Succour for Greek crisis

MOHAN R. LAVI | Updated on July 20, 2011

IFRS-9 standard gives specific instances when cost of financial instruments can be considered to be representative of fair value and when it cannot.

The official name of Greek Parliament is Hellenic. Living up to a part of the name, the country has given hellish times to its citizens over the past few years. Like any crisis, the Greek one had its origins years ago when the country with a tiny economy was consistently living beyond its means. When tough times came , Greece discovered that it did not have enough to service its debt. Events quickly overtook the Government forcing an austerity package. Probably the most difficult part of the austerity package involves disinvesting on an average one public sector undertaking – which accounts for 40 per cent of the Gross Domestic Product (GDP) of the country— every 15 days.

Banks that hold Greek bonds have discovered that their values are at their nadir. The new Chairman at the International Accounting Standards Board (IASB) has commenced his tenure with a statement that adoption of IFRS-9 on Financial Instruments would give more breathing space to banks from accounting for losses on bonds.


IAS 39, the previous avatar of IFRS-9, was pooh-poohed as an over-ambitious standard since differing economic conditions ensured that the mark-to-market mantra stipulated for most financial instruments therein did not represent the fair value in moody markets. IFRS-9 nipped the problem in the bud by providing for only two classifications of financial instruments — those measured at amortised cost and those measured at fair value.

The available for sale and held-to-maturity classifications stipulated in IAS-39 were eliminated. Classification is made at the time the financial asset is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument.

IFRS 9 permits debt instruments to be measured at amortised cost if they met two tests — the business model test and the cash flow characteristics test.

The business model test would be satisfied if the objective of the entity's business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes).

The cash flow characteristics test would be said to have been satisfied if the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.

The European banks that held Greek bonds would have the option to value the investments at amortised cost since at least one of the tests would be satisfied. IFRS-9 requires all equity instruments to be measured at fair value. However, considering the fact that borrowers in trouble normally propose that the debt be converted into equity, IFRS-9 provides an exception. The standard gives specific instances when cost can be considered to be representative of fair value and when it cannot.

Measurement at cost cannot avoid the annual impairment test on these assets though it is felt that the losses on impairment would not be as much as the losses that could have been incurred had the instruments been measured at fair value and the dip in values hit the profit and loss account.

Reviving IFRS

IFRS-9 has been issued after vehement protests over IAS-39 and is seen as a saviour to prevent IFRS standards themselves from being impaired. Treading carefully, the IASB has issued the standard in stages.

India has not gone beyond the exposure draft stage in implementing the accounting standards for financial instruments. Possibilities of a Greek-style debt syndrome in India are remote considering the fact that Government bonds are trading at healthy rates and external debt is not too high. The Ministry of Corporate Affairs along with the Institute of Chartered Accountants of India combine should think of amending Ind-AS 32, 39 and 107 on the lines of IFRS-9 with its toned-down measurement criteria.

(The author is a Banglore-based chartered accountant).

Published on July 14, 2011

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