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)- December 2014

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Legislation au F2015L00136 Not in force Legislative Instrument

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Explanatory Statement

 

 

Accounting Standard 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)

December 2014

 

 

EXPLANATORY STATEMENT

Reasons for Issuing AASB 2014-8

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.  Amendments to existing versions of AASB 9 Financial Instruments 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). Amendments to other Standards and Interpretations have been incorporated into AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9.  The AASB needs to issue AASB 2014-8 (together with AASB 9 Financial Instruments (December 2014) and AASB 2014-7) 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 2014-8

Main Requirements

AASB 2014-8 makes amendments to Australian Accounting Standards, 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.

AASB 2014-8 makes amendments to existing versions of AASB 9 such that for annual reporting periods beginning on or after 1 January 2015, an entity may apply AASB 9 (December 2009) or AASB 9 (December 2010) if, and only if, the entity’s date of initial application (as described in the applicable Standard) is before 1 February 2015.

Application Date

AASB 2014-8 applies to annual reporting periods beginning on or after 1 January 2015.

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.

In particular, in relation to the amendments in AASB 2014-8, constituents and the AASB supported the IASB’s proposals in ED 230 to limit application of earlier versions of IFRS 9 once the completed version of AASB 9 was issued.

Statement of Compatibility with Human Rights

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

Accounting Standard 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)

Overview of the Accounting Standard

AASB 2014-8 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.

AASB 2014-8 makes amendments to existing versions of AASB 9 such that for annual reporting periods beginning on or after 1 January 2015, an entity may apply AASB 9 (December 2009) or AASB 9 (December 2010) if, and only if, the entity’s date of initial application (as described in the applicable Standard) is before 1 February 2015.

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

Accounting Standard AASB 2014-8, enacted in December 2014, was introduced to address the need for Australian entities to align with international financial reporting standards regarding the accounting treatment of financial instruments, particularly in relation to impairment and classification. The Australian Accounting Standards Board (AASB), under the aegis of the Australian government, issued this standard to ensure that Australian entities could continue to comply with International Financial Reporting Standards (IFRS) in the wake of the IASB's issuance of IFRS 9 Financial Instruments. The policy objective was to provide a framework for recognising impairment losses on financial assets on an expected loss basis and to introduce a fair value through other comprehensive income (FVOCI) category for non-equity financial assets. This standard was designed to facilitate a seamless transition for entities already using earlier versions of AASB 9, allowing them to apply these versions if their initial application date was before 1 February 2015.

Scope and Application

AASB 2014-8 applies to entities subject to Australian Accounting Standards, specifically those involved in financial reporting. These entities include corporations, public sector entities, and not-for-profit organisations that prepare financial reports in accordance with Australian Accounting Standards. The scope encompasses any financial instruments held by these entities, particularly those subject to impairment and classification requirements. Geographically, the Act applies throughout Australia, as it is issued by the Australian Accounting Standards Board (AASB), a Commonwealth body. The amendments are designed to align Australian standards with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The Act does not specify exclusions or exemptions but mandates that for annual reporting periods beginning on or after 1 January 2015, entities may apply AASB 9 (December 2009) or AASB 9 (December 2010) if their initial application date is before 1 February 2015. The AASB may extend or restrict the application of this standard through subordinate instruments, ensuring compliance with international standards while accommodating transitional provisions for early adopters.

Key Provisions

AASB 2014-8, as outlined in the explanatory statement, primarily addresses the amendments to Australian Accounting Standards that are necessitated by the issuance of AASB 9 in December 2014. The primary sections include amendments to AASB 9 Financial Instruments to require that entities recognise impairment losses on financial assets on an expected basis, rather than an incurred basis, and to introduce a fair value through other comprehensive income (FVOCI) category for non-equity financial assets (Section 1). These amendments are significant as they affect how financial assets are reported and valued. The standard also amends the existing disclosures set out in AASB 7 Financial Instruments: Disclosures, particularly in relation to impairment and classification and measurement of financial assets (Section 2). Furthermore, AASB 2014-8 allows entities to apply earlier versions of AASB 9, specifically AASB 9 (December 2009) or AASB 9 (December 2010), if their initial application date is before 1 February 2015, but only for annual reporting periods beginning on or after 1 January 2015 (Section 3). Entities governed by AASB 2014-8 are required to make these specified amendments to their accounting practices. For financial assets, they must now recognise impairment losses on an expected loss basis, rather than the previously used incurred loss basis. This change in recognition approach demands a shift in how entities assess and record potential losses on financial assets. Additionally, entities must adopt the new FVOCI category for non-equity financial assets, which will affect how these assets are measured and reported in the financial statements. Entities must also update their disclosures to align with the new requirements under AASB 7, ensuring that the information provided is comprehensive and relevant to the new accounting treatments. If an entity meets the criteria, it may continue to apply the earlier versions of AASB 9, but only if the initial application date was before 1 February 2015. Failure to comply with the provisions of AASB 2014-8 could lead to non-compliance with International Financial Reporting Standards (IFRS), potentially resulting in misleading financial statements. While the explanatory statement does not explicitly list penalties for non-compliance, it is clear that adherence to these standards is critical for maintaining the integrity and transparency of financial reporting. Non-compliance could lead to scrutiny from regulatory bodies, reputational damage, and possibly financial repercussions if the entities' financial statements are found to be inaccurate or misleading. Entities must ensure they are fully compliant with the new requirements to avoid any potential negative consequences.

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