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    ESMA and ISDA Respond to Post-Implementation Review on IFRS 9 Standard

    The International Swaps and Derivatives Association (ISDA) and the European Securities and Markets Authority (ESMA) issued a letter each, in response to the request for information from the International Accounting Standards Board (IASB) on post-implementation review of the classification and measurement requirements in the financial instruments standard IFRS 9. ESMA and ISDA both support the post-implementation review and suggest certain improvements that can be implemented, with ISDA mostly covering aspects that have direct or indirect relevance for derivatives.

    Additionally, ISDA notes that two aspects of IFRS 9 classification and measurement, which its members think warrant the Board’s particular consideration, relate to contractual cash flow characteristics as follows: 

    • For financial assets with environmental social and governance (ESG) features (such as those included in certain lending arrangements), the members recommend this is considered as part of either the loan’s variable profit margin, or a normal lending arrangement. This is consistent with how the members consider these features in the context of meeting their externally published ESG targets and accommodating the needs of borrowers to commit to similar ESG related targets. Recognition of such lending arrangements at amortized cost also ensures that the most decision-useful information on the ESG lending is presented to users of the financial statements.
    • Contractually linked instruments is an area in which the members consider that the existing guidance does not meet the objectives for which it was developed. It would benefit from clarification of key definitions and the addition of examples and guidance to better indicate how it should be applied. Consideration should also be given for revising the scope of instruments captured by this guidance.

    In its letter, ESMA strongly supports post implementation review as an opportunity to assess how issuers apply in their financial statements the IFRS requirements and how these can be further improved to address any issues that may challenge consistent application, enforceability, and usefulness to users of financial statements. ESMA calls on IASB to provide more guidance on the assessment of whether sales of financial assets are compatible with the business model “held to collect” and the change in the objective of the entity’s business model. It recommends that IASB provide additional guidance and/or examples to assess whether the cash flows of certain assets with sustainability features are cash flows that are solely payments of principal and interest. Considering the increasing importance of this issue, ESMA believes that it should be addressed by IASB in a timely manner outside the post-implementation review. ESMA also recommends for IASB to provide further explanations on assessing when modified financial instruments shall be derecognized, including the criteria for derecognition and practical examples illustrating the application of those criteria. ESMA would welcome further guidance on the question of whether conditions attached to the interest rate should be reflected in the estimates and revisions of expected future cash flows when determining the effective interest rate. ESMA emphasizes that certain fact patterns related to the classification of non-derivative financial instruments as held for trading may warrant further guidance from IASB. The answers to the request for information, as included in Appendix to the letter, are based on the evidence from supervision and enforcement activities undertaken by European enforcers on financial statements, as discussed within the European Enforcers Coordination Sessions (EECS) and the Financial Institutions Task Force (FITF).

     

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    Keywords: International, Europe, EU, Banking, IFRS 9, Financial Instruments, Post Implementation Review, Credit Risk, Reporting, Sustainable Finance, ESG, Lending, Derivatives, ISDA, IASB, ESMA

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