AASB 2014-7 - Amendments to Australian Accounting Standards arising from AASB 9 (December 2014)

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Explanatory Statement

 

 

Accounting Standard AASB 2014-7
Amendments to Australian Accounting Standards arising from AASB 9

December 2014

 

 

EXPLANATORY STATEMENT

Reasons for Issuing AASB 2014-7

The International Accounting Standards Board (IASB) has issued IFRS 9 Financial Instruments, which includes an Appendix C that sets out amendments to other IFRSs that are a consequence of the issuance of IFRS 9.  Except for amendments to existing versions of AASB 9 Financial Instruments (which are incorporated into AASB 2014-8 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) – Application of AASB 9 (December 2009) and AASB 9 (December 2010)), Appendix C of IFRS 9 has been incorporated into AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9.  The AASB needs to issue AASB 2014-7 (together with AASB 9 Financial Instruments (December 2014) and AASB 2014-8) to enable Australian reporting entities to continue to be compliant with International Financial Reporting Standards in relation to accounting for Financial Instruments.

Main Features of AASB 2014-7

Main Requirements

AASB 2014-7 makes amendments to Australian Accounting Standards and Interpretations, which arise from the issuance of AASB 9 in December 2014.

AASB 9 Financial Instruments requires that entities recognise impairment losses on financial assets on an expected basis rather than an incurred basis and introduces a fair value through other comprehensive income (FVOCI) category for non-equity financial assets.

The consequential amendments arising from AASB 9 also amend the existing disclosures set out in AASB 7 Financial Instruments: Disclosures in relation to impairment and classification and measurement of financial assets.

Application Date

AASB 2014-7 applies to annual reporting periods beginning on or after 1 January 2018.  If AASB 9 (December 2014) is early applied, AASB 2014-7 shall also be applied for that earlier period.

Consultation Prior to Issuing this Standard

In the process of developing AASB 9, the AASB published the following consultation documents for public comment (which were based on similar consultation documents issued internationally by the IASB):

(a) Exposure Draft ED 189 Financial Instruments: Amortised Cost and Impairment (proposed amendments to AASB 7 and AASB 139) in November 2009, which incorporated the IASB Exposure Draft ED/2009/12 (of the same title);

(b) Exposure Draft ED 210 A Supplement to ED 189 in February 2011, which incorporated the IASB Exposure Draft A Supplement to ED/2009/12;

(c) Exposure Draft ED 230 Classification and Measurement: Limited Amendments to AASB 9 in December 2012, which incorporated the IASB Exposure Draft ED/2012/4 (of the same title); and

(d) Exposure Draft ED 237 Financial Instruments: Expected Credit Losses in March 2013, which incorporated the IASB Exposure Draft ED/2013/3 (of the same title).

A draft RIS was not prepared to accompany any of these Exposure Drafts. However, the Exposure Drafts were each accompanied by a Basis for Conclusions that included an outline of the potential benefits and costs of the respective proposals in qualitative terms. Accordingly, constituents were made aware of the IASB’s thinking on matters of costs and benefits of the proposals and were provided with ample opportunity to comment on those costs and benefits. Each Exposure Draft issued during the development of the ‘completed’ version of IFRS 9 also asked constituents whether they wish to raise any Australian-specific issues.

Impairment

There were three formal rounds of consultation as the IASB developed its proposals. The AASB, Australian constituents, and many others from around the world, contributed to their development.

In response to ED 189, which incorporated IASB ED/2009/12, the AASB received seven submissions. The AASB also held roundtable discussions in March 2010 in Melbourne and Sydney that approximately 30 constituents attended.

The ED 189 proposals were generally not supported and various issues were raised for consideration. The AASB considered comments it received in making its submission to the IASB on ED/2009/12 and submitted to the IASB that the IASB’s ED/2009/12 proposals are not supportable on both conceptual and practical grounds. Similar comments were made by a wide range of constituents (including other national standards setters) from around the world.

In February 2011 the AASB issued ED 210, which incorporated the IASB Supplementary Exposure Draft, which was an attempt by the IASB to address the weaknesses that had been commented on in respect of ED/2009/12.

Two submissions were received by the AASB and face-to-face meetings conducted with key constituents in respect of the proposals in ED 210 raised various issues for consideration. The AASB considered comments it received in making its submission to the IASB on the Supplement to ED/2009/12.

The AASB expressed concerns about the proposed approach because it employed both the time-proportionate loss method and the foreseeable future loss method and lacked a conceptual basis.

Based on the feedback on ED/2009/12 and on the Supplement to ED/2009/12, the IASB developed completely different proposals for an expected loss model.

In response to ED 237, which incorporated IASB ED/2013/3, the AASB received nine submissions. The AASB also held roundtable discussions in Melbourne and Sydney that approximately 20 constituents attended.

There was general support for the proposals in ED 237, whilst various issues were raised for consideration. The AASB considered comments it received in making its submission to the IASB that expressed the view that while the AASB was not entirely in agreement with the ED/2013/3 proposals, with certain refinements, it could provide a workable solution to the issues being faced.

Classification and Measurement

In response to ED 230, which incorporated IASB ED/2012/4 the AASB received eight submissions. Those submissions generally supported adopting the proposals, whilst raising various issues for consideration. The AASB considered comments it received in making its submission to the IASB on ED/2012/4.

Although concerned about the reversal of the IASB’s previous position of not having a FVOCI category for financial instruments in IFRS 9, the AASB broadly supported the proposals in ED/2012/4.


Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011

Accounting Standard AASB 2014-7
Amendments to Australian Accounting Standards arising from AASB 9

Overview of the Accounting Standard

AASB 2014-7 makes amendments to Australian Accounting Standards and Interpretations, which arise from the issuance of AASB 9 in December 2014.

AASB 9 Financial Instruments requires that entities recognise impairment losses on financial assets on an expected basis rather than an incurred basis and introduces a fair value through other comprehensive income (FVOCI) category for non-equity financial assets.

The consequential amendments arising from AASB 9 also amend the existing disclosures set out in AASB 7 Financial Instruments: Disclosures in relation to impairment and classification and measurement of financial assets.

Human Rights Implications

This Standard is issued by the AASB in furtherance of the objective of facilitating the Australian economy.  It does not diminish or limit any of the applicable human rights or freedoms, and thus does not raise any human rights issues.

Conclusion

This Standard is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

The Accounting Standard AASB 2014-7, Amendments to Australian Accounting Standards arising from AASB 9, was enacted in December 2014 to address the need for Australian reporting entities to comply with International Financial Reporting Standards (IFRS) in accounting for financial instruments, following the issuance of IFRS 9 Financial Instruments by the International Accounting Standards Board (IASB). This amendment was necessitated by the need to incorporate the changes proposed in IFRS 9 into Australian standards to ensure consistency and alignment with international practices. The Australian Accounting Standards Board (AASB) issued AASB 2014-7, along with AASB 9 Financial Instruments (December 2014) and AASB 2014-8, to incorporate the consequential amendments from IFRS 9, including the introduction of an expected loss model for recognising impairment losses on financial assets and the establishment of a fair value through other comprehensive income (FVOCI) category for non-equity financial assets. These changes also update the disclosures in AASB 7 Financial Instruments: Disclosures concerning impairment and the classification and measurement of financial assets. The standard applies to annual reporting periods beginning on or after 1 January 2018, with early application possible if AASB 9 (December 2014) is adopted early. The AASB conducted extensive consultation with stakeholders during the development of AASB 9, publishing several exposure drafts and seeking public feedback to refine the proposals, ensuring that the final standard is both practical and conceptually sound.

Scope and Application

Accounting Standard AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 is designed to align Australian financial reporting with international standards by incorporating amendments necessitated by the issuance of AASB 9 Financial Instruments in December 2014. This legislation applies to all entities in Australia that are required to comply with Australian Accounting Standards, encompassing for-profit and not-for-profit organisations, both public and private, that prepare general-purpose financial reports. The scope of the Act extends to any financial instruments that these entities may hold, which include financial assets, liabilities, and equity instruments. The amendments address critical areas such as the recognition of impairment losses on financial assets on an expected loss basis, the introduction of the fair value through other comprehensive income (FVOCI) category for non-equity financial assets, and modifications to the disclosures required under AASB 7 Financial Instruments: Disclosures. AASB 2014-7 applies to annual reporting periods beginning on or after 1 January 2018, with early application permitted if AASB 9 (December 2014) is adopted early. The standard ensures that Australian reporting entities remain compliant with International Financial Reporting Standards and facilitates consistent financial reporting practices across the nation.

Key Provisions

The AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 (section 1) is a legislative instrument that amends Australian Accounting Standards and Interpretations to align them with AASB 9 Financial Instruments, which was issued in December 2014. The key operative sections of AASB 2014-7 require Australian reporting entities to recognise impairment losses on financial assets on an expected loss basis (section 2) and introduce a fair value through other comprehensive income (FVOCI) category for non-equity financial assets (section 3). Additionally, AASB 2014-7 amends the existing disclosures in AASB 7 Financial Instruments: Disclosures concerning impairment and the classification and measurement of financial assets (section 4). This amendment is necessary to ensure Australian reporting entities remain compliant with International Financial Reporting Standards (IFRS) in relation to accounting for financial instruments. The AASB 2014-7 imposes several obligations and requirements on the parties and entities it governs. Firstly, entities must recognise impairment losses on financial assets using the expected loss model rather than the incurred loss model (section 2). This requires entities to assess the credit risk of financial assets and estimate the expected credit losses over the life of the financial asset. Secondly, entities must classify certain financial assets into the FVOCI category if they meet specific criteria (section 3). This category requires entities to recognise changes in the fair value of the financial assets in other comprehensive income, rather than profit or loss. Thirdly, entities must provide additional disclosures in relation to impairment and the classification and measurement of financial assets (section 4). These disclosures are intended to provide users of financial statements with a better understanding of the risks and performance of financial instruments. Breach of the requirements set out in AASB 2014-7 may result in civil or criminal consequences. While the AASB 2014-7 itself does not specify any penalties or offences, breaches of accounting standards can result in civil liability under the Corporations Act 2001 (Cth) (section 12AA). Additionally, directors and officers of entities that fail to comply with accounting standards may be subject to criminal penalties under section 180(2)(a) of the Corporations Act 2001 (Cth). The maximum penalty for a breach of section 12AA is 10,000 penalty units (currently AUD 1.7 million) for individuals and 50,000 penalty units (currently AUD 8.5 million) for bodies corporate. The maximum penalty for a breach of section 180(2)(a) is imprisonment for up to five years, a fine of up to 250,000 penalty units (currently AUD 42.5 million) or both.

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