Recent Updates on Financial Instruments

Overview
IFRS 9, Financial Instruments, is a new standard dealing with the accounting for financial instruments. In August 2011, the International Accounting Standards Board (IASB) has published an exposure draft of proposed amendments to IFRS 9 (issued November 2009) and IFRS 9 (issued October 2010) to propose changing the mandatory effective date of IFRS 9 so that entities would be required to apply them for annual periods beginning on or after January 1, 2015 rather than being required to apply them for annual periods beginning on or after January 1, 2013.

IFRS 7, Financial Instruments: Disclosures,prescribes disclosure requirements in the financial statements to enable users to evaluate  the significance of financial instruments for the entity’s financial position and performance; and the nature and extent of risks arising from financial instruments to which the entity is exposed, and how the entity manages those risks.  The principles in IFRS 7 also complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32, Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments.

Recent Updates
The IASB issued last December 16, 2011 the following amendments relating to areas of financial instrument accounting:

• Mandatory Effective Date of IFRS 9 and Transition Disclosures [Amendments to IFRS 9 (2009), IFRS 9 (2010) and IFRS 7]
• Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32), and
• Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)
     
  A summary of each of these amendments is set out below.

 

Mandatory Effective Date of IFRS 9 and Transition Disclosures [Amendments to IFRS 9 (2009), IFRS 9 (2010) and IFRS 7]

The amendments to IFRS 9, Financial Instruments, defer the mandatory effective date from January 1, 2013 to January 1, 2015.  This means that all the phases of the project (i.e., classification and measurement, impairment and hedge accounting) to replace IAS 39 will now have the same mandatory effective date. 
 
The amendments also provide relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9.  This relief was originally only available to companies that chose to apply IFRS 9 prior to 2012.  Additional transition disclosures will now be required to help understand the initial application  of the standard.

In connection with this, IASB also published amendments to IFRS 7, Financial Instruments – Disclosures, to require additional disclosures on transition from IAS 39 to IFRS 9.  Accordingly, entities that initially apply IFRS 9 in periods:

• beginning before January 1, 2012 need not restate prior periods and are not required to provide the reconciliation disclosures set out in the amended IFRS 7;
• beginning on or after January 1, 2012 and before January 1, 2013 must elect either to provide the reconciliation disclosures set out in IFRS 7 or to restate prior periods; and,
• beginning on or after January 1, 2013 shall provide the reconciliation disclosures set out in IFRS 7. The entity need not restate prior periods.

 

Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)

The amendments to IAS 32, Financial Instruments: Presentation, add application guidance to address inconsistencies in applying IAS 32’s criteria for offsetting financial assets and financial liabilities in the following two areas:

1. The meaning of 'currently has a legally enforceable right of set-off'

The I ASB has c larified that a right of set-off is required to be legally enforceable in the normal course of business, in the event of default and in the event of insolvency or bankruptcy of the entity and all of the counterparties.

 

The right must also exist for all counterparties

2. That some gross settlement systems may be considered equivalent to net settlement

There was diversity in practice related to the interpretation of 'simultaneous settlement' in IAS 32

The IASB has therefore clarified the principle behind net settlement and included an example of a gross settlement system with characteristics that would satisfy the IAS 32 criterion for net settlement.

Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)

The IASB and the FASB had originally intended to introduce common offsetting requirements for IFRSs and US GAAP. In the end, however, the two Boards decided to maintain their respective offsetting models. While they were unable to achieve convergence on common offsetting requirements, they noted that requiring common disclosures would be helpful for users of financial statements.

Accordingly, qualitative and quantitative disclosures have been added to IFRS 7 relating to gross and net amounts of recognised financial instruments that are (a) set off in the statement of financial position and (b) subject to enforceable master netting arrangements and similar agreements, even if not set off in the statement of financial position.

Entities are required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The required disclosures should be provided retrospectively.