| In response to concerns that IAS 39 Financial Instruments: Recognition and Measurement (‘IAS 39’) is “difficult to understand, apply and interpret” the IASB has set about replacing IAS 39. To ensure a timely response to calls to address concerns with IAS 39, the IASB has taken a phased approach to the development of the Standard.
The first part of Phase 1 (that resulted in the publication of IFRS 9 by the IASB in November 2009) deals with classification and measurement of financial assets. The second part of Phase 1 will deal with classification and measurement of financial liabilities. Phase 2, considered here, deals with impairment of financial assets carried at amortised cost and Phase 3 will address hedge accounting. The entire package is expected to be completed by the end of 2010.
The first phase, dealing with classification and measurement of financial assets instruments, replaces the classification categories in IAS 39 with two primary measurement categories for financial instruments - fair value and amortised cost. Therefore, given the characteristics of the instruments that will be carried at amortised cost there would be one single impairment model for such financial assets as opposed to the different impairment models relating to three of the four categories of financial instruments in IAS 39.
The Exposure Draft Financial Instruments: Amortised Cost and Impairment (ED), published in November 2009, proposes to clearly set out the objective of amortised cost measurement and how it should be calculated. Impairment of financial assets is an integral component of the amortised cost measurement model. The proposals would also result in consequential amendments to other IFRSs and to the guidance on those IFRSs.
The IASB have tentatively agreed that the proposed standard should provide a clear objective, emphasise principles and provide concise application guidance. Guidance will be limited since it is felt that the expected cash flow approach is very process driven. In addition, certain issues will be discussed with the Impairment Expert Advisory Panel (EAP) rather than being included as guidance in the ED.
The objective of the proposed standard is to establish principles for the measurement of financial assets and financial liabilities at amortised cost to provide useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of future cash flows. This includes the allocation of expected cash flows over the expected life of financial instruments based on conditions existing at initial recognition as well as subsequent impairment of the financial instruments. The key issues therefore relate to:
(a) The effective interest method; and
(b) The expected cash flow approach (including future credit losses).
The ED also includes guidance on presentation and disclosure that aim to support the measurement objective.
|
