The International Accounting Standards Board (IASB) on Thursday issued requirements on the accounting for financial liabilities that address the problem of volatility in profit and loss (P&L) arising when an issuer measures its own debt at fair value—often referred to as the “own credit” problem.
According to a news release, the requirements will be added to IFRS 9, Financial Instruments, and complete the classification and measurement phase of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement. They follow the IASB’s November 2009 issuance of IFRS 9, which prescribed the classification and measurement of financial assets.
In response to feedback received during its consultation process, the IASB decided to maintain the existing amortized cost measurement for most liabilities, limiting change to that required to address the own credit problem. The exposure draft, Fair Value Option for Financial Liabilities, issued in July 2009, proposed a two-step approach, which required the own credit amount to be shown first in P&L and then, as a second step, as a transfer to other comprehensive income (OCI).
With the new requirements, an entity choosing to measure a liability at fair value will present the portion of the change in its fair value due to changes in the entity’s own credit risk directly in the OCI section of the income statement, rather than within P&L.
“The new additions to IFRS 9 address the counterintuitive way a company in severe financial trouble can book a large profit based on its theoretical ability to buy back its own debt at a reduced cost,” said IASB Chairman Sir David Tweedie in the news release.
IFRS 9 applies to financial statements for annual periods beginning on or after Jan. 1, 2013. Entities may apply the new requirements in earlier periods, however, if they do, they must also apply the requirements in IFRS 9 that relate to financial assets.
The second and third phases of the IFRS 9 project deal with accounting for the impairment of financial assets and hedge accounting. The IASB is aiming to complete those phases by June 30, 2011, by adding the impairment and hedge accounting requirements to IFRS 9 and, therefore, replacing IAS 39 in its entirety.
The IASB’s project summary and feedback statement outlines how the board responded to views received in its consultation process.
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