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Danske Bank A/S Period End 31 December 2009
Proposal to end deferral loophole on corporate bonds draws comment
Danish Bank Danske Bank draws attention, in its discussion of impending changes in IFRS, to the implicit intention of the International Accounting Standards Board no longer to permit deferral of movements in the fair value of corporate bonds, the company having last year adopted this classification for DKK117 billion corporate bonds.
In November 2009, the International Accounting Standards Board (IASB) issued IFRS 9 “Financial instruments” as part of a project in three phases to progressively replace IAS 39 “Financial instruments: recognition and measurement” with a more principles-based and less complex Standard. This includes the requirement to use the ‘business model’ principle in classifying financial instruments for accounting purposes.
IFRS 9 requires changes in the fair value of financial instruments carried at fair value to be recognised in the income statement, with the exception of equity instruments. Danske Bank notes that this would mean (in the terminology of current IFRS) that corporate bonds could not be treated as available for sale.
The company last year changed the classification of DKK117 billion mortgage and “foreign covered” bonds to available for sale, removing movements in fair value from the income statement. It states this year that the market remains highly illiquid and that it is thus difficult to distinguish transactions that reflect a fair price from those that reflect the conditions of forced sales. The issue is thus material in the context of Danske Bank’s financial statements, although the company states that it would not have a material effect on measurement.
The relevant section of the Basis for Conclusions of IFRS 9 on the treatment of gains and losses discusses only the cases for and against classification of equity instruments as available for sale and does not discuss corporate bonds. In our view, Danske Bank has identified a significant impending change that will restrict the ability to recognise fair value movements outside the income statement whilst continuing to carry bonds at fair value.
Danske Bank also notes that the European Union has not endorsed IFRS 9. This occurred in the light of public opposition despite recommendation for endorsement by the European Financial Reporting Advisory Group.