While the SEC approved a statement supporting the adoption of global accounting standards for U.S. companies, the Chairman Mary Schapiro cautioned that, “Incorporating International Financial Reporting Standards (IFRS) into our financial reporting system would involve a significant undertaking. We must carefully consider and deliberate whether such a change is in the best interest of U.S. investors and markets.
“The Commission also voted to approve a Work Plan developed by SEC staff that would gather information to aid the Commission as it evaluates the impact that the use of IFRS by U.S. companies would have on our securities market,” Schapiro said. The Work Plan will be completed in 2011, the target date set by the 2008 Proposed Roadmap.
Schapiro said, however, that no decision had been made about the timing of a possible conversion to IFRS. “We must still determine what this means for U.S. companies and markets; should we incorporate IFRS into our reporting system and, if so, when and how?
The much-anticipated International Financial Reporting Standards (IFRS) is likely to be rolled out only partially in India from April 1, 2011.That’s because a core group on IFRS implementation, set up by the ministry of company affairs and headed by renowned chartered accountant Y H Malegam, is set to recommend that it be made mandatory only for big corporates in the first phase.
Central Board of Direct Taxes (CBDT) and accounting rule-maker Institute of Chartered Accountants of India (ICAI) have jointly constituted a study group to identify and address direct tax issues that will affect convergence of India’s accounting standards with International Financial Reporting Standards (IFRS).With IFRS convergence due for April 2011 and the government coming up with the new Direct Taxes Code (DTC), the suggestions of the study group finds relevance.
On 12 November 2009, IASB published IFRS 9 Financial Instruments on the classification and measurement of financial assets. The present IAS 39 is proposed to be replaced in three phases as follows by International Accounting Standards Board (IASB): Phase 1: Classification and measurement. This is presently published as IFRS 9 Financial Instruments on the classification and measurement of financial assets. Phase 2: Impairment methodology. On 25 June IASB published a Request for Information on the feasibility of an expected loss model for the impairment of financial assets. The exposure draft published in November 2009. Phase 3: Hedge accounting. IASB is currently conducting outreach with its constituents and intends to issue an exposure draft on hedge accounting in the first quarter of 2010.
On 12 November 2009, the International Accounting Standards Board (IASB) issued IFRS 9 Financial Instruments.
Salient differences between IAS 39 and IFRS 9
Recognition and Measurement
Effective from 1st Jan 2013 with early adoption permitted
All aspects of Financial
assets & Financial Liabilities including hedge accounting
Only Financial assets included. Presently the standard does not include Financial liabilities, derecognition of financial instruments, impairment and hedge accounting
of debt instruments
Fair Value Through Profit & Loss (FVPL)
Loan and Receivable (LAR)
Fair Value Through Profit & Loss (FVPL)
Amortised Cost (AC)
of equity instruments
Fair Value Through Profit
& Loss (FVPL)
Fair Value Through
Profit & Loss (FVPL)
Fair Value Through Other Comprehensive Income (FVOCI)
Basis of classification
Intention to hold till maturity, trading for short term profits, derivative, loan or receivable, or intentional designation subject to certain restrictions
Classification based on business model and the contractual cash flow characteristics
– Debt Instruments
Measured at amortised cost if classified as held-to-maturity or as loan or receivable.
Other classifications are measured at fair value.
Measured at amortised cost (AC) if business model objective is to
collect the contractual cash flows and the contractual cash flows represent solely payment of principal and interest on the principal amount outstanding.
Debt instruments meeting the above criteria can still be measured at fair value through profit or loss (FVPL) if such designation would eliminate or reduce accounting mismatch.
If not, measured at fair value through profit or loss (FVPL)
– Equity Instruments
Measured at fair value.
Exception: Unquoted equity
investments are measured at cost where fair valuation is not sufficiently reliable.
Measured at fair value through profit or loss.
An entity can irrevocably designate at initial recognition as fair value through other comprehensive income, provided the equity investment is not held for trading.
Embedded derivatives are
separated from the hybrid contract and are measured at FVPL.
No bifurcation of asset.
The financial asset is assessed in its entirety as to the contractual cash flows and if any of its cash flows do not represent either payments of principal or interest then the whole asset is measured at FVPL.
Fair value option
An entity can designate a financial asset to be measured at fair value on initial recognition.
The entity has the freedom to do so and need not satisfy any other criteria
A financial asset can be designated as FVPL on initial recognition only
if that designation eliminates or significantly reduces an accounting
mismatch had the financial asset been measured at amortised
– Debt instruments
Reclassification between the various four categories allowed under specific circumstances with the gain/loss being treated differently depending upon the movement between the classifications.
Reclassification from held-to-maturity (HTM) is viewed seriously if does not fall within the permitted exceptions.
If entity’s business model objective changes, reclassification is permitted between FVPL and AC or vice versa. Such changes should be demonstrable to external parties and are expected to be very infrequent.
– Equity instruments
Reclassification is permitted between the FVPL and AFS.
When transferred from AFS to FVPL, unrealized gain/loss is recognized in P&L based on fair value.
When transferred from FVPL to AFS, no reversal of gain/loss recognized as unrealized is permitted.
However all gain/loss on disposal of AFS are recognized in P&L by transfer from equity.
Reclassification between FVPL and FVOCI not permitted as FVOCI classification is done at the
irrevocable designation of the entity as such.
Only dividend income is recognized in P&L of assets designated as FVOCI.
Even on disposal of such assets, the gain/loss is not transferred from equity, but remains permanently in equity.
•Accounting for Investments – Equities, Futures & Options – is the first volume in this series published by John Wiley & Sons. This video gives an overview of the contents of this book. This is the first part of a series of videos that would cover the contents all the chapters in great detail.
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Certain non-derivative financial assets recognized are permitted to be reclassified with effect from 1st Nov 2008 prospectively. If the decision to reclassify is taken before 1st Nov then the entity has the option of giving effect to the reclassification retrospectively from any date starting 1st July 2008 till 31st October 2008.
Reclassification out of FVPL and AFS categories
If a financial asset would have met the definition of loans and receivables (LAR) had it not been classified as FVPL or AFS at initial recognition then such a financial asset can be reclassified out of FVPL or AFS. Note that reclassification option is not applicable for financial liabilities, derivatives and financial assets that are designated as at FVPL on initial recognition under the fair value option.
A debt instrument that would have met the definition of LAR may be reclassified out of FVPL if the entity has the intention and ability to hold the asset for the foreseeable future or until maturity.
A debt instrument classified as AFS that would have met the definition of LAR may be reclassified to the LAR category if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity.
Any other debt instrument or any equity instrument may be reclassified form FVPL to AFS or from FVPL to HTM (in the case of debt instruments), if the financial asset is no longer held for the purpose of selling in the near term – but only in rare circumstances. The IASB has already announced that the market conditions in the third quarter of 2008 are an example of rare circumstances.
Measurement at the reclassification date
All reclassifications are required to be made at the fair value of the financial asset and any previously recognized gains or losses cannot be reversed. The fair value at the date of reclassification becomes the new cost or amortized cost of the financial asset as applicable.
Measurement after the reclassification date
For financial assets measured at mortised cost a new effective interest rate will be determined at the date of reclassification. Ina the case of reclassifications of a fixed rate debt instrument to LAR and HTM this effective interest rate will be used as the discount rate for future impairment calculations.
IASB amendments permit reclassification of financial instruments
The International Accounting Standards Board (IASB) today issued amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures that would permit the reclassification of some financial instruments. The amendments to IAS 39 introduces the possibility of reclassifications for companies applying International Financial Reporting Standards (IFRSs), which were already permitted under US generally accepted accounting principles (GAAP) in rare circumstances.
The deterioration of the world’s financial markets that has occurred during the third quarter of this year is a possible example of rare circumstances cited in these IFRS amendments and therefore justifies its immediate publication. Today’s action enables companies reporting according to IFRSs to use the reclassification amendments, if they so wish, from 1 July 2008.
These amendments are the latest in a series of steps that the IASB has undertaken to respond to the credit crisis. The IASB has worked with a number of other regional and international bodies, including the Financial Stability Forum (FSF), to address financial reporting issues associated with the credit crisis. In responding to the crisis, the IASB notes the concern expressed by EU leaders and finance ministers through the ECOFIN Council to ensure that ‘European financial institutions are not disadvantaged vis-à-vis their international competitors in terms of accounting rules and of their interpretation.’ The amendments today address the desire to reduce differences between IFRSs and US GAAP in a manner that produces high quality financial information for investors across the global capital markets.
Sir David Tweedie, Chairman of the IASB, said: In addressing the rare circumstances of the current credit crisis, the IASB is committed to taking urgent action to ensure that transparency and confidence are restored to financial markets. The IASB has acted quickly to address the concerns raised by EU leaders and others regarding the issue of reclassification. Our response is consistent with the request made by European leaders and finance ministers; it is important that these amendments are permitted for use rapidly and without modification.’