Explanatory Statement
Accounting Standard AASB 2009-2 Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments
April 2009
EXPLANATORY STATEMENT
Standards Amended by AASB 2009-2
This Standard makes amendments to the following Australian Accounting Standards:
- AASB 4 Insurance Contracts;
- AASB 7 Financial Instruments: Disclosures;
- AASB 1023 General Insurance Contracts; and
- AASB 1038 Life Insurance Contracts.
These amendments arise from the issuance of Improving Disclosures about Financial Instruments (Amendments to IFRS 7) by the International Accounting Standards Board in March 2009.
The amendments require enhanced disclosures about fair value measurements and liquidity risk.
Main Features of this Standard
Application Date
This Standard is applicable to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 April 2009. Early adoption is permitted for annual reporting periods beginning on or after 1 January 2005, but before 1 January 2009 and for annual reporting periods beginning on or after 1 January 2009 that end before 30 April 2009.
Main Requirements
The amendments to AASB 7 require enhanced disclosures about fair value measurements and liquidity risk. In particular, the amendments:
(a) clarify that the existing fair value disclosure requirements in AASB 7 must be made separately for each class of financial instrument;
(b) require disclosure of any change in a method for determining fair value and the reasons for the change;
(c) introduce a three-level hierarchy for making fair value measurements, as follows:
(i) level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
(ii) level 2 – inputs, other than quoted prices included within level 1, that are observable for the asset or liability; and
(iii) level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs);
(d) require disclosure about the relative reliability of each fair value measurement in the statement of financial position;
(e) clarify that the current maturity analysis for non-derivative financial instruments should include issued financial guarantee contracts; and
(f) require disclosure of a maturity analysis for derivative financial liabilities.
The amendments to AASB 4, AASB 1023 and AASB 1038 comprise editorial changes resulting from the amendments to AASB 7.
Consultation Prior to Issuing AASB 2009-2
The AASB issued Exposure Draft ED 169 Improving Disclosures about Financial Instruments: Proposed Amendments to AASB 7 in October 2008. ED 169 reproduced the proposals included in the IASB’s Exposure Draft Improving Disclosures about Financial Instruments (Proposed amendments to IFRS 7) without amendment.
The AASB invited comments from Australian constituents on the proposals regarding enhanced disclosures about fair value measurements and liquidity risk, as well as the consequential amendments to other Australian Accounting Standards resulting from the amendments to AASB 7. The AASB received five submissions from Australian constituents. Submissions received were generally supportive. However, in its submission to the IASB, the AASB expressed concerns that other potential improvements could have been made to IFRS 7 Financial Instruments: Disclosures and as such, that the IASB should consider expanding the scope of the proposed amendments. In addition, the AASB suggested clarifying the wording within level 2 of the three-level hierarchy to make the fair value measurement guidance more consistent with US SFAS 157 Fair Value Measurements. The IASB addressed the AASB’s concern by changing the wording of the three-level hierarchy in issuing its final Standard; however, the IASB did not address the scope of the amendments at this time.
A Regulation Impact Statement has not been prepared in connection with the issue of AASB 2009-2 as the amendments made do not have a substantial direct or indirect impact on business or competition, are of a minor or machinery nature or clarify existing requirements.
Overview
The Accounting Standard AASB 2009-2, issued in April 2009, amends several Australian Accounting Standards to improve disclosures about financial instruments. This legislation was enacted to address the need for more transparent and comprehensive disclosures regarding fair value measurements and liquidity risks associated with financial instruments, aligning with international standards set by the International Accounting Standards Board. The amendments are designed to enhance the quality of financial reporting by requiring more detailed disclosures about the methods used to determine fair values and the classification of these measurements into a three-tiered hierarchy. The Australian Accounting Standards Board, as the relevant legislature, sought to ensure that Australian standards reflect international best practices while consulting with various stakeholders to gather feedback on the proposed changes. The overarching policy objective of AASB 2009-2 is to improve the reliability and comparability of financial reporting by providing clearer and more informative disclosures about financial instruments.
Scope and Application
The AASB 2009-2 Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments apply to entities that prepare financial reports under Australian Accounting Standards. Specifically, it affects entities required to disclose financial instruments in their financial statements, including those in industries such as banking, insurance, and investment services. The amendments are designed to improve the quality and transparency of financial reporting by enhancing disclosures about fair value measurements and liquidity risk. The amendments are applicable to annual reporting periods beginning on or after 1 January 2009, with early adoption permitted for periods starting from 1 January 2005. The Standard does not explicitly exclude any specific entities or industries from its scope, thus broadly impacting any entity subject to Australian Accounting Standards. While the Standard itself does not provide for exclusions, exemptions, or thresholds, application may be influenced by subordinate instruments or guidance notes issued by the Australian Accounting Standards Board.
Key Provisions
The main operative sections of AASB 2009-2 (sections 4, 7, 1023, and 1038) primarily focus on enhancing disclosures related to financial instruments, especially around fair value measurements and liquidity risks. Specifically, section 7 (AASB 7 Financial Instruments: Disclosures) mandates detailed disclosures for each class of financial instrument, including any changes in valuation methods and the reasons behind such changes. It also introduces a three-tier hierarchy for fair value measurements, distinguishing between quoted prices in active markets (Level 1), observable inputs (Level 2), and unobservable inputs (Level 3). Furthermore, the amendments require disclosure of the relative reliability of each fair value measurement and provide a more comprehensive maturity analysis for financial instruments, including derivative liabilities and financial guarantees.
The AASB 2009-2 Act imposes several obligations on entities subject to its purview. Firstly, these entities must ensure that their financial disclosures are detailed and separate for each class of financial instrument, adhering to the three-tier hierarchy for fair value measurements. This includes providing clear information on any changes in valuation methods and the reasons for such changes. Additionally, entities must disclose the relative reliability of each fair value measurement and include a comprehensive maturity analysis for financial instruments, particularly for derivative liabilities and financial guarantees. These obligations are aimed at enhancing transparency and enabling stakeholders to better understand the financial position and liquidity risks of the entities.
Failure to comply with the provisions of AASB 2009-2 could result in various civil or criminal consequences, although specific penalties are not outlined in the explanatory statement. The primary consequence would likely be non-compliance with financial reporting standards, which could lead to scrutiny from regulatory bodies and potential legal action. This non-compliance might also affect the entity’s reputation and investor confidence, resulting in financial losses. While the explanatory statement does not detail specific penalties, it is clear that adhering to the enhanced disclosure requirements is crucial to avoid adverse repercussions.