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The IASB has issued an exposure draft on Financial Instruments: Classification and Measurement that proposes two primary categories for financial instruments. A financial asset or a financial liability would be measured at amortised cost if two conditions are met: (1) the instrument has basic features, and (2) the instrument is managed on a contractual yield basis. A financial asset or financial liability that does not meet both conditions would be measured at fair value.
EFRAG’s agrees that a mixed measurement model should be retained and we also agree that the existing classification model should be simplified so that there are only two categories (amortised cost and fair value).
We agree with the proposals that the classification of financial instruments should be based on whether the cash flows on an instrument have a close relation to the amount advanced under the instrument. However, we have some important concerns about how that principle is translated by the standard into detailed tests.
However, we do not support the proposals in the ED on the treatment of embedded derivatives, prohibiting reclassification between categories, prohibiting the recycling from OCI to profit or loss of gains and losses arising from equity investments and omitting the reliability exemption from the requirement to measure all equity instruments held (and all derivatives on such instruments) at fair value.
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