September 2009 International Financial Reporting Standards Financial Instruments

September 2009 International Financial Reporting Standards Financial Instruments: Classification and Measurement 1 -4 September 2009 IASC Foundation The views expressed in this presentation are those of the presenter, not necessarily those of the IASC Foundation or the IASB 2008 IASC Foundation | 30 Cannon Street | London EC 4 M 6 XH | UK | www. iasb. org

Timetable One project – three phases 2 Project phase Exposure Draft Finalisation 1. Classification and Measurement July 2009 In time for 2009 year end financial statements 2. Impairment methodology October 2009 In 2010 3. Hedge accounting December 2009 In 2010 * The above is in addition to a project on derecognition of financial instruments. ED Derecognition was published in March 2009. 2008 IASC Foundation | 30 Cannon Street | London EC 4 M 6 XH | UK | www. iasb. org

Classification and Measurement Overview of proposed approach Basic loan features + Managed on a contractual yield basis Amortised cost (one impairment method) 3 FVO for accounting mismatch No reclassification All other instruments: • Equities • Derivatives • Some hybrid contracts • … 2009 IASC Foundation | 30 Cannon Street | London EC 4 M 6 XH | UK | www. iasb. org Fair Value (no impairment) Equities: OCI presentation available

Classification and Measurement Amortised cost criterion • Basic loan features – Contractual terms that give rise to cash flow amounts that represent both principle and interest – Interest represents consideration for: – time value of money – credit risk • Managed on a contractual yield basis – Business model is to manage and evaluate based on collection or payment of contractual cash flows generated when holding or issuing the instrument – Not an instrument by instrument approach to classification

Classification and Measurement Other features of proposed approach • Embedded derivatives – For hybrid contracts with financial hosts > Entire hybrid contract assessed using proposed classification and measurement model – For hybrid contracts with non-financial hosts > Existing IAS 39 requirements retained • Fair value option – Retained to address accounting mismatches

Classification and Measurement OCI presentation option • Scope – investments in equity instruments not held for trading • Other features: – option available instrument by instrument on initial recognition – no recycling, impairment or change in presentation – dividends also recognised in OCI 2008 IASC Foundation | 30 Cannon Street | London EC 4 M 6 XH | UK | www. iasb. org 6

Summary of key changes to IAS 39 Classification Many categories each with different measurement, presentation and impairment methods Measurement Proposed approach Two measurement bases: Amortised cost (one impairment method) and Fair Value. Irrevocable option at initial recognition to present fair value changes of some equity instruments in OCI. Impairment Different impairment rules depending on category and instrument type Only debt instruments at amortised cost are tested for impairment. One impairment method. Tainting rules for held to maturity investments No tainting rules for assets measured using amortised cost. Reclassification Some reclassifications permitted/required No reclassifications. Business model approach. Embedded derivatives Bifurcation of embedded derivatives required in some cases No separation. Same classification approach (for hybrids with financial hosts) FVO Available if specific criteria are met Available for an accounting mismatch

Classification and Measurement 8 Approach proposed for transition – Generally fully retrospective, but some transition relief will be provided – Early adopters will be subject to disclosures in addition to IAS 8 disclosures Effective date – Any final proposals will be available for voluntary application for 2009 year end financial statements – Mandatory date for adoption – not before 1 January 2012 • Comment deadline for exposure draft is 14 September 2009 2008 IASC Foundation | 30 Cannon Street | London EC 4 M 6 XH | UK | www. iasb. org

Classification and Measurement FASB proposed approach • All financial instruments within the scope of the project would be measured on balance sheet at fair value with changes in net income or other comprehensive income • Fair value through net income – Default category. Includes all equity investments, derivatives & hybrid contracts that require separation. • Fair value through OCI – Qualify if business strategy is to hold debt instruments with principle amounts for collection or payment(s) of contractual cash flows rather than to sell or settle the financial instruments with a third party – Current period interest & impairment recognised in P&L. – Other changes in fair value recognised in OCI. – Recycling on derecognition.

Classification and Measurement FASB FV-OCI presentation approach • Balance sheet – present as separate line items in the balance sheet amortized cost and the necessary adjustment to arrive at fair value, and cumulative credit losses. • Income/performance statement – One statement is mandatory with subtotals for net income and total comprehensive income. (EPS based on net income). – Net income to include interest and dividends, credit impairments, realized gains and losses. – OCI to include entire change in fair value for qualifying instruments.

Classification and Measurement FASB model other features • Amortized cost option – Limited amortized cost option for certain financial liabilities (own debt) • Embedded derivatives – Current bifurcation criteria for hybrid financial instruments would determine whether those instruments would be classified in FV-NI category or could be FV-OCI category. – Clearly closely related could be at FV-OCI – Not clearly closely related at FV-NI – Non-financial hybrids would continue to follow current guidance related to bifurcation

Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. 2008 IASC Foundation | 30 Cannon Street | London EC 4 M 6 XH | UK | www. iasb. org 12