fair Value Measurement, which would include fair value fluctuations resulting from changes in derivatives’ floating legs and credit risk.

Derivative hedging instruments would be measured at FVTPL, including the effects of credit risk and floating legs.

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Actual loan commitments seem likely to be eligible for inclusion in the net risk position, but pipeline trades do not.

Unrecognised items such as loan commitments and pipeline trades

Some banks consider items that are not yet recognised in the statement of financial position when they are managing interest rate risk. For example, a bank may consider:

• unrecognised loan commitments; and

• forecast volumes of products to be issued at advertised rates (i.e. ‘pipeline trades’)

when it models the open interest rate risk position to be hedged.

The IASB discussed how a bank’s practice of considering unrecognised items when managing interest rate risk could be integrated into the accounting model for macro hedging.

In the related agenda paper, the staff suggested that as long as the unrecognised items exist – i.e. there is a contract – they could be included in the hedged risk position under the revaluation model for macro hedging. That would allow loan commitments to be integrated into the revaluation model, but would exclude pipeline trades. The staff reasoned that including pipeline trades in the hedged risk position would be inconsistent with the existing Conceptual Framework for Financial Reporting (‘the Framework’) because:

• it could result in recognising gains and losses from forecast transactions (because it would not be operationally feasible to apply a cap similar to the ‘lower of’ test for cash flow hedges);

• accounting for fair value risk from forecast transactions implicitly means considering the effect of economic compulsion for accounting purposes; and

• it leads to recognition of items that could be viewed as similar to internally generated goodwill.

During the ensuing discussion, some IASB members expressed agreement with the staff that the revaluation model for macro hedging should not include pipeline trades as part of the hedged net risk position. In particular, there was concern that an expected transaction that does not yet exist could not qualify as an asset. However, other Board members commented that banks considered the risks associated with pipeline trades to be real, and noted that the IASB is restarting its project on revising and completing the Framework. Decisions on revisions to the definitions of assets and liabilities in the Framework could interact with the development of the revaluation model for macro hedging. Those Board members seemed more open to the possibility of including pipeline trades in the net risk position, and suggested that the issue be explored further in the forthcoming discussion paper on macro hedging.

Next stepsThe staff will continue to develop a discussion paper on macro hedging, and will hold additional education sessions as needed. The staff then plan to move forward along two tracks:

• engaging in extensive constituent outreach on a tentative macro hedging model for interest rate risk; and

• holding education sessions with the IASB on the potential application of a tentative model to hedges of other risks by other industries (e.g. commodity price risk and foreign exchange risk).

The IASB plans to issue the discussion paper on macro hedging in the first half of 2013.

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Discussionpaper

Revisedstandard?

201220102009

Asset andliability

offsetting

Impairment

Classification&

measurement

Hedgeaccounting

Source: IASB work plan – projected targets as at 1 October 2012

Standardon assets:

IFRS 9 (2009)

Supplementarydocument

Exposuredraft

Exposuredraft

2011

Effective

1/1/2015date

Effectivedates 1/1/2013and 1/1/2014

Gen

eral

Mac

ro

Exposuredraft

Standardon liabilities:IFRS 9 (2010)

Amendmentsto IFRS 7 and

IAS 32

Finalstandard?

Deferral ofeffective date

Exposuredraft – limitedamendments

1 2 3

4 5

6

7

Effectivedate?

Reviewdraft

8

2012 (Q4) 2013

Final standard

PROJECT MILESTONES AND TIMELINE FOR COMPLETION

The current work plan anticipates significant progress in 2012, which will be necessary to maintain an effective date for IFRS 9 of 1 January 2015.

Our suite of publications considers the different aspects of the work plan, and provides a comparison to IAS 39 where relevant.

KPMG publications

1First Impressions: IFRS 9 Financial Instruments (December 2009)

• For KPMG’s most recent and comprehensive views on IFRS 9, refer to Insights into IFRS: Chapter 7A – Financial instruments: IFRS 9.

First Impressions: Additions to IFRS 9 Financial Instruments (December 2010)

• For KPMG’s most recent and comprehensive views on IFRS 9, refer to Insights into IFRS: Chapter 7A – Financial instruments: IFRS 9.

In the Headlines: Amendments to IFRS 9 – Mandatory effective date of IFRS 9 deferred to 1 January 2015 (December 2011)

2

3

4 New on the Horizon: ED/2009/12 Financial Instruments: Amortised Cost and Impairment (November 2009)

5 New on the Horizon: Impairment of financial assets measured in an open portfolio (February 2011)

6 New on the Horizon: Hedge Accounting (January 2011)

7 First Impressions: Offsetting financial assets and financial liabilities (February 2012)

8 New on the Horizon: Hedge Accounting (September 2012)

For more information on the project see our website.

The IASB’s website and the FASB’s website contain summaries of the Boards’ meetings, meeting materials, project summaries and status updates.

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© 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

Moving towards global insurance accounting

This edition of IFRS Newsletter: Insurance highlights the results of the IASB and FASB discussions in September 2012 on the joint

insurance contracts project and FASB discussions over the summer. In addition, it provides the current status of the project and an

expected timeline for completion.

Highlights

l   The IASB announced plans to issue a targeted re-exposure document in the first half of 2013. The IASB staff expect that the earliest date for a completed draft of a final IFRS would

be May 2014.

l   The Boards revised transition proposals requiring retrospective application with a practical expedient when impracticable.

l   The Boards agreed that an insurer should recognise acquisition costs as part of the insurance liability in the pre-coverage period.

l   The IASB decided that an insurer should accrete interest on the residual margin at a locked-in discount rate.

l   The IASB carried forward most disclosure requirements from the 2010 ED, while adding new disclosures.

The industry is in great need of a final IFRS for insurance; however, quality should not be ignored. We are pleased that the IASB has laid out a path forward in issuing an ED rather than a staff draft, and will solicit feedback on key changes to the model, including the use of OCI.

Joachim Kolschbach,KPMG’s global IFRS Insurance leaderKPMG International Standards Group

IFRS NEWSLETTER 

INSURANCEIssue 29, October 2012

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SPECIAL EDITION Issue 4, July 2012

IFRS NEWSLETTER 

THE BALANCING ITEMS

The IASB has published a Request for Information as the first step in its initial comprehensive review of the IFRS for Small and Medium-sized Entities (IFRS for SMEs).

What do you think about the IFRS for SMEs?

This IFRS Newsletter: The Balancing Items brings into focus the IASB’s review of the IFRS for SMEs.

As part of its plan for a comprehensive review of the IFRS for SMEs, the IASB has issued a Request for Information (RFI) to ask stakeholders whether they feel any amendments are

needed to the standard. The responses will assist the IASB to assess stakeholders’ experience of implementation since the standard was issued, and to develop proposed amendments to the

standard.

Questions raised in the RFI are organised into two parts. Part A deals with specific questions on particular sections of the IFRS for SMEs. Part B deals with general questions relating to

implementation of the overall standard. Respondents are also invited to raise other issues on the IFRS for SMEs that are not specifically covered in the RFI.

Comments on the RFI are due by 30 November 2012.

IFRS NEWSLETTER: LEASES Special edition: September 2012, Issue 12

Highlights

• Boards conclude redeliberations on leases

• On-balance sheet approach for lessees

• ‘Dual’ model for income/expense recognition

• Increase in complexity for lessee and lessor accounting

• Revised exposure draft delayed until first quarter of 2013

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The future of lease accounting

The home straight? In September 2012, after many months of joint discussion, the Boards concluded their redeliberations on the lease accounting proposals published in August 2010. We can now look forward to a revised exposure draft (ED) in the first quarter of 2013, most likely with a 120-day comment period.

After a long period of redeliberation, with many twists and turns, the proposals to be included in the new exposure draft are now clear, at least in outline. This special edition of our newsletter highlights the key impacts of those proposals on lessees and lessors.

Central to the proposals will be the right-of-use model, under which all but short-term leases would be on-balance sheet for lessees. The goal of eliminating lease accounting as a source of off-balance sheet finance has become the project’s touchstone. In most instances, the proposals achieve that goal. However, the costs of achieving this goal include complexity and conceptual compromise.

The proposals will introduce new ‘dual models’ for income/expense recognition. Lessees and lessors would apply a new lease classification test, on a lease-by-lease basis, to determine which model to apply. Lease classification would depend on the extent to which the underlying asset is consumed over the lease term, and the nature of the underlying asset (real estate vs other assets).

Many leases of real estate would qualify for straight-line income/expense recognition. Lessors would achieve this by applying an approach similar to current operating lease accounting. Lessees would apply a version of the on-balance sheet right-of-use (ROU) model in which the asset is measured as a balancing figure to achieve straight-line expense recognition.

Many leases of other assets would result in an accelerated profile of income/expense recognition. Lessors would apply the new receivable and residual (R&R) model, recognising a lease receivable and a residual asset representing their interest in the underlying asset at the end of the lease term; lessors might also recognise an upfront profit. Lessees would generally recognise total lease expense on an accelerated basis, being the sum of a straight-line amortisation charge and an accelerated interest charge.

Lessees and lessors would not need to apply the models to leases with a maximum contractual term of 12 months or less. In such cases, they would not recognise lease assets and liabilities, and would recognise straight-line income/expense.

The proposals are certain to prove controversial. Several Board members have indicated that they may dissent from the proposals, and initial reaction from some user groups has been cool. We will all have a chance to comment in 2013.

FIND OUT MORE

For more information on the financial instruments (IAS 39 replacement) project, please speak to your usual KPMG contact or visit the IFRS – financial instruments hot topics page, which includes line of business insights.

You can also go to the Financial Instruments page on the IASB website.

Visit KPMG’s Global IFRS Institute at http://www.kpmg.com/ifrs to access KPMG’s most recent publications on the IASB’s major projects and other activities, including:

© 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

Issue 2, September 2012 IFRS NEWSLETTER 

REVENUE

The Boards could not reach a consensus on how to present the effects of customer credit risk, leaving the future shape of the income statement unclear.

Phil Dowad, KPMG’s global IFRS revenue recognition leader

Boards defer credit risk decisionThis edition of IFRS Newsletter: Revenue examines the current

thinking on the revenue project, and what the proposals could mean for you.

In September, the Boards continued their redeliberations of the proposals in the ED by considering the many comments received on some key areas of the proposals.

Highlights

l   Previous proposals on presentation of customer credit risk rejected – alternative approaches to be developed.

l   Revenue constraint confi rmed in principle – but more work required on when and how to apply it.

l   Boards confi rm proposals on time value of money – adding complexity to accounting for some long-term contracts.

l   No new guidance on sales through distribution networks – this will remain a judgemental implementation issue.

Our IFRS – revenue hot topics page brings together our materials on the revenue project, including our IFRS Newsletter: Revenue.

Our IFRS – insurance hot topics page brings together our materials on the insurance project, including our IFRS Newsletter: Insurance.

Our IFRS – leases hot topics page brings together our materials on the leases project, including our IFRS Newsletter: Leases.

Our IFRS Newsletter: The Balancing Items, which brings into focus narrow-scope amendments to IFRS, is available at http://www.kpmg.com/ifrs.

KPMG CONTACTS

AmericasMichael HallT: +1 212 872 5665E: mhhall@kpmg.com

Tracy BenardT: +1 212 872 6073E: tbenard@kpmg.com

Asia-PacificReinhard KlemmerT: +65 6213 2333E: rklemmer2@kpmg.com.sg

Yoshihiro KurokawaT: +81 3 3548 5555 x.6595E: yoshihiro.kurokawa@jp.kpmg.com

Europe, Middle East, and AfricaColin MartinT: +44 20 7311 5184E: colin.martin@kpmg.co.uk

Venkataramanan VishwanathT: +91 22 3090 1944E: vv@kpmg.com

AcknowledgementsWe would like to acknowledge the efforts of the principal authors of this publication: Nicolle Pietsch, Robert Sledge and Sze Yen Tan.

© 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

KPMG International Standards Group is part of KPMG IFRG Limited.

Publication name: IFRS Newsletter: Financial Instruments

Publication number: Issue 6

Publication date: October 2012

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IFRS Newsletter: Financial Instruments is KPMG’s update on the IASB’s financial instruments project.

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