© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

IFRS NEWSLETTERFINANCIAL INSTRUMENTS

Issue 14, July 2013

We welcome the IASB’s tentative decision to defer the mandatory effective date of IFRS 9 but also to allow early application of the ‘own credit’ requirements in isolation. This should give entities greater confidence that they will have sufficient time to prepare for adoption of the final standard while enabling a quicker and more focused response to the ‘own credit’ issue.

Andrew VialsKPMG’s global IFRS financial instruments leader

The future of IFRS financial instruments accounting

This edition of IFRS Newsletter: Financial Instruments highlights the discussions of the IASB in July 2013 on the financial

instruments (IAS 39 replacement) project.

Highlights

Classification and measurement

l    The IASB tentatively decided to allow early application of the own credit requirements before the completed version of IFRS 9 is issued.

l    The IASB also tentatively decided to defer the effective date of IFRS 9 to an unspecified date pending the finalisation of the impairment and classification and measurement phases of the

project.

Impairment

l    The IASB and the FASB (the Boards) considered feedback received on their respective exposure drafts.

l    The staff will provide a more detailed analysis of feedback received on specific issues and a complete analysis of the final results from the IASB fieldwork during the September meeting. In

addition, the staff are expected to provide a roadmap for the project going forward.

Macro hedge accounting

l    The forthcoming discussion paper (DP) will consider the alternative of presenting the revaluation effect from dynamic risk management in other comprehensive income (OCI) rather than through profit or loss.

l    The forthcoming DP will consider the types of disclosures that may be required.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2

WORK CONTINUES TO ASSESS CONSTITUENT FEEDBACK

The story so far ...Since November 2008, the IASB has been working to replace its financial instruments standard (IAS 39 Financial Instruments: Recognition and Measurement) with an improved and simplified standard. The IASB structured its project in three phases:

Phase 1: Classification and measurement of financial assets and financial liabilities

Phase 2: Impairment methodology

Phase 3: Hedge accounting.

In December 2008, the FASB added a similar project to its agenda; however, the FASB has not followed the same phased approach as the IASB.

The IASB issued IFRS 9 Financial Instruments (2009) and IFRS 9 (2010), which contain the requirements for the classification and measurement of financial assets and financial liabilities. Those standards have an effective date of 1 January 2015. In November 2012, the IASB issued an exposure draft (ED) on limited amendments to the classification and measurement requirements of IFRS 9 (the C&M ED).

The Boards were working jointly on a model for the impairment of financial assets based on expected credit losses, which would replace the current incurred loss model in IAS 39. The Boards previously published their own differing proposals in November 2009 (the IASB) and in May 2010 (the FASB), and published a joint supplementary document on recognising impairment in open portfolios in January 2011. However, at the July 2012 joint meeting the FASB expressed concern about the direction of the joint project and in December 2012 issued an ED of its own impairment model, the current expected credit loss model. Meanwhile, the IASB continued to develop separately its three-bucket impairment model, and issued a new ED in March 2013 (the impairment ED).

The IASB has split the hedge accounting phase into two parts: general hedging and macro hedging. It issued a review draft of a general hedging standard in September 2012, and is working towards issuing a final standard on general hedging and a DP on macro hedging in 2013.

What happened in July 2013?The IASB discussed a project plan for joint redeliberations with the FASB on classification and measurement. The IASB confirmed that it will defer the effective date of IFRS 9 from 1 January 2015 to a date yet to be determined and allow entities to early adopt only the own credit requirements in IFRS 9. This will be achieved by including amendments in the forthcoming version of IFRS 9 that will incorporate the new general hedging model.

The Boards also discussed the main messages received in the comment letters and feedback from the outreach activities on the exposure draft Financial Instruments: Expected Credit Losses (impairment ED) and the proposed Accounting Standard Update Financial Instruments – Credit Losses (FASB impairment proposals), but did not make any decisions on this topic.

In addition, the IASB continued its series of education sessions on macro hedge accounting. The Board discussed an alternative of presenting the revaluation effect from dynamic risk management in OCI rather than profit or loss, as well as the types of disclosures that may be required.

Contents

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 3

CLASSIFICATION AND MEASUREMENT

What was discussed during the July meeting?At their previous joint meetings in May and June 2013, the IASB and the FASB (the Boards) discussed a summary of the feedback received from respondents to the C&M ED and the FASB’s proposed Accounting Standards Update Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (the FASB R&M proposals). No tentative decisions were made at these meetings.

During the July 2013 meeting, the staff announced that a plan for joint redeliberations has been developed which reflects the differing scope of each Board’s proposal – i.e. some topics will be redeliberated jointly, from September 2013 onwards, whereas others will be redeliberated separately – and the topics for joint redeliberation were outlined. The staff anticipated that the IASB’s redeliberations, including those with the FASB, would be substantially complete by the end of 2013.

The technical matters raised in the July meeting were:

• whether the own credit requirements in IFRS 9 should be made available for early application before the completed version of IFRS 9 is issued; and

• whether the effective date of IFRS 9 should be deferred to an unspecified date pending the finalisation of the impairment and classification and measurement phases.

Early application of own credit requirements

The IASB tentatively decided to allow early application of the own credit requirements before the completed version of IFRS 9 is issued.

What’s the issue?

The own credit requirements, added to IFRS 9 in 2010, require that when a financial liability is designated as at fair value through profit or loss (FVTPL) under the fair value option, the change in the fair value of the liability that is attributable to changes in the entity’s credit risk (i.e. ‘own credit’) should be recognised in OCI. Amounts presented in OCI cannot subsequently be transferred to profit or loss. Currently, an entity is permitted to early apply these requirements only if it also early applies all of the other classification and measurement requirements in IFRS 9 (2010).

The C&M ED proposed allowing entities to early apply the own credit requirements in isolation once the completed version of IFRS 9 (i.e. including the classification and measurement, impairment and general hedge accounting chapters) is issued.

What did the staff recommend?

The staff considered the feedback received on the proposal in the C&M ED.

Support for the application of own credit requirements in isolation

Feedback received

Nearly all respondents supported the proposal that entities would be permitted to early apply the own credit requirements in IFRS 9 in isolation. Most suggested incorporating these requirements into IAS 39, considering that the effective date of IFRS 9 is likely to be deferred.

A limited number of respondents did not support making the own credit requirements available for early application as it could result in reduced comparability between entities.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4

Support for the application of own credit requirements in isolation

IASB staff consideration

The staff noted that the IASB’s proposal was based on the expectation that there would not be a significant time lag compared to modifying the early application guidance in IFRS 9 (2010) and later versions of IFRS 9.

Also, in spite of the feedback received, the IASB staff considered it inappropriate to amend IAS 39 because:

• that standard is being replaced by IFRS 9;

• such an amendment would require care to ensure that there were no unintended consequences because the new own credit requirements were drafted in the context of IFRS 9, not IAS 39;

• due process requirements would result in further delay; and

• creation of new versions of IAS 39 could result in complexity and confusion.

Recommendation

Considering the feedback received to make the requirements available as soon as possible, the staff believed that the early application guidance in IFRS 9 should be amended to permit entities to early apply only the own credit requirements when the IASB adds the general hedge accounting chapter to IFRS 9 (expected in the next few months).

Reclassification of own credit gains and losses

Feedback received

Some respondents stated that recycling own credit gains and losses from OCI into profit or loss should be required when the liability is derecognised. This would be consistent with:

• the accounting for financial liabilities at amortised cost – because when those liabilities are derecognised, any own credit gain or loss is part of the gain or loss recognised in profit or loss;

• the FASB R&M proposals, which propose that the accumulated own credit gains or losses are recycled when the financial liability is derecognised; and

• the proposals in the C&M ED to require recycling of gains and losses for investments in debt instruments mandatorily measured at fair value through OCI.

IASB staff consideration

The staff believed that the IASB should not consider the recycling of own credit gains and losses because:

• this was not exposed for comment as part of this C&M ED;

• the question of the use of OCI and recycling remains open and is covered in the recent A Review of the Conceptual Framework for Financial Reporting discussion paper1 (conceptual framework DP); and

• although the FASB’s proposals include recycling, the Boards are seeking only to reduce key differences in particular areas of classification and measurement.

1 For more information, refer to the IASB’s Discussion Paper: A Review of the Conceptual Framework for Financial Reporting

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 5

Reclassification of own credit gains and losses

The staff also noted that the IASB has always been mindful of the need to minimise the extent of change to IFRS 9 and therefore the C&M ED proposed only limited amendments to IFRS 9.

Recommendation

The staff recommended that the IASB should not consider the recycling of own credit gains and losses.

What did the IASB discuss?

Some Board members asked whether the outcome of decisions taken on the conceptual framework project could result in a reconsideration of prohibition on recycling own credit gains and losses – for example, if a decision was taken in the conceptual framework project to recognise a gain when a liability is bought back and a gain is realised. The staff responded that it was a broader question for the IASB to consider, as standards in addition to IFRS 9 could also be impacted by the decisions taken by the IASB in the conceptual framework project.

A few Board members saw some advantages in incorporating the own credit requirements into IAS 39 and expediting the associated due process for its approval. However, most Board members disagreed with amending IAS 39 and suggested amending IFRS 9, as proposed by the staff, to avoid any further delays.

What did the IASB decide?

The IASB agreed with the staff recommendation and tentatively decided that the early application guidance in IFRS 9 should be amended to permit entities to early apply only the own credit requirements in IFRS 9 when the IASB adds the hedge accounting chapter to IFRS 9. The IASB also agreed with the staff recommendation not to reconsider further whether own credit gains and losses should be recycled on derecognition.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 6

The IASB tentatively decided to defer the effective date of IFRS 9 to an unspecified date pending the finalisation of the impairment and classification and measurement phases of the project.

Deferral of mandatory effective date

What’s the issue?

The mandatory effective date of 1 January 2015 was intended to apply to all phases of IFRS 9, but the IASB has made slower than expected progress towards finalising the standard.

Many respondents to the C&M ED asked the IASB to confirm that the mandatory effective date of IFRS 9 would be deferred, particularly considering the lead time needed to implement the proposals on expected credit losses2. These respondents noted that, even if the remaining phases of IFRS 9 were completed by the end of 2013, there would not be sufficient time to adhere to the IASB practice of allowing a minimum of 18 months between the finalisation of a standard and the mandatory effective date. Some respondents, notably insurers and standard setters, also requested that the mandatory effective date be aligned with the mandatory effective date of a new insurance contracts standard3.

What did the staff recommend?

The staff noted that the C&M ED did not specifically ask for feedback on the mandatory effective date of IFRS 9, whereas the impairment ED, published in March 2013, explicitly requested feedback regarding the lead time that would be required.

The staff also noted that it would not be possible to recommend an appropriate mandatory effective date for IFRS 9 before finalising details of the expected credit loss approach. The IASB will only be able to determine an exact mandatory effective date after the redeliberations on impairment and classification and measurement have been completed, and the issue date of the final version of IFRS 9 is known.

The staff recommended that the IASB confirm that the current mandatory effective date of 1 January 2015 will be deferred when the forthcoming hedge accounting chapter of IFRS 9 is issued, and include an explanation in the basis for conclusions that the mandatory effective date will be determined once the outstanding phases of IFRS 9 have been completed. The staff also recommended that the likely lead time to be allowed following the issuance of the final version of IFRS 9 should be indicated. The staff suggested that this lead time should be about three years.

What did the IASB discuss?

One Board member expressed concern regarding a lead time of three years from finalising the standard to its effective date. The staff responded that this was merely a suggestion and not intended to be specific. It was requested that the staff refrain from expressing an estimated permissible lead time – such as the suggested three years – and instead state that sufficient time will be allowed.

What did the IASB decide?

The IASB agreed with the staff recommendation and tentatively decided that the current mandatory effective date of 1 January 2015 will be deferred and that the mandatory effective date should be left open pending the finalisation of the impairment and classification and measurement requirements.

2 The feedback received in response to the impairment ED indicated that preparers would need at least three years to implement the proposed expected credit loss model.

3 For more information on the new Insurance ED, refer to our In the Headlines – Insurance Contracts.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 7

IMPAIRMENT

What’s the background?The IASB’s exposure draft Financial Instruments: Expected Credit Losses (the impairment ED) published on 7 March 2013 proposes replacing the current ‘incurred loss’ model with an ‘expected loss’ approach, which means that a loss event would no longer need to occur before an impairment allowance is recognised.

In general, the proposed expected loss model uses a dual measurement approach, as follows.

12-monthexpected

credit losses*

Transferif the credit risk on the financialasset has increased significantlysince initial recognition

Lifetimeexpected

credit losses

Move backif transfer condition above is no

longer met

* 12-month expected credit losses are defined as the expected credit losses that result from those default events on the financial instrument that are possible within the 12 months after the end of the reporting period.

Accordingly, under the impairment ED, at initial recognition and subsequently, assets would attract a loss allowance equal to expected credit losses associated with the possibility of default over the next 12 months. However, if the credit risk on the asset has increased significantly since initial recognition, the loss allowance would be increased to reflect the full lifetime expected credit losses on the asset.

The proposals in the impairment ED are different from the proposals in the FASB proposed Accounting Standards Update Financial Instruments – Credit Losses (FASB impairment proposals) published in December 2012. The FASB proposals include a single measurement objective of recognising full lifetime expected credit losses.

What has happened since the impairment ED was issued in March 2013?The comment period for the impairment ED closed on 5 July 2013, with 175 comment letters submitted to the IASB. The comment period for the FASB impairment proposals closed on 31 May 2013, with 362 comment letters submitted to the FASB. The Boards have also conducted outreach meetings with interested parties including preparers, auditors, regulators, standard setters and users of financial statements. In addition, the IASB is conducting detailed fieldwork to understand the potential impact of the proposals. Fifteen participants are involved in the fieldwork which is still ongoing.

What happened in July?The staff provided the Boards with a summary of the main messages received in the comment letters and feedback from the outreach activities on the IASB impairment ED and the FASB impairment proposals.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 8

Issue Summary of feedback/results

The IASB proposals for a dual measurement approach to expected credit losses that depends on deterioration in credit risk since initial recognition

The vast majority of the respondents – including the majority of non-US users that participated in the outreach meetings – supported the expected credit loss approach outlined in the impairment ED. In general, respondents believed that the approach achieves an appropriate balance between faithful representation of the underlying economics and the costs of implementation.

Most respondents agreed with the relative approach in the proposals (i.e. that the evaluation as to whether an increase in credit risk is significant would be assessed relative to the credit risk of the instrument at initial recognition rather than against an absolute scale). Most also agreed that the assessment of when to recognise lifetime expected credit losses should only consider changes in credit risk (based on probability of default occurring) rather than changes in expected credit losses (or in loss given default).

However, many of the respondents who supported the IASB model (including users, regulators and standard setters) also recommended providing more detailed and specific guidance on when assets should move to the lifetime expected losses measurement category to reduce subjectivity in application.

Many respondents agreed with the decision not to define ‘default’ – on the basis that the point of default varies between different products. In contrast, many other respondents (including many preparers) recommended including more guidance on what would constitute a default event.

Only a small number of comment letters – but the majority of US users that participated in the outreach meetings – supported a model that always recognises lifetime expected credit losses from initial recognition – i.e. one similar to that proposed by the FASB.

In addition, a small number of respondents supported neither the IASB nor the FASB model and suggested other alternatives instead.

Most of the respondents who supported the IASB model over the FASB model took this view because they believed that the IASB model better reflects the economics of a lending transaction (since the initial credit loss expectations are priced into the assets when originated or purchased).

The Boards considered feedback received on their respective exposure drafts.

What feedback did the Boards receive?

Feedback on the IASB impairment ED

The messages presented in the July 2013 meeting regarding the feedback received on the IASB impairment ED included the following.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 9

Issue Summary of feedback/results

Scope of the proposals

Financial assets mandatorily measured at FVOCI

Most respondents agreed that financial assets mandatorily measured at fair value through other comprehensive income (FVOCI) – as proposed in the C&M ED – should be in the scope of the proposals, and supported having a single impairment model for all financial instruments – including the FVOCI category.

However, some respondents proposed including practical expedients for these financial assets. Several practical expedients were suggested, including the FASB’s proposal that entities could elect not to recognise a loss allowance if the fair value of the financial asset is greater than or equal to its amortised cost and the expected credit losses are insignificant.

Loan commitments

The vast majority of the respondents agreed that loan commitments should be in the scope of the proposals.

However, many respondents supported measuring expected credit losses over the behavioural life of the instrument, rather than over the contractual life of the instrument as suggested in the impairment ED – i.e. based only on the period for which the entity has a present contractual obligation. They believe that the approach in the impairment ED does not reflect the actual losses resulting from these instruments or credit risk management policies.

Low credit risk simplification

Respondents had mixed views on the suggested simplification that a financial instrument is not considered to have suffered a significant deterioration in credit risk if it has low credit risk – e.g. instruments with an ‘investment grade’ credit rating.

Most respondents agreed with the simplification, but many of these respondents also requested additional clarifications on applying this simplification – e.g. on the interaction between external and internal ratings.

Some respondents – including many regulators – did not agree with the simplification, because they believed that the significant deterioration criterion should be applied consistently across all instruments.

30-day rebuttable presumption

Most respondents agreed with the proposed rebuttable presumption that the significant deterioration in credit risk criterion would be met when contractual payments are more than 30 days past due.

Some respondents – in particular regulators and standard setters – did not agree with the 30-day rebuttable presumption, arguing that delinquency is a lagging indicator and that this presumption may therefore result in the recognition of lifetime expected credit losses being delayed.

In addition, some respondents were concerned that this presumption would be applied as a ‘bright line’ and so would, in some cases, be inconsistent with applying the general significant deterioration principle.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 10

Issue Summary of feedback/results

Discount rate used for the calculation of expected credit losses

Most respondents did not agree with the proposals that the discount rate used for the calculation of expected credit losses could be any reasonable rate between the risk-free rate and the effective interest rate (EIR); they recommended that only the EIR should be used to discount expected credit losses.

Many respondents (including preparers, regulators and standard setters) considered the suggested range of interest rates to be too broad and argued that there is insufficient guidance on the appropriate rate to use within the range.

This represents a change from the responses received in the past from preparers to the supplementary document to the exposure draft Financial Instruments: Amortised Cost and Impairment, which was issued in January 2011, in which respondents generally agreed with the proposal to allow the use of a range of interest rates for operational reasons.

Interest revenue The impairment ED proposed that interest revenue would usually be calculated using the EIR method on the gross carrying amount of the financial asset – i.e. the carrying amount before deducting the allowance balance. However, for financial assets that have objective evidence of impairment at the end of the reporting period, interest revenue would be calculated on the net carrying amount – i.e. after deducting the allowance balance.

Respondents had mixed views on this proposal. The vast majority of respondents agreed that, conceptually, interest revenue should be calculated on the net basis for financial assets that have objective evidence of impairment. However, most of these respondents suggested alternatives that they believed would be easier to apply:

• some respondents proposed calculating interest income on the gross carrying amount for all financial assets; while

• others proposed a non-accrual approach, as included in the FASB impairment proposals – which is also similar to regulatory requirements in some jurisdictions – under which interest would not be accrued on financial assets for which the entity does not expect to collect substantially all of the principal and interest.

In the feedback received from users and preparers during outreach, users generally supported the change in the calculation of interest revenue when assets have objective evidence of impairment. Conversely, preparers expressed mixed views on the proposal. Those that did not support the proposal expressed a preference for a non-accrual approach.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 11

Issue Summary of feedback/results

Modifications Most respondents agreed with the proposals on modifications according to which, when the modification does not result in derecognition of the financial asset, the entity would recalculate its gross carrying amount using the original EIR and recognise a modification gain or loss.

However, many respondents requested specific guidance on when a modification results in derecognition, because such guidance is not currently available in IFRS 9 or IAS 39 and this may result in diversity in practice.

Some respondents proposed limiting the guidance on modifications to credit-impaired assets.

Simplified approach for trade and lease receivables

The vast majority of respondents agreed with the simplified approach for trade and lease receivables under which an entity would always measure a lifetime expected credit loss allowance for these assets, because it makes the model easier to operationalise.

Financial assets that are credit-impaired at initial recognition

Most respondents supported the proposals for purchased or originated credit-impaired assets – i.e. that the initial expected credit losses would be included in the estimated cash flows when computing the EIR.

However, many respondents preferred a gross-up approach (which is similar to the approach in the FASB proposals), under which an allowance for expected credit losses would be recognised at initial recognition with a corresponding increase in the gross carrying amount of the asset.

Disclosures Most respondents generally agreed with the objectives of the proposed disclosures, but many respondents expressed concern that some of these requirements are excessive, burdensome, too prescriptive, complex or inoperable. Therefore, many respondents suggested making the disclosures more principles-based, less detailed and more consistent with credit-risk management practices.

However, users generally stated the importance of detailed disclosures, and noted that they want even more detailed information about the assumptions and information used to develop expected credit loss estimates and about changes in expected credit losses caused by changes in the portfolio and credit migration.

Also, to improve comparability, users suggested a variety of additional disclosures and standardisation of disclosures.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 12

Issue Summary of feedback/results

Transition and effective date

Transition

Most respondents agreed with the transition requirements, but some requested additional clarifications and practical ways to assess whether there had been a significant deterioration in credit risk at transition.

Effective date

The impairment ED does not mention an effective date, but notes that the effective date would depend on the lead time needed to implement the proposals, and therefore requested specific feedback on the lead time.

Respondents generally believed that a period of three years is needed to implement the proposals, which would require new systems to be designed, built and tested. By contrast, some believed that two years might be enough while a few thought that four to five years would be required.

Operability of the model

Most preparers (from both financial and non-financial sectors) considered the proposals to be operable because models and data that are currently used in credit risk management systems and for regulatory purposes can be leveraged during implementation.

Numerical impacts and results of fieldwork4

The fieldwork to date indicates that the results of the proposed model in the impairment ED are more sensitive to changing economic conditions than the existing IAS 39 model.

Based on a hypothetical scenario involving a changing macro-economic environment, for almost all participants, the amount of credit allowances would increase on transition and through the entire economic cycle compared with the existing IAS 39 model.

The estimated effects of the proposed model on the credit loss allowance compared with IAS 39 were quantified as follows.

Mortgage portfolios

Increase under the impairment ED compared with IAS 39

On transitionWorst economic forecast scenario

Total allowance 30% to 250% 80% to 400%

Allowance measured 130% to 730% 450% to 540%equal to lifetime expected credit losses

Other portfolios

Increase under the impairment ED compared with IAS 39

On transitionWorst economic forecast scenario

Total allowance 25% to 60% 50% to 150%

Allowance measured 50% to 140% 110% to 210%equal to lifetime expected credit losses

4 Since the fieldwork is not yet completed, the final results may differ from those presented here.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 13

Issue Summary of feedback/results

Numerical impacts and results of fieldwork (continued)

Factors affecting the change in the allowance under the impairment ED compared with IAS 39 are:

• the amount of incurred but not reported (IBNR) allowance recognised under IAS 39;

• the timing of recognition of impairment on an individual basis under IAS 39; and

• the relevant jurisdiction – different jurisdictions have different factors that affect the allowance (e.g. prepayment patterns).

The fieldwork has also examined the numerical effect of calculating a full lifetime expected credit loss allowance as in the FASB proposals. The IASB staff commented that the increase in the allowance under the full lifetime expected credit losses approach was found to be at least 100% higher than the increase in the allowance under the impairment ED. Participants also noted that the results of a full lifetime expected credit loss model were more volatile and allowances increased particularly in a worsened economic period.

Feedback on the FASB impairment proposals

Based on feedback received on the FASB impairment proposals, the FASB reported significant differences between the views of investors and users and those of preparers.

Investors and users

Most investors and users (by a margin of nearly three to one) preferred a model that recognises all expected credit losses over models that:

• include a threshold that needs to be met before the recognition of all expected credit losses (as proposed in the impairment ED); or

• recognise only some expected credit losses.

Most investors and users had significant concerns about delays in the recognition of credit loss allowances.

Preparers Most preparers, however, preferred a model that either recognises only some expected credit losses or includes a threshold that needs to be met before the recognition of all expected credit losses over a model that recognises all expected credit losses.

Most preparers objected to the model in the FASB impairment proposals because they believe that:

• it would result in recognition of day one losses that do not represent the economics of a lending transaction since the initial credit loss expectations are priced into the asset at the date of the transaction; and

• it would fail to match the timing of recognition of credit loss expenses with the timing of recognition of compensation for expected credit losses as part of interest income.

In addition, financial institutions raised significant concerns about the potential impact of the proposed FASB model on regulatory capital.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 14

During the outreach process, the FASB clarified that under its proposals, entities are not expected to forecast economic conditions over the entire life of an asset but only to update historical loss experience for:

• current conditions; and

• reasonable and supportable forecasts being made over a shorter and more reliable period of time.

For periods beyond those that can be reasonably and supportably forecast, the FASB clarified that entities could revert to a historical average loss experience or freeze the furthest reasonable and supportable forecast. On this basis, the FASB reported that nearly all preparers participating in field visits and outreach sessions indicated that the measurement of lifetime expected credit losses was operational.

Based on initial results of tests made with preparers applying current US GAAP, the FASB staff commented that loss allowances might:

• increase by about 40% on transition to the FASB proposals; or

• decrease by about 15% on transition to the IASB proposals.

The case for convergenceMany respondents supported an objective of achieving a single converged standard on accounting for expected credit losses.

However, there were differences in views between respondents to the IASB and respondents to the FASB.

IASB respondents

Many respondents stated that:

• it is more important that the IASB finalises the proposed model in a timely manner, with or without convergence;

• convergence is preferable but should not be achieved at all costs;

• the preference for a converged model is subject to it being similar to the model proposed in the impairment ED; and

• convergence should not be achieved through disclosure – i.e. if the Boards reach different measurement solutions, preparers should not effectively be forced to implement both by requiring disclosures that reconcile between the two.

FASB respondents

Respondents in general believe that convergence is critical to the success of the global capital markets because without convergence:

• comparability will suffer – it will be more difficult for investors to compare financial statements prepared under US GAAP and financial statements prepared under IFRS;

• financial institutions that prepare financial statements under US GAAP will be at a disadvantage in respect of regulatory capital compared with financial institutions that prepare financial statements under IFRS; and

• preparers that prepare financial statements under both US GAAP and IFRS will face significant operational challenges.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 15

What did the IASB discuss?The Boards members considered and discussed the summary of the main points arising from the comment letters and the feedback from other outreach activities. No decisions were made.

The staff are expected to provide a roadmap in September for the project going forward.

Next stepsAt the September 2013 meeting the staff will present a more detailed analysis of feedback received on specific issues and a complete analysis of the final results from the IASB fieldwork. Furthermore, the staff are expected to provide a roadmap for the project going forward.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 16

MACRO HEDGE ACCOUNTING

What happened in July? In July, the IASB continued its series of educational meetings on the macro hedging project. It discussed two items:

• holistic application of the portfolio revaluation approach through OCI, rather than through profit or loss; and

• disclosures about an entity’s dynamic risk management activities and the application of the portfolio revaluation approach.

The Board was not asked to make any decisions at this meeting.

The forthcoming discussion paper will consider the alternative of presenting the revaluation effect from dynamic risk management in OCI, rather than through profit or loss.

Holistic application of the portfolio revaluation approach through OCI

What’s the issue?

The Board has been developing a new macro hedge accounting model, which it has called the portfolio revaluation approach. Under the approach discussed to date, derivatives would continue to be measured at fair value through profit or loss (FVTPL), and risk-managed portfolios would be revalued for the managed risk. The revaluation adjustment to the portfolio would then need to be recognised in the statement of financial position and in the statement of profit or loss and OCI.

At its May 2013 meeting, the Board discussed the scope of the portfolio revaluation approach. One alternative, the ‘holistic approach’, would apply the portfolio revaluation approach broadly irrespective of whether all items in the portfolio are being hedged – i.e. the revaluation would capture both hedging and non-hedging activities. Questions were raised about whether revaluation volatility from unhedged positions would provide useful information on the performance of a bank if it is presented in profit or loss.

At the July 2013 meeting, the Board discussed the alternative of recognising both the revaluation of risk-managed portfolios with respect to the managed risk and the fair value of the hedging instruments in OCI rather than in profit or loss, under the holistic approach. This alternative would be compatible with the ‘actual net interest income’ presentation discussed in May 2013; however, it would result in ‘the revaluation effect from dynamic risk management’ being recognised in OCI, which would keep revaluation volatility from unhedged positions from affecting profit or loss.

The staff observed several consequences of the use of OCI that would need to be considered further.

• It would change the working assumption that all changes in the fair value of hedging instruments would be recognised in profit or loss.

• If internal derivatives that transfer risk within a bank were ‘grossed up’ in the statement of profit or loss and OCI, presenting the portfolio revaluation adjustment in OCI would cause internal derivatives to affect profit or loss.

• Expanding the use of OCI would need to be justified in the context of the Board’s conceptual framework project.

• It may have an effect on regulatory capital and trigger prudential regulation considerations.

What did the IASB discuss?

Board members expressed mixed initial reactions on whether presenting revaluation adjustments in OCI was an alternative that they might support. However, they agreed that presenting

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 17

revaluation adjustments in OCI is an alternative that should be explored in the forthcoming discussion paper (DP) on macro hedging.

The forthcoming DP will consider the types of disclosures that may be required.

Disclosures about an entity’s dynamic risk management activities and the application of the portfolio revaluation approach

What’s the issue?

The forthcoming DP on macro hedging will also solicit feedback on potential disclosures about an entity’s dynamic risk management activities and the application of the portfolio revaluation approach that might be required by the project. The staff proposed four broad disclosure themes for consideration in the DP:

• qualitative information on the objectives and policies for the performance of dynamic risk management, including the identification of risk within exposures;

• qualitative and quantitative information on the calculated risk position and its valuation on the application of the portfolio revaluation approach;

• information on how the entity has applied the portfolio revaluation approach; and

• qualitative and quantitative information on the impact dynamic risk management has had, and is expected to have, on the performance of the entity.

The staff also proposed seeking input on the scope of the disclosures, specifically whether:

• holistic disclosures should be made if the portfolio revaluation approach is applied by the entity;

• disclosures should be made only for the parts of an entity’s business that apply the portfolio revaluation approach; or

• disclosures should be linked to the existence of dynamic risk management activities, regardless of whether the entity applies the portfolio revaluation approach.

What did the IASB discuss?

Board members generally supported soliciting input on disclosures in the forthcoming DP along the lines proposed by the staff. One Board member noted that there may be some overlap with the disclosures being considered and those already required by IFRS 7 Financial Instruments: Disclosures.

Next stepsThe staff will incorporate Board members’ feedback into the forthcoming DP, which is currently scheduled to be released in the second half of 2013.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 18

PROJECT MILESTONES AND TIMELINE FOR COMPLETION

Discussionpaper

(Q3/Q4)

Revisedstandard?

201220102009

Asset andliability

offsetting

Impairment

Classification&

measurement

General hedgeaccounting

Source: IASB work plan – projected targets as at 21 June 2013

Standardon assets:

IFRS 9 (2009)

Supplementarydocument

Exposuredraft

2011

Effective

1/1/2015*date

Effectivedates 1/1/2013and 1/1/2014

Exposuredraft

Standardon liabilities:IFRS 9 (2010)

Amendmentsto IFRS 7 and

IAS 32

Deferral ofeffective date

Exposuredraft – limitedamendments

1 2 3

4 5

6

7

Reviewdraft

8

2013 (H2)

Final standard(Q3)

Macro hedgeaccounting

9

Exposuredraft

10

2013 (H1)

Finalstandard?

Effectivedate?

2014

* Currently, IFRS 9 is effective for annual periods beginning on or after 1 January 2015. However, in July 2013 the IASB tentatively decided to defer the effective date of IFRS 9 to an unspecified date pending the finalisation of the impairment and classification and measurement phases. In addition, in April 2013 the IASB decided to make application of the new general hedging model optional until the completion of the macro hedging project.

Our suite of publications considers the different aspects of the work plan, and provides a comparison to IAS 39 where relevant.

KPMG publications

1First Impressions: IFRS 9 Financial Instruments (December 2009)• For KPMG’s most recent and comprehensive views on IFRS 9, refer to Insights into IFRS: Chapter 7A – Financial

.instruments: IFRS 9

2First Impressions: Additions to IFRS 9 Financial Instruments (December 2010)• For KPMG’s most recent and comprehensive views on IFRS 9, refer to Insights into IFRS: Chapter 7A – Financial

instruments: IFRS 9.

3 In the Headlines: Amendments to IFRS 9 – Mandatory effective date of IFRS 9 deferred to 1 January 2015 (December 2011)

4 New on the Horizon: ED/2009/12 Financial Instruments: Amortised Cost and Impairment (November 2009)

5 New on the Horizon: Impairment of financial assets measured in an open portfolio (February 2011)

6 New on the Horizon: Hedge Accounting (January 2011)

7 First Impressions: Offsetting financial assets and financial liabilities (February 2012)

8 New on the Horizon: Hedge Accounting (September 2012)

9 New on the Horizon: Classification and Measurement – Proposed limited amendments to IFRS 9 (December 2012)

10 New on the Horizon: Financial Instruments – Expected credit losses (March 2013)

For more information on the project see our website.

The IASB’s website and the FASB’s website contain summaries of the Boards’ meetings, meeting materials, project summaries and status updates.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 19

FIND OUT MORE

For more information on the financial instruments (IAS 39 replacement) project, please speak to your usual KPMG contact or visit the IFRS – financial instruments hot topics page, which includes line of business insights.

You can also go to the Financial Instruments page on the IASB website.

Visit KPMG’s Global IFRS Institute at kpmg.com/ifrs to access KPMG’s most recent publications on the IASB’s major projects and other activities.

Our IFRS – revenue hot topics page brings together our materials on the financial instruments project, including our IFRS Newsletter: Revenue. Our IFRS – insurance hot topics page brings together our materials on the insurance project, including our IFRS Newsletter: Insurance and our suite of publications on the IASB’s recently published re-exposure draft on insurance contracts.

Our IFRS – leases hot topics page brings together our materials on the leases project, including our New on the Horizon, which provides detailed analysis on the leases exposure draft published in May 2013. Our IFRS Breaking News page brings you the latest need-to-know information on international standards in the accounting, audit and regulatory space.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

Issue 8, March 2013IFRS NEWSLETTER 

REVENUE

The decision to permit early adoption of the new revenue standard will please those keen to move on from long-running interpretative issues with existing guidance.

Phil Dowad, KPMG’s global IFRS revenue recognition leader

Early adoption back on the table This edition of IFRS Newsletter: Revenue examines the current

thinking on the revenue project, and what the proposals could mean for you.

In its March meeting, the IASB decided that entities reporting under IFRS can adopt the new revenue standard early, reversing its February decision.

In February, the IASB had decided to prohibit early adoption of the new standard – a decision that surprised many. This earlier decision was primarily made to enhance comparability. In light

of the proposed effective date of 1 January 2017, the IASB had been concerned that if early adoption was permitted, then there would be a lack of comparability between those who chose to

early adopt and those who did not – and that this would persist for several years.

However, the IASB received feedback from constituents who were very disappointed with the February decision because they were planning to use the option to early adopt the new standard

to resolve interpretative issues with existing IFRS – including, in particular, issues with IFRIC 15 Agreements for the Construction of Real Estate.

The FASB did not reconsider its decision to prohibit early adoption.

Assuming that the new standard is released as currently scheduled in mid-2013, those considering early adoption will need to start work on their implementation plans right away – including determining which of

the transition options to select.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

IFRS NEWSLETTER 

INSURANCEIssue 35, March 2013

In March, the FASB completed its re-deliberations on the insurance proposals, bringing the planned timing of its exposure draft in line with the IASB. Both exposure drafts are expected by June of this year.

Moving towards global insurance accounting

This special edition of IFRS Newsletter: Insurance highlights the results of the FASB-only discussions during 20 February – 6 March

2013 on the joint insurance contracts project. In addition, it provides the current status of the project and an expected timeline for

completion.

Highlights

The FASB made decisions on:

l  the accretion of interest on the margin;

l  the treatment of changes in estimated interest crediting and accretion rates for asset-affected cash flows;

l  election of the fair value option;

l  segregated assets related to direct performance-linked insurance contracts;

l  the presentation of insurance contracts in the statement of financial position and statement of comprehensive income;

l  disclosures related to insurance contracts; and

l  a number of sweep issues.

IFRS

New on the Horizon: Leases

May 2013

kpmg.com/ifrs

KPMG CONTACTS

AmericasMichael HallT: +1 212 872 5665E: mhhall@kpmg.com

Tracy BenardT: +1 212 872 6073E: tbenard@kpmg.com

Asia-PacificReinhard KlemmerT: +65 6213 2333E: rklemmer2@kpmg.com.sg

Yoshihiro KurokawaT: +81 3 3548 5555 x.6595E: yoshihiro.kurokawa@jp.kpmg.com

Europe, Middle East and AfricaColin MartinT: +44 20 7311 5184E: colin.martin@kpmg.co.uk

Venkataramanan VishwanathT: +91 22 3090 1944E: vv@kpmg.com

AcknowledgementsWe would like to acknowledge the efforts of the principal authors of this publication: Varghese Anthony, Tal Davidson and Robert Sledge.

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

KPMG International Standards Group is part of KPMG IFRG Limited.

Publication name: IFRS Newsletter: Financial Instruments

Publication number: Issue 14

Publication date: July 2013

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The IFRS Newsletter: Financial Instruments contains links to third party websites not controlled by KPMG IFRG Limited. KPMG IFRG Limited accepts no responsibility for the content of such sites or that these links will continue to function. The use of third party content is to be governed by the terms of the site on which it is hosted and KPMG IFRG Limited accepts no responsibility for this.

Descriptive and summary statements in this newsletter may be based on notes that have been taken in observing various Board meetings. They are not intended to be a substitute for the final texts of the relevant documents or the official summaries of Board decisions which may not be available at the time of publication and which may differ. Companies should consult the texts of any requirements they apply, the official summaries of Board meetings, and seek the advice of their accounting and legal advisors.

kpmg.com/ifrs

IFRS Newsletter: Financial Instruments is KPMG’s update on the IASB’s financial instruments project.

If you would like further information on any of the matters discussed in this Newsletter, please talk to your usual local KPMG contact or call any of KPMG firms’ offices.