Sue Lloyd, Vice chair, IASB
Sue explained that the IASB takes the accounting challenges faced by preparers of IFRS financial statements very seriously and it is working hard to provide relief for some of the consequences that IBOR reform may have.
She emphasized that the IASB’s objective in providing this relief is focused on the need to provide useful information to users of financial statements. Any relief provided is likely to focus on scenarios where the current standards may not provide useful information to users rather than situations in which the current standards would result in profit or loss volatility or administrative burdens to preparers. If there are economic consequences due to IBOR reform, this information should be presented to users.
Sue also explained the reasons for splitting the IASB’s IBOR reform project into two parts; ‘phase one’ focusing on the pre-reform effects and ‘phase two’ focusing on the post-reform effects. The IASB received negative feedback following the urgent October 2008 amendments to IAS 39 – Financial instruments: Recognition and Measurement (IAS 39) in which time-to-market was prioritized over due process. With IBOR reform driving an equally urgent need for amendments, the IASB is wary of delving into the post-reform issues, which are slightly less urgent than the pre-reform ones, without allowing for the necessary consultation and analysis.
Sue briefly discussed the May 2019 exposure draft (ED) on IBOR reform.
She also indicated that the Board is ready to start work on ‘phase two’ and encouraged participants to include potential ‘phase two’ focus areas in their comment letters on the ED. However, she stressed that it would be more useful for the staff to receive ‘phase two’ comments that focus on the key aspects rather than a long list of topics. This will allow the staff to prioritize the most urgent issues. Some of the key focus areas could include:
- Guidance on distinguishing IBOR related changes that should result in de-recognition from those which should result in modification accounting
- What should happen when cash flows change, but the name of the benchmark component does not (e.g., the Euro Interbank Offer Rate [Euribor])
- Whether changes in hedge documentation should result in a new hedge relationship
- The impact on leases and insurance
Participants indicated that their IBOR projects are active and likely to result in contract modifications before the end of 2019. This highlights the urgent need for guidance.
Finally, Sue noted that while the IASB is engaged in talks with the US Financial Accounting Standards Board (FASB) in respect of IBOR reform, the outcome of the two standard setters’ relief is likely to differ due to differences in the underlying accounting models for affected contracts.
Dynamic risk management
Sue explained that the next step for the project (expected in the second half of 2019) will not be a discussion paper in the conventional sense. Instead, the proposed core model will be presented in a paper. The IASB will then conduct outreach with stakeholders to assess whether:
- Preparers believe that the proposed model is operational
- Users believe that the proposed models impact on performance measurement and the enhanced disclosures will result in more useful information
Following the outreach, the Board will decide on the next steps for the project.
Financial instruments with characteristics of equity (FICE)
The project remains important, but is currently receiving reduced attention from the Board, given the need to focus on the IBOR reform and dynamic risk management projects.
The staff have received feedback on the FICE discussion paper which showed that it could have a larger impact than expected. Key topics arising from the feedback included:
- Support for the idea of changing the current liability or equity classification guidance, but a lack of agreement on the nature and extent of the changes
- Support for enhanced disclosure
- Support for having only two categories — liability or equity
- Concern about the ‘amount’ criterion
The staff will present the feedback to the Board during the upcoming IASB meetings, following which the project direction will be decided.
Recent Interpretations Committee activities
Sue discussed the changes to the Due Process Handbook relating to allowing preparers ‘sufficient time’ to implement IFRS Interpretation Committee (IFRS IC or the Committee) agenda decisions. The Board is firm in its view that ‘sufficient time’ is a matter of months rather than years.
Amendments to IFRS 17 – Insurance contracts (IFRS 17)
Sue indicated that the exposure draft on proposed amendments to IFRS 17, which was published later in June 2019, would propose amendments that will affect banks (and other entities) which issue:
- Mortgage loans with features whereby the borrower can settle the loan with the bank by ceding the property to the bank. Issuers would have a policy choice to scope these contracts into either IFRS 9 or IFRS 17.
- Credit cards which provide the holder with insurance over purchases made using the card — issuers would have to scope these credit cards out of IFRS 17 if they are not priced based on the specific risks of the customer.