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EFRAG – User outreach event on the latest developments in accounting for
financial instruments on Wednesday 15 September 2010
Completed questionnaire to be submitted no later than Friday 3 September 2010 via e-mail or fax to
patrick.mommens@efrag.org (+32 2 210 4401)
For each question below, please select the view you agree with most. You are also invited to add comments
clarifying your views. The results of this questionnaire will be summarised and presented during the
Outreach event on 15 September 2010. Individual responses will remain confidential.
1. Measurement model
The application of a mixed measurement model (amortised cost and fair value), based on an entity’s
business model as well as the characteristics of the financial instruments, provides the most relevant
and useful financial information for understanding and comparing the performance and sustainability
of reporting entities.
Financial instruments should be measured at fair value, regardless of an entity’s business model,
because a symmetrical measurement of financial assets and financial liabilities for all reporting
entities provides the most relevant and useful financial information for understanding and comparing
the performance and sustainability of reporting entities.
Comments:
2. Presentation and disclosure of fair value information
For financial instruments measured at amortised cost, fair value information should be disclosed in
the notes to the financial statements together with accompanying information.
For financial instruments measured at amortised cost, fair value information should be presented on
the face of the balance sheet to ensure that this information is published at the same time as the
balance sheet and not later when the full set of IFRS financials is published.
Comments:
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3. Recognition of changes in fair value of equity instruments
Changes in the fair value of equity investments not held for trading should be recognised in Other
Comprehensive Income (“OCI”), in order to distinguish between equity instruments held for trading
(measured at fair value through profit or loss) and equity instruments held for value accretion,
measured at fair value through OCI.
Changes in the fair value of equity instruments should always be recognised in profit or loss, with no
option for recognition in OCI.
An entity should have an irrevocable option to recognise changes in the fair value of certain equity
instruments in OCI rather than in profit or loss.
Comments:
4. Recycling of changes in fair value from OCI to profit or loss
Changes in fair value should always be recycled from OCI to profit or loss upon disposal or settlement
of the related financial instrument because all gains and losses should ultimately be reported in profit
or loss.
Changes in fair value should never be recycled from OCI to profit or loss because gains or losses
should be recognised only once. The amount of accumulated gains or losses realised during the
reporting period should be disclosed in the notes to the financial statements.
Whether changes in fair value should be recycled from OCI to profit or loss upon disposal or
settlement of the related financial instrument should depend on an entity’s business model as well as
the characteristics of the financial instruments.
Comments:
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5. Effective interest rate
Interest recognition for financial assets measured at amortised cost should be based on an effective
interest rate that reflects:
both the contractual cash flows and the initially expected credit losses. In this way, initially
expected credit losses would affect profit or loss over the life of the financial asset. This
approach reflects that a portion of the contractual interest rate compensates the lender for
initially expected credit losses.
only contractual cash flows. Initially expected credit losses would affect profit or loss when
credit impairment is assessed. This approach results in the earlier recognition of initially
expected credit losses within the first reporting period.
Comments:
6. Changes in estimate of expected credit losses
When an entity revises its estimate of credit losses, the effects of the change in estimate:
should be recognised in profit or loss in the period of the re-estimate and the entity should
continue to use the same initial effective interest rate for interest recognition.
should only be recognised in the period of the re-estimate to the extent that the change
relates to current or prior periods. Changes in expected future cash flows should be
allocated over the remaining life of the financial asset by revising the effective interest rate.
Comments:
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7. Credit impairment model
When assessing impairment of a loan (or pool of loans), an entity should not take into account
management forecasts at the reporting date because often it would be difficult to accurately forecast
expected cash flows through the life of the loan(s) on the basis of forecasted future events.
Impairment charges should be recognised based on facts existing at the reporting date.
When assessing impairment of a loan (or a pool of loans), an entity should take into account
management forecasts because (i) it better reflects lending decisions and (ii) estimation uncertainty
and the necessity for management to use significant assumptions and judgement is inherent to
financial reporting.
Comments:
8. Embedded derivatives
All hybrid financial instruments containing embedded derivative features should be reported in their
entirety at fair value with all changes recognised in profit or loss because:
(i) fair value is the most relevant measure;
(ii) the elimination of bifurcation/separate accounting facilitates simplification; and
(iii) by ensuring consistency in the classification of hybrid financial instruments comparability is
improved which makes it easier for users of financial statements to understand the information
reported.
Since it is paramount that embedded derivatives are measured at fair value with all changes
recognised in profit or loss, they should always be bifurcated (split) from the host contract and
accounted for separately when the host contract is not measured at fair value with all changes
recognised in profit or loss.
The requirement to bifurcate derivatives embedded in financial assets or liabilities and separately
account for them should depend on the entity’s business model as well as the characteristics of the
host contract. This would allow the entity to measure at amortised cost debt components of hybrid
financial assets that the entity holds for collection of the contractual cash flows instead of measuring
the entire contract at fair value with all changes recognised in profit or loss.
Comments:
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9. Fair value option for financial liabilities – issuer’s own credit risk
When an entity applies the fair value option to measure financial liabilities in order to reduce an accounting
mismatch:
Gains or losses from changes in an entity’s own credit risk should be presented in Other
Comprehensive Income (“OCI”), because presenting them in profit or loss would not result in useful
information as an entity will generally not realise those gains or losses.
Gains or losses from changes in an entity’s own credit risk should always be presented in profit or
loss, regardless of the classification of the liability, because it simplifies reporting and enhances
comparability.
It should be allowed to present gains or losses from changes in an entity’s own credit risk in profit or
loss if doing so would avoid accounting mismatches.
The fair value of a financial liability should not take into account the effect of changes in an entity’s
own credit risk (frozen credit spread method) in order to avoid the reporting of counter-intuitive
results (gains should not result from the deterioration of an entity’s financial position).
Comments:
10. Symmetrical accounting for financial assets and financial liabilities
The same classification and measurement requirements, based on the characteristics of the
instrument and business model tests, should apply to all (hybrid) financial assets and liabilities, in
order to reduce complexity and enhance comparability.
Different classification and measurement requirements should apply to (hybrid) financial assets and
liabilities, to reflect the different nature of financial assets and liabilities.
Comments:
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