Will IFRS 9 end up discouraging investors? I asked that question in another article a few months ago in a discussion of the new requirements, which relate to the accounting treatment of equity investments under IFRS 9. In August 2018, the European Financial Reporting Advisory Group (EFRAG) published a summary of the 53 letters that constituents wrote in response to the discussion paper (DP) released in March 2018. In this article, we'll look at key reactions to (and implications of) IFRS 9.

The discussion paper

The DP asked a few big questions:

  • Would the reintroduction of recycling improve the depiction of the financial performance of long-term investors?
  • Should recycling be accompanied by some form of impairment model?
  • Which impairment model would best meet the general objectives and main features of a robust model for equity instruments?

Recycling or not?

About 70% of the respondents support the reintroduction of recycling for equity investments. They express concern that the prohibition of recycling gains at disposal would, firstly, lead to the impression that gains and losses at disposal are economically not relevant and, secondly, not be consistent with the conceptual framework. These arguments mainly came from preparers and organisations of preparers.

When it comes to one group among the respondents, the National Standard Setters, opinions diverge a little more. Those who favour recycling do so because, they say, it would be more reasonable to recognise changes in value in the financial performance, and to treat dividends and gains on disposal similarly, as such gains would result from the realisation of the fair value of the instrument. The main argument against recycling is that it would be possible to manipulate and misuse this option as an earnings management tool.

Another widespread comment, however, cuts through this discussion: more than 50% of the respondents indicated in their comment letters, despite not being explicitly asked in the DP, that it was too early to propose changes to the new requirements as entities have just started to apply IFRS 9 and the impact for long-term investments is not known yet. They propose waiting for the International Accounting Standards Board's (IASB) post-implementation review.

Possible impairment models

With regards to the second question above, almost all of the respondents endorse the view that recycling should be accompanied by a strong impairment model for prudence and transparency reasons. Furthermore, the profit and loss statement should be the primary source of information in the financial statements when preparers include incurred losses on equity instruments in the financial performance of an entity.

EFRAG proposed two impairment models in its DP:

  • a "revaluation model"
  • an impairment model similar to IAS 39 but with less subjectivity

In the revaluation model, equity instruments are carried at fair value: changes below the original acquisition cost are recognised in profit and loss, and changes above the original acquisition cost are recognised in OCI and recycled on disposal. Additionally, judgments regarding the measurement of the fair value of the instrument are removed. However, one could argue that this model is not an impairment model as such, because it does not determine if changes in fair value are the result of adverse changes of the issuer's economic condition. Plus, it does not fully meet the objective of the fair value option, which is to eliminate volatility in profit and loss.

The model that resembles IAS 39 aims to better clarify when "significant and prolonged" decreases in fair value can be used to assess the impairment of equity instruments. To meet this goal, EFRAG proposes leaving the general principle of the impairment model under IAS 39, but making it more prescriptive and leaving less room for judgment.

When asked what an appropriate impairment model would look like, most respondents agreed that it should provide relevant and reliable information and should be usable for comparisons.

Overall, some constituents like the revaluation model, while others favour one similar to IAS 39. Still others proposed a different approach that takes changes in fair value into consideration, i.e. a model based on the value in use.


I think that EFRAG has a lot work to do now as opinions across the respondents—users and preparers alike—are quite diverse. As mentioned in the beginning of this article, the post-implementation review will better clarify whether the changes will actually have an impact on long-term investments as some stakeholders fear. In addition, a large number of respondents suggested that there should be no changes introduced at European level but rather by the IASB itself.

Please check this blog regularly for updates about the advice about the possible solutions provided by EFRAG to the European Commission.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.