International Financial Reporting Standard IFRS 9

International Financial Reporting Standard IFRS 9

Financial Instruments

July 2014

BASIS FOR CONCLUSIONS

IFRS 9 BC

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CONTENTS

IFRS 9 BASIS FOR CONCLUSIONS

BASIS FOR CONCLUSIONS ON IFRS 9 FINANCIAL INSTRUMENTS

INTRODUCTION SCOPE (Chapter 2) RECOGNITION AND DERECOGNITION (Chapter 3) CLASSIFICATION (Chapter 4) MEASUREMENT (Chapter 5) HEDGE ACCOUNTING (Chapter 6) EFFECTIVE DATE AND TRANSITION (Chapter 7) ANALYSIS OF THE EFFECTS OF IFRS 9 GENERAL DISSENTING OPINIONS APPENDIX A Previous dissenting opinions APPENDIX B Amendments to the Basis for Conclusions on other Standards

from paragraph

BCIN.1 BCZ2.1 BCZ3.1

BC4.1 BCZ5.1 BC6.76

BC7.1 BCE.1 BCG.1

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IFRS 9 FINANCIAL INSTRUMENTS--JULY 2014

Basis for Conclusions on IFRS 9 Financial Instruments

This Basis for Conclusions accompanies, but is not part of, IFRS 9.

IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement. When revised in 2003 IAS 39 was accompanied by a Basis for Conclusions summarising the considerations of the IASB as constituted at the time, in reaching some of its conclusions in that Standard. That Basis for Conclusions was subsequently updated to reflect amendments to the Standard. For convenience the IASB has incorporated into its Basis for Conclusions on IFRS 9 material from the Basis for Conclusions on IAS 39 that discusses matters that the IASB has not reconsidered. That material is contained in paragraphs denoted by numbers with the prefix BCZ. In those paragraphs cross-references to the Standard have been updated accordingly and minor necessary editorial changes have been made. In 2003 and later some IASB members dissented from the issue of IAS 39 and subsequent amendments, and portions of their dissenting opinions relate to requirements that have been carried forward to IFRS 9. Those dissenting opinions are set out in an appendix after this Basis for Conclusions.

Paragraphs describing the IASB's considerations in reaching its own conclusions on IFRS 9 are numbered with the prefix BC.

Introduction

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This Basis for Conclusions summarises the considerations of the International Accounting Standards Board (IASB) when developing IFRS 9 Financial Instruments. Individual IASB members gave greater weight to some factors than to others.

The IASB has long acknowledged the need to improve the requirements for financial reporting of financial instruments to enhance the relevance and understandability of information about financial instruments for users of financial statements. That need became more urgent in the light of the global financial crisis that started in 2007 (`the global financial crisis'), so the IASB decided to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety as expeditiously as possible. To do this the IASB divided the project into several phases. In adopting this approach, the IASB acknowledged the difficulties that might be created by differences in timing between this project and others, in particular the project on insurance contracts.

Classification and measurement

IFRS 9 is a new Standard that deals with the accounting for financial instruments. When developing IFRS 9, the IASB considered the responses to its 2009 Exposure Draft Financial Instruments: Classification and Measurement (the `2009 Classification and Measurement Exposure Draft').

That 2009 Classification and Measurement Exposure Draft contained proposals for all items within the scope of IAS 39. However, some respondents said that the IASB should finalise its proposals on the classification and measurement of financial assets while retaining the existing requirements for financial liabilities (including the requirements for embedded derivatives and the fair value option) until the IASB had more fully considered the issues relating to financial

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IFRS 9 BASIS FOR CONCLUSIONS

BCIN.5 BCIN.6 BCIN.7

BCIN.8 BCIN.9

liabilities. Those respondents pointed out that the IASB had accelerated its project on financial instruments because of the global financial crisis, which had placed more emphasis on issues in the accounting for financial assets than for financial liabilities. They suggested that the IASB should consider issues related to financial liabilities more closely before finalising the requirements for classification and measurement of financial liabilities.

The IASB noted those concerns and, as a result, in November 2009 it finalised the first chapters of IFRS 9, dealing with the classification and measurement of financial assets. In the IASB's view, requirements for classification and measurement are the foundation for a financial reporting standard on accounting for financial instruments, and the requirements on associated matters (for example, on impairment and hedge accounting) have to reflect those requirements. In addition, the IASB noted that many of the application issues that arose in the global financial crisis were related to the classification and measurement of financial assets in accordance with IAS 39.

Thus, financial liabilities, including derivative liabilities, initially remained within the scope of IAS 39. Taking that course enabled the IASB to obtain further feedback on the accounting for financial liabilities, including how best to address accounting for changes in own credit risk.

Immediately after issuing IFRS 9, the IASB began an extensive outreach programme to gather feedback on the classification and measurement of financial liabilities. The IASB obtained information and views from its Financial Instruments Working Group (FIWG) and from users of financial statements, regulators, preparers, auditors and others from a range of industries across different geographical regions. The primary messages that the IASB received were that the requirements in IAS 39 for classifying and measuring financial liabilities were generally working well but that the effects of the changes in a liability's credit risk ought not to affect profit or loss unless the liability is held for trading. As a result of the feedback received, the IASB decided to retain almost all of the requirements in IAS 39 for the classification and measurement of financial liabilities and carry them forward to IFRS 9 (see paragraphs BC4.46?BC4.53).

By taking that course, the issue of accounting for the effects of changes in credit risk does not arise for most liabilities and would remain only in the context of financial liabilities designated as measured at fair value under the fair value option. Thus, in May 2010, the IASB published the Exposure Draft Fair Value Option for Financial Liabilities (the `2010 Own Credit Risk Exposure Draft'), which proposed that the effects of changes in the credit risk of liabilities designated under the fair value option would be presented in other comprehensive income. The IASB considered the responses to the 2010 Own Credit Risk Exposure Draft and finalised the requirements, which were then added to IFRS 9 in October 2010.

In November 2012 the IASB published the Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 (Proposed amendments to IFRS 9 (2010)) (the `2012 Limited Amendments Exposure Draft'). In that Exposure Draft, the

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IFRS 9 FINANCIAL INSTRUMENTS--JULY 2014

IASB proposed limited amendments to the classification and measurement requirements in IFRS 9 for financial assets with the aims of:

(a) considering the interaction between the classification and measurement of financial assets and the accounting for insurance contract liabilities;

(b) addressing specific application questions that had been raised by some interested parties since IFRS 9 was issued; and

(c) seeking to reduce key differences with the US national standard-setter, the Financial Accounting Standards Board's (FASB) tentative classification and measurement model for financial instruments.

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Accordingly, the 2012 Limited Amendments Exposure Draft proposed limited amendments to clarify the application of the existing classification and measurement requirements for financial assets and to introduce a fair value through other comprehensive income measurement category for particular debt investments. Most respondents to the 2012 Limited Amendments Exposure Draft--as well as participants in the IASB's outreach programme--generally supported the proposed limited amendments. However, many asked the IASB for clarifications or additional guidance on particular aspects of the proposals. The IASB considered the responses in the comment letters and the information received during its outreach activities when it finalised the limited amendments in July 2014.

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Amortised cost and impairment methodology

In October 2008, as part of a joint approach to dealing with the financial reporting issues arising from the global financial crisis, the IASB and the FASB set up the Financial Crisis Advisory Group (FCAG). The FCAG considered how improvements in financial reporting could help to enhance investor confidence in financial markets. In its report, published in July 2009, the FCAG identified weaknesses in the current accounting standards for financial instruments and their application. Those weaknesses included the delayed recognition of credit losses on loans (and other financial instruments) and the complexity of multiple impairment approaches. One of the FCAG's recommendations was to explore alternatives to the incurred credit loss model that would use more forward looking information.

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Following a Request for Information that the IASB posted on its website in June 2009, the IASB published, in November 2009, the Exposure Draft Financial Instruments: Amortised Cost and Impairment (the `2009 Impairment Exposure Draft'). Comments received on the 2009 Impairment Exposure Draft and during outreach indicated support for the concept of such an impairment model, but highlighted the operational difficulties of applying it.

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In response, the IASB decided to modify the impairment model proposed in the 2009 Impairment Exposure Draft to address those operational difficulties while replicating the outcomes of that model that it proposed in that Exposure Draft as closely as possible. These simplifications were published in the Supplementary Document Financial Instruments: Impairment in January 2011, however the IASB did not receive strong support on these proposals.

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