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May 10, 2010

IASB publishes financial liabilities proposals

The International Accounting Standards Board (IASB) is seeking feedback on the financial liabilities section of IFRS 9 Financial Instruments.

The IASB has already completed the classification and measurement of the financial assets stage of IFRS 9, the standard that will replace the complex and unpopular IAS 39.

The liabilities proposal features just one key change to the accounting outlined in IAS 39, which addresses counter-intuitive effects of fair value.

 

Counterintuitive

The IASB said many investors and stakeholders believe volatility in profit or loss resulting from changes in the credit risk of liabilities (knows as ‘own credit’) that an entity chooses to measure at fair value is counterintuitive and does not provide useful information.

The IASB has, therefore, proposed that all gains and losses resulting from changes in own credit for financial liabilities that an entity chooses to measure at fair value should be transferred to other comprehensive income.  

Changes in own credit will not affect reported profit or loss.

“Whilst there are theoretical arguments for treating financial assets and liabilities in the same way, it is hard to defend the accounting as providing useful information when a company suffering deterioration in credit quality is able to book a corresponding large profit, especially when investors tell us that such information is often excluded from their financial models,” IASB chairman David Tweedie explained.

No other changes have been proposed as IASB consultations revealed most stakeholders felt the existing requirements, aside from the effects of changes to own credit, work well.

The exposure draft Fair Value Option for Financial Liabilities is open for comment until 16 July 2010. 

 

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