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Summary of the Amendments to IAS 39 & IFRS 7 – October 2008

Reclassification of financial assets

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.

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