By Rob Starr, Content Manager, Big4.com
KPMG welcomes the proposed limited amendments to IFRS 9 that were issued today by the IASB as a step towards completing its plan to reform financial instruments accounting under IFRS. The project is a joint one with the US FASB and responds to calls from the G20 for a single set of high-quality global accounting standards.
The proposals introduce a new measurement category for financial assets that are managed both in order to collect contractual cash flows and for sale – such as some bond investment portfolios. This new category will require the measurement of the asset at fair value, with fair value changes being recognised outside P&L and in ‘other comprehensive income’ or OCI. Some financial assets that an entity previously expected to measure at amortised cost under the existing IFRS 9 model may have to be classified in this new category – this may have the consequence of increasing volatility in reported equity and, for financial institutions, regulatory capital.
Another significant change introduced by the proposals is that entities will be allowed to early apply the own credit requirements in IFRS 9 for financial liabilities measured under the fair value option without having to early apply IFRS 9 in its entirety. Current standards require the impact of changes in own credit risk on these liabilities to be recognised in P&L – leading to a large boost in a bank’s profits when its creditworthiness deteriorates. Under IFRS 9, these gains and losses too would be excluded from reported profits. This will be good news for many constituents who view the own credit requirements introduced in IFRS 9 as a significant step towards enhancing the quality and reputation of IFRS. However, early adoption will still not be available to banks in the European Union unless and until the EU endorses the new standard – which is unlikely to be soon.