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Financial Instruments: Recognition and Measurement

Date recorded:

Comprehensive reconsideration of IAS 39

The Board gave a brief summary of its timetable on the IAS 39 project to develop a comprehensive standard for the recognition and measurement of financial instruments. This timetable aims for the Board to begin to make tentative decisions on the measurement methods for financial instruments and the potential characteristics for categorising financial instruments in time for the joint FASB and IASB meeting in July.

This session was the first of series to ensure Board members comprehensively understood the different possible measurement methods available and the perceived advantages and disadvantages of each in order to make informed decisions on which method to choose at a later stage. No decisions on which method to adopt were made at this meeting.

This session discussed the first of three different measurement methods: amortised cost (the other two being discounted cash flows and fair value which will be discussed in the next two months).

The Board discussion focussed on the three different impairment models: incurred loss, expected loss and fair value based. Board members raised the point that when it comes to choosing which model to use, they will need to understand the objective of measuring impairment and the principle behind it such that criteria can be used to assess each model.

Board members debated how an expected loss model would work in practice which highlighted differences in understanding of the model. Some board members expected it to equate to a fair value model, based on the discount rate being recalculated to reflect market rates. Questions were raised over whether the expected loss model was applied on a portfolio basis or an individual basis. There were different expectations about whether the expected loss model resulted in a smoothing in impairment losses.

Board members requested that the concepts in FSP FAS 115-2 and FAS 124-2 be appropriately considered in the fair value based model.

As a result of these discussions further detail would be provided to the Board on the expected loss model and the fair value based model at the next Board meeting.