The Debate Continues Over IFRS 9 (Accounting For Equity Investments)

Will IFRS 9 end up discouraging investors? I asked that question in another article a few months ago in a discussion of the new requirements, which relate to the accounting treatment of equity investments under IFRS 9. In August 2018, the European Financial Reporting Advisory Group (EFRAG) published a summary of the 53 letters that constituents wrote in response to the discussion paper (DP) released in March 2018. In this article, we'll look at key reactions to (and implications of) IFRS 9.

The discussion paper

The DP asked a few big questions:

Would the reintroduction of recycling improve the depiction of the financial performance of long-term investors? Should recycling be accompanied by some form of impairment model? Which impairment model would best meet the general objectives and main features of a robust model for equity instruments? Recycling or not?

About 70% of the respondents support the reintroduction of recycling for equity investments. They express concern that the prohibition of recycling gains at disposal would, firstly, lead to the impression that gains and losses at disposal are economically not relevant and, secondly, not be consistent with the conceptual framework. These arguments mainly came from preparers and organisations of preparers.

When it comes to one group among the respondents, the National Standard Setters, opinions diverge a little more. Those who favour recycling do so because, they say, it would be more reasonable to recognise changes in value in the financial performance, and to treat dividends and gains on disposal similarly, as such gains would result from the realisation of the fair value of the instrument. The main argument against recycling is that it would be possible to manipulate and misuse this option as an earnings management tool.

Another widespread comment, however, cuts through this discussion: more than 50% of the respondents indicated in their comment letters, despite not being explicitly asked in the DP, that it was too early to propose changes to the new requirements as entities have just started to apply IFRS 9 and the impact for long-term investments is not known yet. They propose waiting for the International Accounting Standards Board's (IASB) post-implementation review.

Possible impairment models

With regards to the second question above, almost all of the respondents endorse the view that recycling should be accompanied by a strong impairment model for prudence and transparency...