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EFRAG welcomes the IASB’s decision to consider making limited amendments to IFRS 9 Financial Instruments (2010). EFRAG notes that changes to the original requirements have been proposed based on feedback received from constituents and also to consider the interaction with the future IFRS on insurance contracts and the differences with the FASB’s tentative classification and measurement model. EFRAG appreciates the IASB’s effort to consider EFRAG´s request to address accounting mismatches that may arise from the application of different measurement models to financial assets and insurance liabilities.
In EFRAG's view, the IASB’s proposals to modify the contractual cash flow characteristics assessment do not go far enough. EFRAG believes that there are still many financial assets that do not pass the contractual cash flow characteristics assessment, despite the fact that an amortised cost measurement – or fair value through other comprehensive income (FV-OCI) measurement – would provide more useful information than measurement at fair value through profit or loss (FV-PL).
EFRAG believes that the IASB should clarify that the definition of interest in IFRS 9 (and the related application guidance) were not meant to be inconsistent with how entities determine interest of financial assets in practice, for example by including a reasonable profit margin and a premium for liquidity risk and considering other entity-specific factors such as the expected future behaviour of customers, provided that the resulting interest reflects market transactions.
Constituents reported that financial assets with regulated interest rates and those with early automatic redemption features would most likely fail the assessment. In both cases EFRAG believes that these instruments should be eligible for a measurement basis other than FV-PL. In this regard, EFRAG intends to share with the IASB the results arising from a fact finding exercise, which EFRAG is carrying out with its partners, that aims identifying the high level reasons for the changes from a current amortised cost measurement as foreseen currently by IAS 39 to a fair value basis under IFRS 9 (and the other way around) and to understand the accounting effects of the IASB’s decision not to allow bifurcation for financial assets.
Constituents also identified a number of other instruments that are expected to fail the assessment, including financial assets that are currently measured at amortised cost under IAS 39 which are (at least partially) managed to collect the contractual cash flows. EFRAG recommends that the IASB introduces bifurcation into IFRS 9 for financial assets based on an approach consistent with the contractual cash flow characteristics assessment as described in paragraphs BC63-BC67 of the ED. In EFRAG´s view, entities should bifurcate financial assets that fail the contractual cash flow characteristics assessment, unless entities elect (either at the entity level or on a portfolio level) to measure these financial assets in their entirety at FV-PL due to the excessive cost of bifurcation. This would ensure measuring financial assets that fail the contractual cash flow characteristics assessment more consistently with how entities manage them.
With regards to the introduction of an additional measurement category in IFRS 9, EFRAG believes that the ED fails to clearly identify the business model underlying measurement at FV-OCI. In addition, the ED does not fully address the concerns raised by insurance companies, which was one of the reasons for re-opening the classification and measurement requirements in IFRS 9.
EFRAG believes that measurement at FV-OCI is necessary as part of a solution to address insurers’ concerns about accounting mismatches and performance reporting. Therefore, in the absence of a third business model being clearly identified, EFRAG recommends to the IASB introducing FV-OCI measurement as part of its project on insurance contracts rather than proceeding with the introduction of an additional measurement category in IFRS 9.
Finally, EFRAG notes that the ED includes in its basis for conclusions the IASB’s analysis of the likely effects that will result from the proposed amendments covering, among other aspects, the comparability and usefulness of the financial information that would result from the ED and the likely effect on costs for preparers and users of financial statements. In this respect, EFRAG appreciates the step forward that the IASB has taken by integrating an effect analysis into the standard setting process.