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Financial Instruments

Financial Instruments is part of the convergence project between the IASB and the FASB. The need for a single accounting standard on financial instruments arises both from the many differences that exist today between IFRSs and U.S. GAAPs on this issue, and from the importance that the accounting standard on financial instruments has taken on in recent years due to the financial crisis.
The two boards have decided to tackle the project with two different strategies. While the IASB decided to deliberate on specific issues in different phases, the FASB issued a single exposure draft on financial instruments. During the mutual deliberations to be held in the coming months, the two boards are planning to achieve convergence on the main aspects of the accounting standard on financial instruments. For the IASB, the standard should be the IFRS 9.

The main objectives of the project are:
– to develop a new standard that is more “principle-based” and therefore less complex to apply, since the accounting for financial instruments foreseen by current IAS 39 is difficult to understand, to apply and to interpret;
– to develop a classification and measurement model that enables users of financial statements to have better information about how cash flows from financial instruments are expected to be realized;
– to improve the measurement of amortized cost, with particular reference to the transparency of losses on loans and the credit quality of financial assets;
– to reconsider the current provisions on hedge accounting.

For each of the four phases of the project regarding IAS 39, the main technical aspects are:
– Phase 1 Classification and Measurement: the IASB has decided to simplify the categories of classification of financial instruments by reducing them from 4 to 2. The two categories are Amortized Cost and Fair Value. In a particular, a financial instrument may be classified in the amortized cost category only when the characteristics of the instrument and the entity’s business model allow its inclusion in this category. In all other cases, it shall be classified in  the Fair Value category. There is no longer the requirement of separation of embedded derivatives, while the equity instruments, which cannot be recognized at amortized cost, are included in the category of Fair Value with changes in fair value recognized in OCI, used only for instruments not held for trading.
With regard to the classification and measurement of liabilities, there are no significant changes in relation to the current version of IAS 39, except for the requirement to capture in OCI the effects of change in fair value due to changes to own credit risk when the Fair Value Option is chosen. The derecognition requirements of assets and liabilities remain unchanged from the current version of IAS 39.
– Phase 2 Impairment: the Board has decided to develop an impairment model based on the expected cash flow approach rather than based on incurred losses as now required by IAS 39. The proposed model should allow the recognition of losses in the income statement based on the entity’s expectations and not based on indicators that some credits may have suffered losses.
– Phase 3 Hedge accounting: on 9 December 2010, the Board issued ED Hedge Accounting, in consultation until 9 March 2011. The ED does not address the issue of macro hedging, which instead will be dealt with separately by the Board in the coming months. The IASB approach on this project is to maintain the current structure of IAS 39, which distinguishes between fair value hedges and cash flow hedges, and in the meantime trying to make the cash flow hedge model and fair value hedge models more consistent with each other, to define better  the concepts of risk covered that are within the scope of hedge accounting, and to simplify the control of effectiveness.
– Phase 4 Asset Liability offsetting: this phase deals with the balance sheet netting of positions on derivatives and other financial instruments which may result in significant differences in the reporting of financial institutions. On 28 January 2011, the Board issued ED Offsetting Financial Assets and Financial Liabilities, in consultation until 28 April 2011. The FASB will issue the same document for public comments.

IASB work plan
The re-exposure of the proposals on impairment is expected by June 2012.
The IFRS on hedge accounting is expected by June 2012. An exposure draft on macro hedge accounting will be published by September 2012.
The IFRS on asset and liability offsetting and on the deferral of mandatory effective date of IFRS 9 published in December 2011.

To summarize, the following table shows for each part, the timing and documentation produced by the IASB so far and available on the OIC website


Current Status


Phase 1 Classification and Measurement


– IFRS 9 Financial Instruments: Classification and Measurement (November 2009) - available in the restricted area of the IASB website

Phase 2 Impairment

In progress

– Request for Information (June 2009)
– ED Amortised cost and impairment (November 2009)
– Supplementary document Financial Instruments: Impairment (January 2011)

Phase 3 Hedge Accounting

In progress

– ED Hedge accounting (December 2010)

Phase 4 Asset and liability offsetting


– ED Offsetting Financial Assets and Financial Liabilities (January 2011)
– Offsetting Financial Assets and Financial Liabilities – amendments to IAS 32 (December 2011) – available in the restricted area of the IASB website

None of the documents issued by the IASB has yet been approved by the European Commission.

For more information, please refer to the IASB website.

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