EFRAG urges the IASB to carefully consider ways of minimising the negative effects of the approach on constituents including foreseeing reconsideration of accounting choices by entities upon implementation of a subsequent phase of the IAS 39 replacement.
EFRAG’s summarised comments are:
· While EFRAG understands the IASB’s decision to split the IAS 39 replacement project into phases, a phased approach has some consequences that EFRAG thinks the IASB needs to bear in mind in the later stages of its work. As a result, EFRAG urges the IASB to carefully consider ways of minimising the negative effects of such an approach on constituents (including foreseeing reconsideration of accounting choices by entities upon implementation of a subsequent phase of the IAS 39 replacement project, as well as taking into account the circumstances of insurance entities awaiting the completion of the IFRS 4 Insurance Contracts replacement project.)
· It agrees that a mixed measurement model should be retained.
· It agrees that the existing classification model should be simplified and that instruments should be allocated to categories in a way that will enable useful information to be presented.
· It agrees 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, EFRAG has some important concerns about how that principle is translated by the standard into detailed tests.
· EFRAG believes that the tests to distinguish between the measurement categories should be clarified by making them more principles based.
· It does not support the proposals in the ED:
o on the treatment of embedded derivatives.
o prohibiting reclassification of instruments from one category to another.
o omitting the reliability exemption from the requirement to measure all equity investments (and all derivatives on such investments) at fair value.
o requiring an entity choosing not to account for an equity investment at fair value through profit or loss to present the total return on the instrument in OCI and to prohibit the recycling from OCI to profit or loss of any part of that total return.
EFRAG understands that the FASB is currently working on its set of proposals for reporting for financial instruments and that those proposals are likely to be significantly different from the proposals in this ED. It urges the IASB to encourage FASB to converge around a classification and measurement model along the lines set out in the IASB’s ED.
© EFRAG - European Financial Reporting Advisory Group
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