II. Financial Instruments: Amortised Cost and Impairment (ED)

Background

On 5 November 2009, the International Accounting Standards Board (IASB) issued ED/2009/12, Financial Instruments: Amortised Cost and Impairment. This exposure draft (ED) represents the next part of the lASBs project to replace IAS 39 Financial Instruments: Recognition and Measurement. The ED proposes principles for the measurement of financial instruments at amortised cost including a new impairment methodology based on expected losses.

The ED is part of the wider project to replace IAS 39 with an entirely new Standard (IFRS 9) for which the date of mandatory adoption is not expected to be before January 2013.

Summary of the proposed model

The ED applies to all financial instruments that are measured at amortised cost and describes the objective of amortised cost measurement, underpinned by new measurement principles for financial assets, based on an expected cash flow methodology.

Under the proposed measurement principles, an entity would determine the initial carrying amount of a financial asset (or portfolio of financial assets) measured at amortised cost, on the basis of the present value of the future expected cash flows from the asset, taking into consideration expectations about future credit losses (referred to as the expected loss approach1).

Subsequent to initial recognition an entity would be required to revise its estimates of expected cash flows at each measurement date. Any resulting adjustment to the carrying amount of the financial instrument would be recognised in profit or loss.

The proposed expected loss approach is designed to result in earlier loss recognition compared to the incurred loss approach currently in IAS 39 by taking into account future credit losses expected over the life of the financial asset measured at amortised cost. Under this approach the initial estimate of expected future losses is gradually recognised over the life of the instrument as it is incorporated into the effective interest rate.