Will IFRS 9 End Up Discouraging Investors?

After IFRS 9 Financial Instruments amended the accounting treatment of equity investments, the International Accounting Standards Board (IASB) decided that such investments are, by default, to be measured at fair value with value changes recognised in the profit and loss (P&L) column.

However, entities can, if they choose, recognise value changes as fair value through other comprehensive income (OCI or FVOCI). Such a decision, which is irrevocable, must happen at the start of the investment. If this option is taken, impairment losses cannot be recognised in P&L, nor will there be any recycling of gains or losses through P&L upon derecognition.

Stakeholders have expressed concerns over these new requirements, as they could lead to fewer investments in long-term equity instruments. They also worry because the recognition of fair value changes in P&L may not reflect the business model of long-term investors due to possible volatility, and because the option to recognise fair value changes in OCI. The popular opinion is that investor performance will not be properly reflected, as amounts allocated in OCI cannot be recycled through P&L, which would remove the incentive for investors to invest in long-term equity instruments.

Investigation by EFRAG

As a result of all these concerns, the European Commission (EC) asked the European Financial Reporting Advisory Group (EFRAG) in May 2017 to investigate the potential accounting effects of IFRS 9 on long-term equity investments and to gather quantitative information on equity portfolios. EFRAG was requested to perform its research in two phases, an assessment phase and a possible solution phase.

In January 2018 EFRAG published its final assessment, containing observations from its self-selected consultations and reviews of 2015 and 2016 financial statements. The group's key finding was that some—not many—entities were erroneously classifying equity investments in aggregate as available for sale (AFS) under IAS 39 Financial Instruments: Recognition and Measurement.

In March 2018 EFRAG published a discussion paper, which includes an analysis of the relevance of recycling in the context of long-term equity investments and illustrates two models for those investments carried at FVOCI.

Statement of the IASB

In April, the International Accounting Standards Board (IASB) published its considerations for setting the requirements for the accounting treatment of equity instruments. The crucial aspects were...