IASB proposes tweaks to financial instruments standard

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The International Accounting Standards Board has proposed a set of minor amendments to the financial instruments standard to make it easier to implement.

The changes to IFRS 9 would allow companies using International Financial Reporting Standards to measure certain prepayable financial assets with so-called “negative compensation” at amortized cost. They come in response to comments provided to the IFRS Interpretations Committee.

“These proposed minor amendments to the Standard respond to comments received about the accounting for prepayment options under IFRS 9 and are consistent with the Board’s enhanced focus on supporting implementation of major new Standards,” said IASB chairman Hans Hoogervorst in a statement.

 The exposure draft containing the proposed amendments is available here. The IASB is asking for comments by May 24, 2017.

The IASB's financial instruments standard differs in many ways from the Financial Accounting Standards Board's version for U.S. GAAP, particularly in terms of how credit losses are treated for impaired loans. FASB is using a current expected credit loss, or CECL model, while the IASB uses a three-stage approach to measure expected credit losses over a period of time.

During a recent webinar, the financial information company Sageworks surveyed professionals from banks and credit unions about their biggest challenges in planning implementation of the CECL model at their businesses. More than half the respondents said introducing new models and executing various methodologies is their biggest challenge in the planning process.

In explaining its proposed amendments to IFRS 9, the IASB noted that many financial instrument contracts (such as mortgages or other loans) allow for prepayment, which is sometimes referred to as "negative compensation." If a borrower decides to prepay a loan, the lender generally receives compensation. However, some contracts compensate either the borrower or the lender based on factors such as changes in market interest rates. Thus, under such contracts, it's possible for the lender to pay, rather than receive, compensation even when it is the borrower who opts to prepay. When applying IFRS 9, only those financial instruments with “simple” cash flows (that represent cash flows that are solely payments of principal and interest) are supposed to be eligible to be measured at amortized cost or at fair value through other comprehensive income.

The proposed tweaks to IFRS 9 would allow particular financial assets with these kinds of negative compensation features to be measured at amortized cost or at fair value through other comprehensive income, provided certain conditions are met.

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