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CEBS Comments on IASB's Exposure Draft: Financial Instruments - Classification and Measurement

Core Content

The Committee of European Banking Supervisors (CEBS) has provided detailed feedback on the International Accounting Standards Board's (IASB) Exposure Draft (ED) on Financial Instruments: Classification and Measurement. CEBS, representing banking supervisory authorities and central banks across the EU, supports the IASB's efforts to improve financial reporting standards, particularly in the context of the G20's call for better valuation of financial instruments based on liquidity and investor holding horizons. However, CEBS raises several concerns regarding the proposed model and its implications for transparency, reliability, and decision-usefulness of financial information.

Main Views

1. Support for Mixed Attribute Model

• CEBS supports the IASB's mixed attribute model for financial instruments.
• They believe fair value is appropriate in certain cases, especially for actively traded instruments.
• CEBS emphasizes that the model should reflect an entity's business model and the way it generates cash flows.

2. Concerns About Amortised Cost Criteria

• CEBS is concerned that the proposed criteria for amortised cost (basic loan features and contractual yield basis) may exclude more financial instruments from this category than intended.
• This could result in more complex instruments being measured at fair value through profit and loss, which may not be reliable.
• CEBS prefers a model that is more closely tied to an entity's business model and liquidity considerations.

3. Proposal for Additional Measurement Category

• CEBS suggests the introduction of an additional category where fair value changes are recognized in Other Comprehensive Income (OCI), especially for instruments with unobservable data and held for medium- or long-term purposes.
• This category could help address reliability concerns and provide more decision-useful information.

4. Support for Limited Reclassification

• CEBS does not support a complete prohibition of reclassification.
• They believe that limited reclassification should be allowed when an entity's business model changes, especially in extreme market conditions.
• Comprehensive disclosures are necessary to ensure transparency.

5. Concerns About Fair Value Through Profit and Loss

• CEBS questions whether fair value through profit and loss is always appropriate for instruments not actively traded.
• They believe that fair value estimates for illiquid instruments may be unreliable, as seen during the financial crisis.
• CEBS reiterates concerns about the decision-usefulness of fair value through profit and loss in all circumstances.

6. Call for Convergence with US GAAP

• CEBS encourages the IASB and FASB to work together towards convergence in financial instrument accounting.
• They believe that convergence should not compromise the quality of accounting standards.

Key Recommendations

• Retain at least two measurement categories: amortised cost and fair value, with the latter including OCI.
• Improve guidance on "basic loan features" and "contractual yield basis": especially for complex instruments, hybrid contracts, and structured products.
• Allow limited reclassification: when an entity's business model changes, subject to strict criteria and full disclosure.
• Conduct field tests and impact assessments: before finalizing the proposals to ensure consistency with other IAS 39 revisions.
• Ensure alignment with impairment models: particularly for unquoted and illiquid equity investments.
• Clarify the treatment of AFS debt instruments and impairment rules.
• Provide clear guidance on embedded derivatives: retaining bifurcation where it is the best way to represent the nature and cash flows of hybrid instruments.
• Improve disclosures: especially qualitative ones, to maintain market confidence.
• Consider retrospective application: for the effective date and transition guidance, as it enhances comparability.
• Retain cost as a proxy for fair value in cases of unquoted equity investments where reliable fair value estimates are not available.

Conclusion

CEBS believes that while the IASB's proposed model has merit, it needs further refinement to ensure reliability, decision-usefulness, and consistency with existing standards. They emphasize the importance of aligning the model with the business model of the entity, considering liquidity, and providing adequate guidance and disclosure requirements. CEBS also advocates for a cautious approach to fair value through profit and loss, particularly for illiquid instruments, and for continued convergence with US GAAP.