Different approaches to recycling of FV gains/losses in IFRS 9

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Marek Muc
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Different approaches to recycling of FV gains/losses in IFRS 9

Post by Marek Muc »

Hi, we had a discussion the other day about IFRS9's approach to recycling. Namely, it is required for debt instruments in FVOCI category, but not allowed for equity instruments.

Para. IFRS 9 BC4.153(a) explains why the approach to recycling from OCI to P/L is different:
One of the primary reasons is that recycling would create the need to assess equity investments for impairment
but frankly speaking I don't quite understand it... I mean, do you have any ideas why recycling from OCI to P/L for equity instruments would mean that impairment is needed?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by pub_acco »

Recycling of FVTOCI is one of the two biggest differences (another being amortization of goodwill) between IFRS and our local gaap, so the accounting authority in my country has published several statements to defend the recycling policy. I’ve taken a look at some of them, but they don’t really elaborate on impairment :o They say as if impairment assessment were a natural consequence of recycling :o

Their point is basically like P&L should be the comprehensive indicator of financial performance and thus all the OCI have to be recycled and cumulative P&L should equal to cumulative comprehensive income and cash flows in the very very long-term. Accordingly, impairment has to be recognized on a timely basis to maintain the relevance of P&L as the indicator, just like impairment testing is required for other non-current assets.

I’m personally against recycling and don’t really agree to their point. But it seems like the discussion over the recycling and impairment strongly depends on how to define P&L and OCI, which IFRS obviously lacks.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by Marek Muc »

OK so we still don't quite understand why 'impairment assessment is a natural consequence of recycling' , right?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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We don’t :roll:
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by JRSB »

Is there a facility to ask IASB a straight question, other than submitting something as an agenda decision query or consultation?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by exIFRS »

Unfortunately the IFRS meeting records weren't as comprehensive back in 2009 when this matter was discussed, so I can't get a record of the actual Board discussion (though it may exist on audio tape but I am not that enthused to go back and review).

There is a specific paper addressing OCI and recycling: http://archive.ifrs.org/Current-Project ... b3Aobs.pdf

The key paragraph is para 28:

"As no recycling mechanisms would be established, which reduces complexity compared to today’s accounting for available-for-sale equity instruments, there is no incentive for management to designate any equity instruments that are managed on a fair value basis as the instrument’s performance would never be reported in profit or loss. This is based on the assumption that management would only undertake an investment managed on that basis if it expects that it generates benefits and these benefits are reported in profit or loss."

This all started to ring a bell, though its been a few years since I really thought about IAS 39, and I don't really want to relive those days (especially at 10pm on a Saturday night [why do I do this to myself]), but I believe these are the offending paragraphs of IAS 39:

Available-for-sale financial assets

67 When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired (see paragraph 59), the cumulative loss that had been recognised directly in equity shall be removed from equity and recognised in profit or loss even though the financial asset has not been derecognised.

68 The amount of the cumulative loss that is removed from equity and recognised in profit or loss under paragraph 67 shall be the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.

69 Impairment losses recognised in profit or loss for an investment in an equity instrument classified as available for sale shall not be reversed through profit or loss.

70 If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognised in profit or loss.

An international GAAP book at the time described these requirements in certain circumstances as "a little inconsistent" and difficult to implement.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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I should also add that just because the Basis of Conclusions says "One of the primary reasons is that recycling would create the need to assess equity investments for impairment" does not mean this was one of the primary reasons, it may just be a convenient rationale, that provides support for a decision that was based more on political or theoretical reasons that actually lie at the heart of the decision. Never forget this standard was a joint project with the FASB too.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by JRSB »

I'm interested in understanding this so have read the thread with interest but I don't even understand the first paragraph of that link, so I think I'll leave it at that!


At the May 2009 meeting, the Board made the tentative decision to allow presentation of fair value changes for particular financial instruments in other comprehensive income (OCI), but without any subsequent transfers to profit or loss (either on disposal or otherwise). This would eliminate the need to test these instruments for impairment.


Does 'impairment' only refer to a decline in value that is recorded in the P&L?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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@exIFRS - Saturday evening is great for discussing conceptual matters, one gets a bit more open minded after a few drinks ;)
@JRSB - IASB refers to AFS category in IAS 39, where you had FV changes in OCI, but you had to distinguish when a decline in FV is actually an impairment. It does not mean that all decline in FV meant impairment and this is why this requirement was difficult to implement in practice. For example, IAS 39 stated that 'a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.'

So it seems that IASB's written conclusions revolve about impairment, but the link between the need for recognising impairment and recycling to P/L is not stated. Perhaps they thought that it would be not 'right' to allow entities to choose the timing of recycling losses to P/L. For example, if an entity buys an equity instrument and chooses FVOCI option, and recycling to P/L happens on derecognition, but no impairment in P/L is required before derecognition, P/L would benefit from well performing investments (i.e. when entity sells it), but, at the same time, poorly performing investments may not make their way to P/L at all (i.e. entity keeps such investment indefinitely). That's why they did not like this solution (i.e. recycling to P/L on derecognition but without the need for impairment in P/L). Does it make any sense to you?

It may also be the case, as exIFRS pointed out, that IASB's real basis for conclusions are not written in BC paragraphs...
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by JRSB »

Thanks for this summary. I'm semi-clear and understand the thinking where a strategic equity investment should never impact P&L and makes sense.

It's unfortunate that no standard summarises clearly the whole topic of OCI comprehensively - they should down and document these things perhaps instead of tinkering with minor aspects which have very small impacts. When are they getting to the treatment of changes in contingent consideration on the purchase of intangibles.....
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by Marek Muc »

well, your summary (first sentence) is a bit off the point in my opinion :) you can easily classify a 'strategic' investment as FVTPL, in fact we can say that this is the default option

every now and then IASB admits that there are no clear-cut conceptual basis for recognising something in P/L vs OCI, and that's unfortunate
When are they getting to the treatment of changes in contingent consideration on the purchase of intangibles.....
there is a project page, but they stopped indicating any timeline, so don't hold your breath :)
https://www.ifrs.org/projects/work-plan ... rent-stage
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by exIFRS »

@JRSB (I am assuming you are London based or nearby, apologies if this is a wrong assumption) when @Marek is next in London, we can grab a beverage of choice and I will tell you all about OCI. Including the time one of the Board Members had coffee mugs produced for all the other Board Members that read "Don't panic, you don't have to use OCI" (they were promptly banned from appearing at the Board table).
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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Look forward to it!
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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Interestingly, basis for conclusions to IAS 1 are silent on the reasons for introduction of OCI...
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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PS I'm looking for docs about this at IFRS.org and have found only these:
http://archive.ifrs.org/News/Press-Rele ... Q27May.pdf
https://www.ifrs.org/-/media/feature/me ... te-oci.pdf

do you know other docs that would summarise IASB's basis for conclusions?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by exIFRS »

I think OCI is more of a Conceptual Framework issue. Chapter 7 paras 7.15 - 7.19 are the key ones, though I don't think you will find any enlightenment. The BC to the 2018 Conceptual Framework notes:

BC7.24: Accordingly, the 2018 Conceptual Framework sets out a principle that all income and expenses are included in the statement of profit or loss. ... Thus, decisions to exclude any income and expenses from the statement of profit or loss and to include them in other comprehensive income can be made only in exceptional circumstances. Those exceptional circumstances would be when the Board concludes that requiring or permitting the exclusion of particular items of income or expenses from the statement of profit or loss would result in the statement of profit or loss providing more relevant information or providing a more faithful representation of an entity’s financial performance for that period.

BC7.25: The 2018 Conceptual Framework does not include specific guidance on how the Board might reach that conclusion. The Board expects to take that decision when developing Standards and to explain its reasons in the bases for conclusions on those Standards. Entities cannot take that decision (see paragraph 88 of IAS 1).
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by exIFRS »

This is probably the key paper:

April 2014 Board Meeting
Project Conceptual Framework
Paper topic Initial strategy: Profit or loss and other comprehensive income

https://cdn.ifrs.org/-/media/feature/me ... income.pdf
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by JRSB »

A conceptual statement somewhere for those new to IFRS would really assist I think. Even just to explain that certain income and expenses are felt to be outside the entity's operational performance (in some cases permenantly) and are therefore recorded separately. or something to that effect.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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I think 7.17 is the closest you are going to get:

"Because the statement of profit or loss is the primary source of information about an entity’s financial performance for the period, all income and expenses are, in principle, included in that statement. However, in developing Standards, the Board may decide in exceptional circumstances that income or expenses arising from a change in the current value of an asset or liability are to be included in other comprehensive income when doing so would result in the statement of profit or loss providing more relevant information, or providing a more faithful representation of the entity’s financial performance for that period."

Basically OCI is where we put stuff that arises from our preference for relevant asset and liability measurements that leads to weird outcomes in the P&L that are distracting and, to be frank, a little embarrassing.

Or put in a more nerdy way, accounting financial statements are a little like Heisenberg's uncertainty principle (https://en.wikipedia.org/wiki/Uncertainty_principle), I can try and give you a true balance sheet, or a true income statement, but I can't give you both.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by pub_acco »

I like the uncertainty principle analogy!
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by JRSB »

Pub - at the start you mentioned this as a key difference between IFRS and your GAAP. Is that US?

Does US GAAP have a similar arrangement, or is this another 'sticking point' in harmonisation?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by Marek Muc »

thank you exIFRS, I haven't thought about looking into Conceptual Framework! :oops:
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by pub_acco »

JRSB - Japan. Japan gaap require to recycle everything eventually. The April 2014 board meeting paper mentions "The Accounting Standards Board of Japan presented a paper Profit or Loss/OCI and Measurement that explored definitions of comprehensive income, P&L and OCI, the nature of P&L and recycling and the interaction between the use of P&L and OCI and measurement." This is it.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

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that's interesting, so for example when do you recycle to P/L actuarial gains/losses on post-employment benefits?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by pub_acco »

That’s the weirdest one :roll: Actuarial gains/losses are recognized through OCI and then amortized using the straight line method and charged to operating profit over the expected remaining years of service (eg 10-15 years). Actuarial losses are sometimes huge and so is the amortization charge for a year, but it’s hard to interpret the recycled expenses in analyzing the business performance :?
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by Marek Muc »

I see, thanks

FYI IAS 19 had similar approach until ca. 10 years ago, it was called a 'corridor approach' - gains/losses were amortised to P/L, but the part that was still unrecognised in P/L wasn't recognised in OCI (you could see it only in the notes)
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by pub_acco »

Aha, we used to use a similar unrecognized actuarial gains/losses approach and switched to OCI ~10 years ago. There must have been some interactions with IAS 19.
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by JRSB »

Does anyone know the US situation (in the expectation that IFRS will go that way eventually)
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Re: Different approaches to recycling of FV gains/losses in IFRS 9

Post by Marek Muc »

from what I see in Big4's comparisons of US GAAP and IFRS, actuarial gains and losses are eventually amortised to P/L

page 274:
https://assets.kpmg/content/dam/kpmg/xx ... p-2017.pdf
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