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EFRAG Research Project Equity Instruments - Impairment and Recycling



IFRS 9 Financial Instruments was issued by the IASB in July 2014 and is effective for annual periods beginning on or after 1 January 2018. For equity instruments, other than those held for trading and contingent consideration recognised in a business combination, the IASB has introduced an irrevocable option at inception on an instrument-by-instrument basis that permits those instruments to be accounted for at fair value through other comprehensive income, with no impairment losses recognised in profit or loss and no reclassification in profit or loss of gains or losses upon derecognition.

In the Basis for Conclusions of IFRS 9, the IASB notes that one of the primary reasons for not allowing recycling is that it would create the need to assess these equity instruments for impairment. The IASB also noted that the application of impairment requirements for Available for Sale ('AFS') instruments in IAS 39 was very subjective.

In its Endorsement Advice to the European Commission ('EC') related to IFRS 9, EFRAG noted that the prohibition of recycling may be considered as limiting the relevance of the information, since profit or loss is the main indicator of performance, and could affect in particular long-term investors.

What is the objective of the project?

This research project intends to consider possible alternative approaches to the impairment of equity investments and the relation between an effective impairment model and the recycling of gains or losses on disposal of equity investments designated at fair value through OCI.

The European Commission's request

In May 2017, the European Commission requested EFRAG to investigate the potential effects on long-term investment of the IFRS 9’s requirements on accounting for equity instruments. In the first phase of the project (‘assessment phase’), EFRAG was asked to collect quantitative data on the current holdings of equity instruments and their accounting treatment and investigate whether, and to what extent, entities expect that the new accounting requirements will affect their decisions in relation to investment in equity instruments. In January 2018, EFRAG issued its letter to the European Commission, which you can download here.

In the second phase of the project, the EC asked EFRAG to provide advice on whether and how IFRS 9's requirements on accounting for holdings of equity instruments could be improved.

The EFRAG Discussion Paper

In March 2018, EFRAG published a Discussion Paper (‘DP’) to gather constituents’ views on recycling and impairment of equity instruments designated at FVOCI. EFRAG did not include a preliminary view on the issues explored in the DP.

The DP analyses the relevance of recycling in the context of a long-term investment business model. It also presents arguments on the conceptual relationship between recycling gains and losses on derecognition and recognising impairment losses (which would create the need to develop an impairment model for this category of financial instruments).

The DP illustrates two models but does not express a preliminary view as to which, if either, of these two models is preferable. 

You can download the DP here

In March 2018, EFRAG published a literature review authored by an independent international academic team. You can download the paper here.

In August 2018, EFRAG published a Summary of Responses received from constituents. ​​You can dowload the paper here​.

In November 2018, EFRAG published its response to the request for technical advice. The response addresses the interaction between an impairment model and the reintroduction of recycling, and what characteristics an impairment model for equity instruments could have. You can download the response ​ he​r​e​.​

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