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.
Andrew Vials, KPMG’s global IFRS Financial Instruments leader, said: “Banks, insurance companies and other financial institutions are most likely to be affected by the proposed changes. Some entities will expect an overall reduction in P&L volatility, although for others volatility in equity and regulatory capital may increase.”
“It was good to see the IASB and the FASB working together on developing common principles in this area,” Vials continued. “Let’s hope that they can follow that through in terms of finalising the detail that will govern how the new requirements are actually applied in practice.”
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.
Chris Spall, partner in KPMG International Standards Group, said: “The new category will be welcomed by many in the insurance industry, as it is intended to dovetail with the IASB’s tentative decision that changes in insurance liabilities driven by changes in discount rates also should be excluded from P&L. However, the debate will continue as to whether the IASB has found the best overall package to try to minimise accounting mismatches.”
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.
Spall said: “Companies, in particular financial institutions, should start re-looking at their financial assets and at how the proposed amendments might impact them. Although these amendments are labelled ‘limited’, they could have far-reaching implications for an entity’s financial reporting.”
The proposals are out for consultation until 28 March 2013.
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