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EFRAG published its final comment letter on the IASB ED/2012/4 'Classification and Measurement: Limited Amendments to IFRS 9' on 16 April 2013. This feedback statement summarises the main comments received by EFRAG on its Draft Comment Letter and explains how those comments were considered by the EFRAG Technical Expert Group (EFRAG) during its technical discussions.
EFRAG published a draft comment letter on the proposed ED in December 2012. In that letter EFRAG welcomed the IASB’s decision to consider making limited amendments to IFRS 9 and appreciated the effort made to address accounting mismatches arising from the application of different measurement models to financial assets and insurance liabilities. However, EFRAG expressed a number of concerns on the proposals.
In particular, EFRAG was concerned that there were still financial assets that would not pass the contractual cash flow characteristics assessment, for different reasons, despite the fact that an amortised cost measurement would provide more useful information. In this respect, EFRAG invited constituents to provide with more examples than those already identified in the draft comment letter.
In addition, EFRAG noted that the definition of interest in IFRS 9 should be revised to clarify that it includes other components which are inherent in any theoretical definition of interest (e.g. liquidity risk).
EFRAG did not reach a consensus on the IASB’s proposal to introduce an additional business model in IFRS 9. EFRAG had two distinct views and invited constituents to comment on these. Some EFRAG TEG members agreed with the approach in the ED that eligible debt instruments should be mandatorily measured at FV-OCI if they are held within a business model whose objective is both to collect contractual cash flows and to sell, whereas other EFRAG TEG members believed that the FV-OCI measurement category should be introduced as an option at initial recognition to address accounting mismatches.
EFRAG requested its constituents’ views on the IASB’s decision not to introduce bifurcation for financial assets, in particular, (i) whether they were aware of any circumstances in which bifurcation might still be needed, and (ii) how they would strike the balance – having as objective the effectiveness of financial reporting – between requesting bifurcation of hybrid financial assets on a basis consistent with the principles in IFRS 9 and encouraging the IASB to complete IFRS 9 as quickly as possible.
EFRAG also sought input from the EFRAG Insurance Accounting Working Group and Financial Instruments Working Group on a number of targeted areas of the ED to help them formulate a final view, in particular, on the introduction of an additional business model into IFRS 9.
Most of the constituents agreed with the proposed clarifications on the contractual cash flow characteristics assessment; however, they felt that the assessment was too restrictive and would result in different traditional lending products and simple debt instruments to fail the assessment.
The majority of constituents raised concerns about introducing FV-OCI measurement in IFRS 9 in the way proposed by the ED. Many constituents felt that it was difficult to define an additional business model other than the amortised cost and fair value through profit or loss (FV-PL) and believed that the IASB’s definition focused too much on the level of sales activity. In particular, constituents argued that the dividing lines between measurement categories were not clear enough.
Furthermore, constituents were divided as to whether and how FV-OCI measurement should be introduced into IFRS 9. A significant number of constituents believed that the IASB’s proposals would introduce more complexity in the accounting for financial assets. Most of these constituents suggested introducing FV-OCI measurement as an option to avoid accounting mismatches, whereas a few of them preferred the current dual model in IFRS 9.
Other constituents, including insurance companies, supported FV-OCI measurement although they proposed alternative definitions to characterise the underlying business model or provided various recommendations, for example, to introduce this measurement basis as an unrestricted option into IFRS 9.
Constituents generally agreed to early apply the own credit provisions in IFRS 9; however they argued that a narrow-scope amendment to IAS 39 was a preferable solution.
Finally, constituents generally agreed to apply the standard in its entirety once IFRS 9 will be finalised, however they emphasised that the current mandatory effective date of 2015 was no longer realistic and therefore should be extended.