Companies (Accounting Standards) (Amendment) Regulations 2006

Status:

Published in Subsidiary Legislation Supplement
on 03 Jan 2006

No. S 2

Companies Act

(Chapter 50)

Companies (Accounting Standards) (Amendment) Regulations 2006

In exercise of the powers conferred by section 200A(1) of the Companies Act, the Accounting Standards Committee (known as the Council on Corporate Disclosure and Governance), with the approval of the Minister for Finance, hereby makes the following Regulations:

Citation and commencement

1. These Regulations may be cited as the Companies (Accounting Standards) (Amendment) Regulations 2006 and shall come into operation on 3rd January 2006.

Amendment of Third Schedule

2. The Third Schedule to the Companies (Accounting Standards) Regulations (Rg 6) is amended —

(a)

by inserting, immediately after paragraph (iv) in the third column of the item relating to FRS 1, the following paragraphs:

"(v) Insert, immediately after paragraph 124 of IAS 1, the following paragraphs:

"Capital

124A. An entity shall disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital.

124B. To comply with paragraph 124A, the entity discloses the following:

(a) qualitative information about its objectives, policies and processes for managing capital, including (but not limited to):

(i) a description of what it manages as capital;

(ii) when an entity is subject to externally imposed capital requirements, the nature of those requirements and how those requirements are incorporated into the management of capital; and

(iii) how it is meeting its objectives for managing capital.

(b) summary quantitative data about what it manages as capital. Some entities regard some financial liabilities (e.g. some forms of subordinated debt) as part of capital. Other entities regard capital as excluding some components of equity (e.g. components arising from cash flow hedges).

(d) whether during the period it complied with any externally imposed capital requirements to which it is subject.

(e) when the entity has not complied with such externally imposed capital requirements, the consequences of such non-compliance.

These disclosures shall be based on the information provided internally to the entity’s key management personnel.

124C. An entity may manage capital in a number of ways and be subject to a number of different capital requirements. For example, a conglomerate may include entities that undertake insurance activities and banking activities, and those entities may also operate in several jurisdictions. When an aggregate disclosure of capital requirements and how capital is managed would not provide useful information or distorts a financial statement user’s understanding of an entity’s capital resources, the entity shall disclose separate information for each capital requirement to which the entity is subject.".";

(b)

by inserting, immediately after paragraph (iii) in the third column of the item relating to FRS 32, the following paragraphs:

"(iv) Delete sub-paragraph (d) of paragraph 4 in IAS 32 and substitute the following sub-paragraph:

(d) insurance contracts as defined in FRS 104 Insurance Contracts. However, this Standard applies to derivatives that are embedded in insurance contracts if FRS 39 requires the entity to account for them separately. Moreover, an issuer shall apply this Standard to financial guarantee contracts if the issuer applies FRS 39 in recognising and measuring the contracts, but shall apply FRS 104 if the issuer elects, in accordance with paragraph 4 (d) of FRS 104, to apply FRS 104 in recognising and measuring them.".

(v) Insert, immediately after the words “financial asset or financial liability at fair value through profit or loss” in paragraph 12 of IAS 32, the following words:

“• financial guarantee contract”.

(vi) Delete sub-paragraphs (b) and (c) of paragraph 66 in IAS 32, and substitute the following sub-paragraphs:

"(b) the basis of measurement applied to financial assets and financial liabilities on initial recognition and subsequently;

(c) the basis on which income and expenses arising from financial assets and financial liabilities are recognised and measured; and

(d) for financial assets or financial liabilities designated as at fair value through profit or loss:

(i) the criteria for so designating such financial assets or financial liabilities on initial recognition.

(ii) how the entity has satisfied the conditions in paragraph 9, 11A or 12 of FRS 39 for such designation. For instruments designated in accordance with paragraph 9 (b) (i) of FRS 39, that disclosure includes a narrative description of the circumstances underlying the measurement or recognition inconsistency that would otherwise arise. For instruments designated in accordance with paragraph 9 (b) (ii) of FRS 39, that disclosure includes a narrative description of how designation as at fair value through profit or loss is consistent with the entity’s documented risk management or investment strategy.

(iii) the nature of the financial assets or financial liabilities the entity has designated as at fair value through profit or loss.".

(vii) Re-number sub-paragraphs (g) to (j) of paragraph 94 in IAS 32 as sub-paragraphs (j) to (m), delete sub-paragraphs (e) and (f) of paragraph 94 in IAS 32 and substitute the following sub-paragraphs:

"(e) An entity shall disclose the carrying amounts of:

(i) financial assets that are classified as held for trading;

(ii) financial liabilities that are classified as held for trading;

(iii) financial assets that, upon initial recognition, were designated by the entity as financial assets at fair value through profit or loss (i.e. those that are not financial assets classified as held for trading);

(iv) financial liabilities that, upon initial recognition, were designated by the entity as financial liabilities at fair value through profit or loss (i.e. those that are not financial liabilities classified as held for trading).

(f) An entity shall disclose separately net gains or net losses on financial assets or financial liabilities designated by the entity as at fair value through profit or loss.

(g) If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it shall disclose:

(i) the maximum exposure to credit risk (see paragraph 76 (a)) at the reporting date of the loan or receivable (or group of loans or receivables),

(ii) the amount by which any related credit derivative or similar instrument mitigates that maximum exposure to credit risk,

(iii) the amount of change during the period and cumulatively in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in credit risk determined either as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or using an alternative method that more faithfully represents the amount of change in its fair value that is attributable to changes in credit risk,

(iv) the amount of the change in the fair value of any related credit derivative or similar instrument that has occurred during the period and cumulatively since the loan or receivable was designated.

(h) If the entity has designated a financial liability as at fair value through profit or loss, it shall disclose:

(i) the amount of change during the period and cumulatively in the fair value of the financia liability that is attributable to changes in credit risk determined either as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (see paragraph AG40); or using an alternative method that more faithfully represents the amount of change in its fair value that is attributable to changes in credit risk.

(ii) the difference between the carrying amount of the financial liability and the amount the entity would be contractually required to pay at maturity to the holder of the obligation.

(i) The entity shall disclose:

(i) the methods used to comply with the requirement in (g) (iii) and (h) (i).

(ii) if the entity considers that the disclosure it has given to comply with the requirements in (g) (iii) or (h) (i) does not faithfully represent the change in the fair value of the financial asset or financial liability attributable to changes in credit risk, the reasons for reaching this conclusion and the factors the entity believes to be relevant.".

(viii) Delete paragraph AG40 in IAS 32 and substitute the following paragraph:

"AG40. If an entity designates a financial liability or a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it is required to disclose the amount of change in the fair value of the financial instrument that is attributable to changes in credit risk. Unless an alternative method more faithfully represents this amount, the entity is required to determine this amount as the amount of change in the fair value of the financial instrument that is not attributable to changes in market conditions that give rise to market risk. Changes in market conditions that give rise to market risk include changes in a benchmark interest rate, commodity price, foreign exchange rate or index of prices or rates. For contracts that include a unit-linking feature, changes in market conditions include changes in the performance of an internal or external investment fund. If the only relevant changes in market conditions for a financial liability are changes in an observed (benchmark) interest rate, this amount can be estimated as follows:

(a) First, the entity computes the liability’s internal rate of return at the start of the period using the observed market price of the liability and the liability’s contractual cash flows at the start of the period. It deducts from this rate of return the observed (benchmark) interest rate at the start of the period, to arrive at an instrument-specific component of the internal rate of return.

(b) Next, the entity calculates the present value of the cash flows associated with the liability using the liability’s contractual cash flows at the start of the period and a discount rate equal to the sum of the observed (benchmark) interest rate at the end of the period and the instrument-specific component of the internal rate of return at the start of the period as determined in (a).

(c) The amount determined in (b) is then adjusted for any cash paid or received on the liability during the period and increased to reflect the increase in fair value that arises because the contractual cash flows are one period closer to their due date.

(d) The difference between the observed market price of the liability at the end of the period and the amount determined in (c) is the change in fair value that is not attributable to changes in the observed (benchmark) interest rate. This is the amount to be disclosed.

“The above example assumes that changes in fair value that do not arise from changes in the instrument’s credit risk or from changes in interest rates are not significant. If, in the above example, the instrument contained an embedded derivative, the change in fair value of the embedded derivative would be excluded in determining the amount in paragraph 94 (h) (i).”.";

(c)

by inserting, immediately after paragraph (xi) in the third column of the item relating to FRS 39, the following paragraphs:

"(xii) Delete paragraph 3 of IAS 39.

(xiii) Delete sub-paragraphs 2 (e) and 2 (h) of IAS 39 and substitute the following sub-paragraphs:

"(e) rights and obligations arising under (i) an insurance contract as defined in FRS 104 Insurance Contracts, other than an issuer’s rights and obligations arising under an insurance contract that meets the definition of a financial guarantee contract in paragraph 9, or (ii) a contract that is within the scope of FRS 104 because it contains a discretionary participation feature. However, this Standard applies to a derivative that is embedded in a contract within the scope of FRS 104 if the derivative is not itself a contract within the scope of FRS 104 (see paragraphs 10–13 and Appendix A paragraphs AG27-AG33). Moreover, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either this Standard or FRS 104 to such financial guarantee contracts (see paragraphs AG4 and AG4A). The issuer may make that election contract by contract, but the election for each contract is irrevocable.

(h) loan commitments other than those loan commitments described in paragraph 4. An issuer of loan commitments shall apply FRS 37 to loan commitments that are not within the scope of this Standard. However, all loan commitments are subject to the derecognition provisions of this Standard (see paragraphs 15-42 and Appendix A paragraphs AG36-AG63).".

(xiv) Delete paragraph 4 of IAS 39 and substitute the following paragraph:

"4. The following loan commitments are within the scope of this Standard:

(a) loan commitments that the entity designates as financial liabilities at fair value through profit or loss. An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination shall apply this Standard to all its loan commitments in the same class.

(b) loan commitments that can be settled net in cash or by delivering or issuing another financial instrument. These loan commitments are derivatives. A loan commitment is not regarded as settled net merely because the loan is paid out in instalments (for example, a mortgage construction loan that is paid out in instalments in line with the progress of construction).

(c) commitments to provide a loan at a below-market interest rate. Paragraph 47 (d) specifies the subsequent measurement of liabilities arising from these loan commitments.".

(xv) Delete sub-paragraphs (a) (iii) and (b) of paragraph 9 in IAS 39 under the heading “Definitions of Four Categories of Financial Instruments” and substitute the following sub-paragraphs:

"(iii) a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

(b) Upon initial recognition it is designated by the entity as at fair value through profit or loss. An entity may use this designation only when permitted by paragraph 11A, or when doing so results in more relevant information, because either:

(i) it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as “an accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or

(ii) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity’s key management personnel (as defined in FRS 24 Related Party Disclosures (as revised in 2004)), for example the entity’s board of directors and chief executive officer.

In FRS 32, paragraphs 66, 94 and AG40 require the entity to provide disclosures about financial assets and financial liabilities it has designated as at fair value through profit or loss, including how it has satisfied these conditions. For instruments qualifying in accordance with (ii) above, that disclosure includes a narrative description of how designation as at fair value through profit or loss is consistent with the entity’s documented risk management or investment strategy.

Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured (see paragraph 46 (c) and Appendix A paragraphs AG80 and AG81), shall not be designated as at fair value through profit or loss.

It should be noted that paragraphs 48, 48A, 49 and Appendix A paragraphs AG69-AG82, which set out requirements for determining a reliable measure of the fair value of a financial asset or financial liability, apply equally to all items that are measured at fair value, whether by designation or otherwise, or whose fair value is disclosed.".

(xvi) Insert the following heading and words in paragraph 9 of IAS 39, immediately before the heading “Definitions Relating to Recognition and Measurement”:

"Definition of a financial guarantee contract

A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.".

(xvii) Delete paragraphs 12 and 13 in IAS 39 and insert, immediately after paragraph 11 of IAS 39, the following paragraphs:

"11A. Notwithstanding paragraph 11, if a contract contains one or more embedded derivatives, an entity may designate the entire hybrid (combined) contract as a financial asset or financial liability at fair value through profit or loss unless:

(a) the embedded derivative(s) does not significantly modify the cash flows that otherwise would be required by the contract; or

(b) it is clear with little or no analysis when a similar hybrid (combined) instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost.

12. If an entity is required by this Standard to separate an embedded derivative from its host contract, but is unable to measure the embedded derivative separately either at acquisition or at a subsequent financial reporting date, it shall designate the entire hybrid (combined) contract as at fair value through profit or loss.

13. If an entity is unable to determine reliably the fair value of an embedded derivative on the basis of its terms and conditions (for example, because the embedded derivative is based on an unquoted equity instrument), the fair value of the embedded derivative is the difference between the fair value of the hybrid (combined) instrument and the fair value of the host contract, if those can be determined under this Standard. If the entity is unable to determine the fair value of the embedded derivative using this method, paragraph 12 applies and the hybrid (combined) instrument is designated as at fair value through profit or loss.".

(xviii) Delete paragraph 47 of IAS 39 and substitute the following paragraph:

"47. After initial recognition, an entity shall measure all financial liabilities at amortised cost using the effective interest method, except for:

(a) financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be measured at fair value except for a derivative liability that is linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured which shall be measured at cost.

(b) financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. Paragraphs 29 and 31 apply to the measurement of such financial liabilities.

(c) financial guarantee contracts as defined in paragraph 9. After initial recognition, an issuer of such a contract shall (unless paragraph 47 (a ) or (b) applies) measure it at the higher of:

(i) the amount determined in accordance with FRS 37 Provisions, Contingent Liabilities and Contingent Assets; and

(ii) the amount initially recognised (see paragraph 43) less, when appropriate, cumulative amortisation recognised in accordance with FRS 18 Revenue.

(d) commitments to provide a loan at a below-market interest rate. After initial recognition, an issuer of such a commitment shall (unless paragraph 47 (a) applies) measure it at the higher of:

(i) the amount determined in accordance with FRS 37; and

(ii) the amount initially recognised (see paragraph 43) less, when appropriate, cumulative amortisation recognised in accordance with FRS 18.

Financial liabilities that are designated as hedged items are subject to the hedge accounting requirements in paragraphs 89-102.".

(xix) Insert, immediately after paragraph 48 of IAS 39, the following paragraph:

“48A. The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the entity uses that technique. The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Periodically, an entity calibrates the valuation technique and tests it for validity using prices from any observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on any available observable market data.”.

(xx) Insert, immediately after paragraph 103A of IAS 39, the following paragraph:

“103B. Financial Guarantee Contracts (Amendments to FRS 39 and FRS 104), issued in January 2006, amended paragraphs 2 (e) and (h ), 4, 47 and AG4, added paragraph AG4A, added a new definition of financial guarantee contracts in paragraph 9, and deleted paragraph 3. An entity shall apply those amendments for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies these changes for an earlier period, it shall disclose that fact and apply the related amendments to FRS 32 and FRS 104 at the same time.”.

(xxi) Delete paragraph 105 in IAS 39 and substitute the following paragraphs:

"105. When this Standard is first applied, an entity is permitted to designate a previously recognised financial asset as available for sale. For any such financial asset the entity shall recognise all cumulative changes in fair value in a separate component of equity until subsequent derecognition or impairment, when the entity shall transfer that cumulative gain or loss to profit or loss. The entity shall also:

(a) restate the financial asset using the new designation in the comparative financial statements; and

(b) disclose the fair value of the financial assets at the date of designation and their classification and carrying amount in the previous financial statements.

105A. An entity shall apply paragraphs 11A, 48A, AG4B-AG4K, AG33A and AG33B and the January 2006 amendments in paragraphs 9, 12 and 13 for annual periods beginning on or after 1 January 2006. Earlier application is encouraged.

105B. An entity that first applies paragraphs 11A, 48A, AG4B-AG4K, AG33A and AG33B and the January 2006 amendments in paragraphs 9, 12 and 13 in its annual period beginning before 1 January 2006:

(a) is permitted, when those new and amended paragraphs are first applied, to designate as at fair value through profit or loss any previously recognised financial asset or financial liability that then qualifies for such designation. When the annual period begins before 1 September 2005, such designations need not be completed until 1 September 2005 and may also include financial assets and financial liabilities recognised between the beginning of that annual period and 1 September 2005. Notwithstanding paragraph 91, any financial assets and financial liabilities designated as at fair value through profit or loss in accordance with this sub-paragraph that were previously designated as the hedged item in fair value hedge accounting relationships shall be de-designated from those relationships at the same time they are designated as at fair value through profit or loss.

(b) shall disclose the fair value of any financial assets or financial liabilities designated in accordance with sub-paragraph (a) at the date of designation and their classification and carrying amount in the previous financial statements.

(c) shall de-designate any financial asset or financial liability previously designated as at fair value through profit or loss if it does not qualify for such designation in accordance with those new and amended paragraphs. When a financial asset or financial liability will be measured at amortised cost after de-designation, the date of de-designation is deemed to be its date of initial recognition.

(d) shall disclose the fair value of any financial assets or financial liabilities de-designated in accordance with sub-paragraph (c) at the date of de-designation and their new classifications.

105C. An entity that first applies paragraphs 11A, 48A, AG4B-AG4K, AG33A and AG33B and the January 2006 amendments in paragraphs 9, 12 and 13 in its annual period beginning on or after 1 January 2006

(a) shall de-designate any financial asset or financial liability previously designated as at fair value through profit or loss only if it does not qualify for such designation in accordance with those new and amended paragraphs. When a financial asset or financial liability will be measured at amortised cost after de-designation, the date of de-designation is deemed to be its date of initial recognition.

(b) shall not designate as at fair value through profit or loss any previously recognised financial assets or financial liabilities.

(c) shall disclose the fair value of any financial assets or financial liabilities de-designated in accordance with sub-paragraph (a) at the date of de-designation and their new classifications.

105D. An entity shall restate its comparative financial statements using the new designations in paragraph 105B or 105C provided that, in the case of a financial asset, financial liability, or group of financial assets, financial liabilities or both, designated as at fair value through profit or loss, those items or groups would have met the criteria in paragraph 9 (b) (i), 9 (b) (ii) or 11A at the beginning of the comparative period or, if acquired after the beginning of the comparative period, would have met the criteria in paragraph 9 (b) (i), 9 (b) (ii) or 11A at the date of initial recognition.".

(xxii) Insert, immediately after paragraph AG3 of IAS 39, the following paragraph:

“AG3A. This Standard applies to the financial assets and financial liabilities of insurers, other than rights and obligations that paragraph 2 (e) excludes because they arise under contracts within the scope of FRS 104.”.

(xxiii) Delete paragraphs AG4 and AG4A of IAS 39 and substitute the following paragraphs:

"AG4. Financial guarantee contracts may have various legal forms, such as a guarantee, some types of letter of credit, a credit default contract or an insurance contact. Their accounting treatment does not depend on their legal form. The following are examples of the appropriate treatment (see paragraph 2 (e)):

(a) Although a financial guarantee contract meets the definition of an insurance contract in FRS 104 if the risk transferred is significant, the issuer applies this Standard. Nevertheless, if the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either this Standard or FRS 104 to such financial guarantee contracts. If this Standard applies, paragraph 43 requires the issuer to recognise a financial guarantee contract initially at fair value. If the financial guarantee contract was issued to an unrelated party in a stand-alone arm’s length transaction, its fair value at inception is likely to equal the premium received, unless there is evidence to the contrary. Subsequently, unless the financial guarantee contract was designated at inception as at fair value through profit or loss or unless paragraphs 29-37 and AG47-AG52 apply (when a transfer of a financial asset does not qualify for derecognition or the continuing involvement approach applies), the issuer measures it at the higher of:

(i) the amount determined in accordance with FRS 37; and

(ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with FRS 18 (see paragraph 47 (c)).

(b) Some credit-related guarantees do not, as a precondition for payment, require that the holder is exposed to, and has incurred a loss on, the failure of the debtor to make payments on the guaranteed asset when due. An example of such a guarantee is one that requires payments in response to changes in a specified credit rating or credit index. Such guarantees are not financial guarantee contracts, as defined in this Standard, and are not insurance contracts, as defined in FRS 104. Such guarantees are derivatives and the issuer applies this Standard to them.

(c) If a financial guarantee contract was issued in connection with the sale of goods, the issuer applies FRS 18 in determining when it recognises the revenue from the guarantee and from the sale of goods.

AG4A. Assertions that an issuer regards contracts as insurance contracts are typically found throughout the issuer’s communications with customers and regulators, contracts, business documentation and financial statements. Furthermore, insurance contracts are often subject to accounting requirements that are distinct from the requirements for other types of transaction, such as contracts issued by banks or commercial companies. In such cases, an issuer’s financial statements typically include a statement that the issuer has used those accounting requirements.".

(xxiv) Insert, immediately after the heading “Definitions (paragraphs 8 and 9)” after paragraph AG4A of IAS 39, the following heading and paragraphs:

"Designation as at Fair Value through Profit or Loss

AG4B. Paragraph 9 of this Standard allows an entity to designate a financial asset, a financial liability, or a group of financial instruments (financial assets, financial liabilities or both) as at fair value through profit or loss provided that doing so results in more relevant information.

AG4C. The decision of an entity to designate a financial asset or financial liability as at fair value through profit or loss is similar to an accounting policy choice (although, unlike an accounting policy choice, it is not required to be applied consistently to all similar transactions). When an entity has such a choice, paragraph 14 (b) of FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the chosen policy to result in the financial statements providing reliable and more relevant information about the effects of transactions, other events and conditions on the entity’s financial position, financial performance or cash flows. In the case of designation as at fair value through profit or loss, paragraph 9 sets out the two circumstances when the requirement for more relevant information will be met. Accordingly, to choose such designation in accordance with paragraph 9, the entity needs to demonstrate that it falls within one (or both) of these two circumstances.

Paragraph 9 (b) (i): Designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise

AG4D. Under FRS 39, measurement of a financial asset or financial liability and classification of recognised changes in its value are determined by the item’s classification and whether the item is part of a designated hedging relationship. Those requirements can create a measurement or recognition inconsistency (sometimes referred to as an “accounting mismatch”) when, for example, in the absence of designation as at fair value through profit or loss, a financial asset would be classified as available for sale (with most changes in fair value recognised directly in equity) and a liability the entity considers related would be measured at amortised cost (with changes in fair value not recognised). In such circumstances, an entity may conclude that its financial statements would provide more relevant information if both the asset and the liability were classified as at fair value through profit or loss.

AG4E. The following examples show when this condition could be met. In all cases, an entity may use this condition to designate financial assets or financial liabilities as at fair value through profit or loss only if it meets the principle in paragraph 9 (b) (i).

(a) An entity has liabilities whose cash flows are contractually based on the performance of assets that would otherwise be classified as available for sale. For example, an insurer may have liabilities containing a discretionary participation feature that pay benefits based on realised and/or unrealised investment returns of a specified pool of the insurer’s assets. If the measurement of those liabilities reflects current market prices, classifying the assets as at fair value through profit or loss means that changes in the fair value of the financial assets are recognised in profit or loss in the same period as related changes in the value of the liabilities.

(b) An entity has liabilities under insurance contracts whose measurement incorporates current information (as permitted by FRS 104 Insurance Contracts, paragraph 24), and financial assets it considers related that would otherwise be classified as available for sale or measured at amortised cost.

(c) An entity has financial assets, financial liabilities or both that share a risk, such as interest rate risk, that gives rise to opposite changes in fair value that tend to offset each other. However, only some of the instruments would be measured at fair value through profit or loss (i.e. are derivatives, or are classified as held for trading). It may also be the case that the requirements for hedge accounting are not met, for example because the requirements for effectiveness in paragraph 88 are not met.

(d) An entity has financial assets, financial liabilities or both that share a risk, such as interest rate risk, that gives rise to opposite changes in fair value that tend to offset each other and the entity does not qualify for hedge accounting because none of the instruments is a derivative. Furthermore, in the absence of hedge accounting there is a significant inconsistency in the recognition of gains and losses. For example:

(i) the entity has financed a portfolio of fixed rate assets that would otherwise be classified as available for sale with fixed rate debentures whose changes in fair value tend to offset each other. Reporting both the assets and the debentures at fair value through profit or loss corrects the inconsistency that would otherwise arise from measuring the assets at fair value with changes reported in equity and the debentures at amortised cost.

(ii) the entity has financed a specified group of loans by issuing traded bonds whose changes in fair value tend to offset each other. If, in addition, the entity regularly buys and sells the bonds but rarely, if ever, buys and sells the loans, reporting both the loans and the bonds at fair value through profit or loss eliminates the inconsistency in the timing of recognition of gains and losses that would otherwise result from measuring them both at amortised cost and recognising a gain or loss each time a bond is repurchased.

AG4F. In cases such as those described in the preceding paragraph, to designate, at initial recognition, the financial assets and financial liabilities not otherwise so measured as at fair value through profit or loss may eliminate or significantly reduce the measurement or recognition inconsistency and produce more relevant information. For practical purposes, the entity need not enter into all of the assets and liabilities giving rise to the measurement or recognition inconsistency at exactly the same time. A reasonable delay is permitted provided that each transaction is designated as at fair value through profit or loss at its initial recognition and, at that time, any remaining transactions are expected to occur.

AG4G. It would not be acceptable to designate only some of the financial assets and financial liabilities giving rise to the inconsistency as at fair value through profit or loss if to do so would not eliminate or significantly reduce the inconsistency and would therefore not result in more relevant information. However, it would be acceptable to designate only some of a number of similar financial assets or similar financial liabilities if doing so achieves a significant reduction (and possibly a greater reduction than other allowable designations) in the inconsistency. For example, assume an entity has a number of similar financial liabilities that sum to CU100* and a number of similar financial assets that sum to CU50 but are measured on a different basis. The entity may significantly reduce the measurement inconsistency by designating at initial recognition all of the assets but only some of the liabilities (for example, individual liabilities with a combined total of CU45) as at fair value through profit or loss. However, because designation as at fair value through profit or loss can be applied only to the whole of a financial instrument, the entity in this example must designate one or more liabilities in their entirety. It could not designate either a component of a liability (e.g. changes in value attributable to only one risk, such as changes in a benchmark interest rate) or a proportion (i.e. percentage) of a liability.

*In this Standard, monetary amounts are denominated in “currency units” (CU).

Paragraph 9 (b) (ii): A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy

AG4H. An entity may manage and evaluate the performance of a group of financial assets, financial liabilities or both in such a way that measuring that group at fair value through profit or loss results in more relevant information. The focus in this instance is on the way the entity manages and evaluates performance, rather than on the nature of its financial instruments.

AG4I. The following examples show when this condition could be met. In all cases, an entity may use this condition to designate financial assets or financial liabilities as at fair value through profit or loss only if it meets the principle in paragraph 9 (b) (ii).

(a) The entity is a venture capital organisation, mutual fund, unit trust or similar entity whose business is investing in financial assets with a view to profiting from their total return in the form of interest or dividends and changes in fair value. FRS 28 Investments in Associates and FRS 31 Interests in Joint Ventures allow such investments to be excluded from their scope provided they are measured at fair value through profit or loss. An entity may apply the same accounting policy to other investments managed on a total return basis but over which its influence is insufficient for them to be within the scope of FRS 28 or FRS 31.

(b) The entity has financial assets and financial liabilities that share one or more risks and those risks are managed and evaluated on a fair value basis in accordance with a documented policy of asset and liability management. An example could be an entity that has issued ’structured products’ containing multiple embedded derivatives and manages the resulting risks on a fair value basis using a mix of derivative and non-derivative financial instruments. A similar example could be an entity that originates fixed interest rate loans and manages the resulting benchmark interest rate risk using a mix of derivative and non-derivative financial instruments.

(c) The entity is an insurer that holds a portfolio of financial assets, manages that portfolio so as to maximise its total return (i.e. interest or dividends and changes in fair value), and evaluates its performance on that basis. The portfolio may be held to back specific liabilities, equity or both. If the portfolio is held to back specific liabilities, the condition in paragraph 9 (b) (ii) may be met for the assets regardless of whether the insurer also manages and evaluates the liabilities on a fair value basis. The condition in paragraph 9 (b) (ii) may be met when the insurer’s objective is to maximise total return on the assets over the longer term even if amounts paid to holders of participating contracts depend on other factors such as the amount of gains realised in a shorter period (e.g. a year) or are subject to the insurer’s discretion.

AG4J. As noted above, this condition relies on the way the entity manages and evaluates performance of the group of financial instruments under consideration. Accordingly, (subject to the requirement of designation at initial recognition) an entity that designates financial instruments as at fair value through profit or loss on the basis of this condition shall so designate all eligible financial instruments that are managed and evaluated together.

AG4K. Documentation of the entity’s strategy need not be extensive but should be sufficient to demonstrate compliance with paragraph 9 (b) (ii). Such documentation is not required for each individual item, but may be on a portfolio basis. For example, if the performance management system for a department — as approved by the entity’s key management personnel — clearly demonstrates that its performance is evaluated on a total return basis, no further documentation is required to demonstrate compliance with paragraph 9 (b) (ii).".

(xxv) Insert, immediately after paragraph AG33 of IAS 39, the following heading and paragraphs:

"Instruments containing Embedded Derivatives

AG33A. When an entity becomes a party to a hybrid (combined) instrument that contains one or more embedded derivatives, paragraph 11 requires the entity to identify any such embedded derivative, assess whether it is required to be separated from the host contract and, for those that are required to be separated, measure the derivatives at fair value at initial recognition and subsequently. These requirements can be more complex, or result in less reliable measures, than measuring the entire instrument at fair value through profit or loss. For that reason this Standard permits the entire instrument to be designated as at fair value through profit or loss.

AG33B. Such designation may be used whether paragraph 11 requires the embedded derivatives to be separated from the host contract or prohibits such separation. However, paragraph 11A would not justify designating the hybrid (combined) instrument as at fair value through profit or loss in the cases set out in paragraph 11A (a) and (b) because doing so would not reduce complexity or increase reliability.".";

(d)

by deleting “25A,” in paragraph (ii) in the third column of the item relating to FRS 101 and inserting immediately thereafter the following paragraphs:

"(iii) Delete paragraph 25A of IFRS 1 and substitute the following paragraph:

"25A. FRS 39 Financial Instruments: Recognition and Measurement permits a financial asset to be designated on initial recognition as available for sale or a financial instrument (provided it meets certain criteria) to be designated as a financial asset or financial liability at fair value through profit or loss. Despite this requirement exceptions apply in the following circumstances:

(a) any entity is permitted to make an available-for-sale designation at the date of transition to FRSs.

(b) an entity that presents its first FRS financial statements for an annual period beginning on or after 1 September 2006 — such an entity is permitted to designate, at the date of transition to FRSs, any financial asset or financial liability as at fair value through profit or loss provided the asset or liability meets the criteria in paragraph 9 (b) (i), 9 (b) (ii) or 11A of FRS 39 at that date.

(c) an entity that presents its first FRS financial statements for an annual period beginning on or after 1 January 2006 and before 1 September 2006 — such an entity is permitted to designate, at the date of transition to FRSs, any financial asset or financial liability as at fair value through profit or loss provided the asset or liability meets the criteria in paragraph 9 (b) (i), 9 (b) (ii) or 11A of FRS 39 at that date. When the date of transition to FRSs is before 1 September 2005, such designations need not be completed until 1 September 2005 and may also include financial assets and financial liabilities recognised between the date of transition to FRSs and 1 September 2005.

(d) an entity that presents its first FRS financial statements for an annual period beginning before 1 January 2006 and applies paragraphs 11A, 48A, AG4B-AG4K, AG33A and AG33B and the 2005 amendments in paragraphs 9, 12 and 13 of FRS 39 — such an entity is permitted at the start of its first FRS reporting period to designate as at fair value through profit or loss any financial asset or financial liability that qualifies for such designation in accordance with these new and amended paragraphs at that date. When the entity’s first FRS reporting period begins before 1 September 2005, such designations need not be completed until 1 September 2005 and may also include financial assets and financial liabilities recognised between the beginning of that period and 1 September 2005. If the entity restates comparative information for FRS 39 it shall restate that information for the financial assets, financial liabilities, or group of financial assets, financial liabilities or both, designated at the start of its first FRS reporting period. Such restatement of comparative information shall be made only if the designated items or groups would have met the criteria for such designation in paragraph 9 (b) (i), 9 (b) (ii) or 11A of FRS 39 at the date of transition to FRSs or, if acquired after the date of transition to FRSs, would have met the criteria in paragraph 9 (b) (i), 9 (b) (ii) or 11A at the date of initial recognition.

(e) for an entity that presents its first FRS financial statements for an annual period beginning before 1 September 2006 — notwithstanding paragraph 91 of FRS 39, any financial assets and financial liabilities such an entity designated as at fair value through profit or loss in accordance with sub-paragraph (c) or (d) above that were previously designated as the hedged item in fair value hedge accounting relationships shall be de-designated from those relationships at the same time they are designated as at fair value through profit or loss.".

(iv) Delete the heading and words in paragraph 36B of IFRS 1 and substitute the following heading and words:

"Exemption from the requirement to present comparative information for FRS 106

36B. An entity that adopts FRSs before 1 January 2006 and chooses to adopt FRS 106 Exploration for and Evaluation of Mineral Resources before 1 January 2006 need not apply the requirements of FRS 106 to comparative information presented in its first FRS financial statements.".

(v) Delete paragraph 43A of IFRS 1 and substitute the following paragraph:

“43A. An entity is permitted to designate a previously recognised financial asset or financial liability as a financial asset or financial liability at fair value through profit or loss or a financial asset as available for sale in accordance with paragraph 25A. The entity shall disclose the fair value of financial assets or financial liabilities designated into each category at the date of designation and their classification and carrying amount in the previous financial statements.”.";

(e)

by inserting, immediately after paragraph (vi) in the third column of the item relating to FRS 104, the following paragraphs:

"(vii) Delete sub-paragraph (d) of paragraph 4 in IFRS 4 and substitute the following sub-paragraph:

“(d) financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either FRS 39 and FRS 32 or this Standard to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.”.

(viii) Insert, immediately after paragraph 41 of IFRS 4, the following paragraph:

“41A. Financial Guarantee Contracts (Amendments to FRS 39 and FRS 104), issued in January 2006, amended paragraph 4 (d), B18 (g) and B (19f). An entity shall apply those amendments for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies those amendments for an earlier period, it shall disclose that fact and apply the related amendments to FRS 39 and FRS 32 at the same time.”.

(ix) Insert, immediately after the definition of “fair value” in Appendix A of IFRS 4, the following definition:

"Financial guarantee contract

A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.".

(x) Delete sub-paragraph (g) of paragraph B18 in Appendix B of IFRS 4 and substitute the following sub-paragraph:

“(g) credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. These contracts could have various legal forms, such as that of a guarantee, some types of letter of credit, a credit derivative default contract or an insurance contract. However, although these contracts meet the definition of an insurance contract, they also meet the definition of a financial guarantee contract in FRS 39 and are within the scope of FRS 32 and FRS 39, not this FRS (see paragraph 4 (d)). Nevertheless, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either FRS 39 and FRS 32 or this Standard to such financial guarantee contracts.”.

(xi) Delete sub-paragraph (f) of paragraph B19 in Appendix B of IFRS 4 and substitute the following sub-paragraph:

“(f) a credit-related guarantee (or letter of credit, credit derivative default contract or credit insurance contract) that requires payments even if the holder has not incurred a loss on the failure of the debtor to make payments when due (see FRS 39).”."; and

(f)

by inserting, immediately after the item relating to FRS 106, the following item:

“

FRS 107
Financial
Instruments:
Disclosures

IFRS 7
Financial
Instruments:
Disclosures

(i) Delete sub-paragraph (d) of paragraph 3 in IFRS 7 and substitute the following sub-paragraph:

"(d) insurance contracts as defined in FRS 104 Insurance Contracts. However, this FRS applies to derivatives that are embedded in insurance contracts if FRS 39 requires the entity to account for them separately.

Moreover, an issuer shall apply this FRS to financial guarantee contracts if the issuer applies FRS 39 in recognising and measuring the contracts, but shall apply FRS 104 if the issuer elects, in accordance with paragraph 4 (d) of FRS 104, to apply FRS 104 in recognising and measuring them.".

(ii) Delete paragraph 43 of IFRS 7 and substitute the following paragraph:

“43. Companies incorporated or foreign companies registered under the Companies Act, that have been admitted to the official list of a securities exchange in Singapore and have not been removed from that official list, shall apply this FRS for annual periods beginning on or after 1 January 2007. All other entities incorporated or registered in Singapore shall apply this FRS for annual periods beginning on or after 1 January 2008. Earlier application is encouraged. If an entity applies this FRS for an earlier period, it shall disclose that fact.”

(iii) Delete paragraph 45 of IFRS 7 and the accompanying heading.

(iv) Insert, immediately after the words “financial asset or financial liability at fair value through profit or loss” in Appendix A to IFRS 7, the following words:

“• financial guarantee contract”.

(v) Delete paragraph C1 of Appendix C to IFRS 7 and substitute the following paragraph:

“In Financial Reporting Standards, including Interpretations, references to FRS 32 Financial Instruments: Disclosure and Presentation are replaced by references to FRS 32 Financial Instruments: Presentation, unless otherwise stated below.”

(vi) Delete the following words in paragraph C2 of Appendix C to IFRS 7:

“IAS 32 Financial Instruments: Disclosure and Presentation (as revised in 2003) is amended as described below.”;

“This Introduction refers to IAS 32 as revised in 2003. In August 2005 IASB amended IAS 32 by relocating all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures.”;

“In August 2005 the IASB relocated all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures.”;

“In August 2005 the Board revised disclosures about financial instruments and relocated them to IFRS 7 Financial Instruments: Disclosures;”, and

“In August 2005 the IASB relocated all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures.”,

and substitute the following words respectively:

“FRS 32 Financial Instruments: Disclosure and Presentation (as revised in 2004) is amended as described below.”;

“This Introduction refers to FRS 32 as revised in 2004. In January 2006 FRS 32 was amended by relocating all disclosures relating to financial instruments to FRS 107 Financial Instruments: Disclosures.”;

“In January 2006, all disclosures relating to financial instruments were relocated to FRS 107 Financial Instruments: Disclosures.”;

“In January 2006, disclosures about financial instruments were revised and relocated to FRS 107 Financial Instruments: Disclosures.”; and

“In January 2006, all disclosures relating to financial instruments were relocated to FRS 107 Financial Instruments: Disclosures.”.

(vii) Delete the following words in paragraph C7 of Appendix C to IFRS 7:

“IAS 39 Financial Instruments: Recognition and Measurement (as amended in April 2005) is amended as described below.”; and

“In August 2005 the IASB relocated all disclosures relating to financial instruments were relocated to IFRS 7 Financial Instruments: Disclosures.”,

and substitute the following words respectively:

“FRS 39 Financial Instruments: Recognition and Measurement (as amended in 2005) is amended as described below.”; and

“In January 2006, all disclosures relating to financial instruments were relocated to FRS 107 Financial Instruments: Disclosures.”.

(viii) Delete the word “June” in paragraph C8 of Appendix C to IFRS 7.".

”(

Amendment of Seventh Schedule

3. The Seventh Schedule to the Companies (Accounting Standards) Regulations is amended by inserting, immediately after the item relating to INT FRS 105, the following item:

"INT FRS 106 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment

IFRIC Interpretation 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment

Delete the following words in paragraph 8 of IFRIC Interpretation 6:

“The IFRIC was asked to determine”, and substitute the following words:

“This Interpretation determines”.".

[G.N. Nos. S 401/2004; S 412/2004; S 521/2004; S 561/2004; S124/2005; S 326/2005; S 546/2005]

Made this 30th day of December 2005.

J Y PILLAY

Chairman,
Council on Corporate Disclosure and Governance,
Singapore.

[F200402551T; AG/LEG/SL/50/2005/3 Vol. 1]

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