reporting date. [IFRS 13.49].
The measurement exception for offsetting positions only applies to financial assets and
financial liabilities within the scope of IFRS 9. [IFRS 13.52]. Also, as indicated by these
criteria, the portfolio approach only applies to financial instruments with offsetting
risks. As such, a group of financial instruments comprised of only financial assets (e.g. a
portfolio of loans) would not qualify for the exception and would need to be valued in
a manner consistent with the appropriate unit of account. However, an entity need not
maintain a static portfolio to use the measurement exception, i.e. the entity could have
assets and liabilities within the portfolio that are traded.
When IFRS 13 was issued, paragraph 52 stated that the measurement exception only
applied to financial assets and financial liabilities within the scope of IFRS 9. However,
it was not the Boards’ intention to exclude contracts to buy or sell a non-financial item
(e.g. physically settled commodity derivative contracts) that are within the scope of
IFRS 9 (and that are measured at fair value) from the scope of the measurement
exception. [IFRS 13.BC119A, BC119B]. If a contract to buy or sell a non-financial item is
within the scope of IFRS 9, those standards treat that contract as if it were a financial
instrument. Therefore the IASB amended paragraph 52 to clarify that all contracts
within the scope of IFRS 9 are eligible for the measurement exception, regardless of
whether they meet the definitions of financial assets or financial liabilities in IAS 32.
[IFRS 13.52].
12.1.1 Accounting
policy
considerations
As noted above, the use of the portfolio approach is an accounting policy decision, to
be made in accordance with IAS 8 (see Chapter 3), which must include an entity’s policy
regarding measurement assumptions – i.e. for both allocating bid-ask adjustments and
credit adjustments (see 12.2 below).
An entity can choose to use the portfolio approach on a portfolio-by-portfolio basis. In
addition, if entities choose this policy for a particular portfolio, they are not required to
apply the portfolio approach to all of the risks of the financial assets and liabilities that
make up the particular group. For example, an entity could choose to measure only the
credit risk associated with a group of financial instruments on a net basis, but not the
group’s exposure to market risk.
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An entity may also decide to apply the portfolio approach to only certain market risks
related to the group. For example, an entity that is exposed to both interest rate and
foreign currency risk in a portfolio of financial assets and liabilities could choose to
measure only its interest rate risk exposure on a net basis.
The accounting policy decision can be changed if an entity’s risk exposure preferences
change, for example, a change in strategy to have fewer offsetting positions. In that case,
the entity can decide not to use the exception but instead to measure the fair value of
its financial instruments on an individual instrument basis. We generally expect that an
entity’s use of the portfolio approach would be consistent from period to period as
changes in risk management policies are typically not common. [IFRS 13.51, BC121].
12.1.2 Presentation
considerations
IFRS 13 is clear that applying the portfolio approach for measurement purposes does
not affect financial statement presentation. For example, an entity might manage a
group of financial assets and liabilities based on the net exposure(s) for internal risk
management or investment strategy purposes, but be unable to present those
instruments on a net basis in the statement of financial position because the entity does
not have a positive intention and ability to settle those instruments on a net basis, as is
required by IAS 32. [IAS 32.42].
If the requirements for presentation of financial instruments in the statement of
financial position differ from the basis for the measurement, an entity may need to
allocate the portfolio-level adjustments (see 12.2 below) to the individual assets or
liabilities that make up the portfolio. Entities may also need to allocate portfolio-
level adjustments for disclosure purposes when items in the group would be
categorised within different levels of the fair value hierarchy (see 16 below for
additional discussion on the allocation of portfolio-level adjustments related to the
fair value hierarchy disclosures).
IFRS
13 does not prescribe any methodologies for allocating portfolio-level
adjustments; instead, it states that the allocation should be performed in a reasonable
and consistent manner that is appropriate in the circumstances. [IFRS 13.50].
12.1.3
Is there a minimum level of offset required to use the portfolio
approach?
While there are explicit criteria that an entity must meet in order to use the portfolio
approach, IFRS 13 does not specify any minimum level of offset within the group of
financial instruments. For example, if an entity has positions with offsetting credit risk
to a particular counterparty, we believe use of the portfolio approach is appropriate
even if the extent of offset is minimal (provided that the entity has in place a legally
enforceable agreement, as discussed at 12.2.2 below, that provides for offsetting upon
default and all the other required criteria are met). To illustrate, even if the gross credit
exposure was CU 100,000 (long) and CU 5,000 (short), upon counterparty default the
entity would be exposed to a credit loss of only CU 95,000 under the terms of its master
netting agreement.
With respect to market risk, considering the degree of offset may require additional
judgement. Entities should assess the appropriateness of using the portfolio
Fair value measurement 1023
approach based on the nature of the portfolio being managed (e.g. derivative versus
cash instruments) and its documented risk management policies (or investment
strategies). An entity should use the portfolio approach in a manner consistent with
the IASB’s basis for providing the measurement exception and not in a manner to
circumvent other principles within the standard.
12.1.4
Can Level 1 instruments be included in a portfolio of financial
instruments with offsetting risks when calculating the net exposure
to a particular market risk?
It is our understanding that Level 1 instruments can be included when using the
exception to value financial instruments with offsetting risks. An entity is allowed to
consider the effect of holding futures contracts when evaluating its net exposure to a
particular market risk, such as interest rate risk. Paragraph 54 of IFRS 13 gives an
example stating that ‘an entity would not combine the interest rate risk associated with
a financial asset with the commodity price risk associated with a financial liability
because doing so would not mitigate the entity’s exposure to interest rate risk or
commodity price risk’. [IFRS 13.54].
We understand that some constituents believe that the requirement in IFRS 13 to
measure instruments that
trade in active markets based on P×Q does not apply to
the measurement of the net exposure when the portfolio exception is used, since
the net exposure does not trade in an active market. As such, these constituents
argue that the measurement of the net exposure and the allocation of this value back
to the instruments that comprise the group are not constrained by the price at which
the individual instruments trade in active markets. Others believe that although
Level 1 instruments, such as futures contracts, may be considered when calculating
an entity’s net exposure to a particular market risk, the quoted price (unadjusted)
for these Level 1 instruments should be used when allocating the fair value to the
individual units of account for presentation and disclosure purposes, to comply with
the requirement in IFRS 13 to measure Level 1 instruments at P×Q. However,
depending on the extent of Level 1 instruments in the group, it may not always be
possible to allocate the fair value determined for the net exposure back to the
individual instruments in a manner that results in each of these instruments being
recorded at P×Q. For this reason, there are constituents who believe that the use of
the portfolio exception should never result in the measurement of Level 1
instruments at an amount other than P×Q. That is, the determination of the fair value
of the net exposure is constrained by the requirement that all Level 1 instruments
within the group are recorded at a value based on P×Q.
As discussed at 5.1.2 above, we understand that the IASB did not intend the portfolio
exception to change existing practice under IFRS or override the requirement in
IFRS 13 to measure Level 1 instruments at P×Q or the prohibition on block
discounts. However, given the lack of clarity, some have asked questions about how
these requirements would apply in practice. In 2013, the IFRS Interpretations
Committee referred a request to the Board on the interaction between the use of
Level 1 inputs and the portfolio exception. The IASB discussed this issue in
December 2013, but only in relation to portfolios that comprise only Level 1 financial
instruments whose market risks are substantially the same. The Board tentatively
1024 Chapter 14
decided that the measurement of such portfolios should be the one that results from
multiplying the net position by the Level 1 prices. Therefore, in September 2014, the
IASB proposed adding a non-authoritative example to illustrate the application of
the portfolio exception in these circumstances.
As discussed at 5.1.2 above and 12.2 below, in April 2015, after considering responses to
this proposal from constituents, the IASB concluded it was not necessary to add the
proposed illustrative example to IFRS 13.
12.2 Measuring fair value for offsetting positions
If the portfolio approach is used to measure an entity’s net exposure to a particular
market risk, the net risk exposure becomes the unit of measurement. That is, the
entity’s net exposure to a particular market risk (e.g. the net long or short Euro
interest rate exposure within a specified maturity bucket) represents the asset or
liability being measured.
In applying the portfolio approach, an entity must assume an orderly transaction
between market participants to sell or transfer the net risk exposure at the
measurement date under current market conditions. The fair value of the portfolio
is measured on the basis of the price that would be received to sell a net long
position (i.e. an asset) for a particular risk exposure or transfer a net short position
(i.e. a liability) for a particular risk exposure. [IFRS 13.48]. That is, the objective of
the valuation is to determine the price that market participants would pay (or
receive) in a single transaction for the entire net risk exposure, as defined. Some
argue that, as a result, an adjustment based on the size of the net exposure could
be considered in the valuation if market participants would incorporate such an
adjustment when transacting for the net exposure. Since the unit of measurement
is the net exposure, size is considered a characteristic of the asset (net long
position) or liability (net short position) being measured, not a characteristic of the
entity’s specific holdings. Many have interpreted the equivalent requirements in
US GAAP in this way. Others believe that the portfolio exception does not override
the unit of account guidance provided in IFRS 9 and, therefore, any premiums or
discounts that are inconsistent with that unit of account, i.e. the individual
financial instruments within the portfolio, must be excluded. This would include
any premiums or discounts related to the size of the portfolio. As discussed at 5.1.2
above, we understand the IASB did not intend the portfolio exception to override
the requirement in IFRS 13 to measure Level 1 instruments at P×Q or the
prohibition on block discounts which raises questions as to how the portfolio
exception would be applied to Level 1 instruments.
Fair value measurement 1025
In 2013, the IFRS Interpretations Committee referred a request to the Board on the
interaction between the use of Level 1 inputs and the portfolio exception. The IASB
discussed this issue in December 2013, but only in relation to portfolios that comprise
only Level 1 financial instruments whose market risks are substantially the same. The
Board tentatively decided that the measurement of such portfolios should be the one
that results from multiplying the net position by the Level 1 prices. In September 2014,
the IASB proposed adding the following non-authoritative example to illustrate the
application of the portfolio exception in these circumstances.
Example 14.19: Applying the portfolio approach to a group of financial assets and
financial liabilities whose market risks are substantially the same
and whose fair value measurement is categorised within Level 1
of the fair value hierarchy20
Entity A holds a group of financial assets and financial liabilities consisting of a long position of 10,000
financial assets and a short position of 9,500 financial liabilities whose market risks are substantially the
same. Entity A manages that group of financial assets and financial liabilities on the basis of its net exposure
to market risks. The fair value measurement of all the financial instruments in the group is categorised within
Level 1 of the fair value hierarchy.
The mid-price and the most representative bid and ask prices are as follows:
Bid
Mid
Ask
Most representative exit price
CU 99
CU 100
CU 101
Entity A applies the exception in paragraph 48 of the IFRS that permits Entity A to measure the fair value of
the group of financial assets and financial liabilities on the basis of the price that would be received to sell, in
this particular case, a net long position (i.e. an asset) in an orderly transaction between market participants at
the measurement date under current market conditions.
Accordingly, Entity A measures the net long position (500 financial assets) in accordance with the corresponding
Level 1 prices. Because the market risks arising from the financial instruments a
re substantially the same, the
measurement of the net position coincides with the measurement of the exposure arising from the group of financial
assets and financial liabilities. Consequently, Entity A measures the group of financial assets and financial liabilities on the basis of the price that it would receive if it would exit or close out its outstanding exposure as follows:
Quantity held (Q)
Level 1 price (P)
P×Q
Net long position
500
CU 99
CU 49,500
Entity A would have also achieved the same measurement of CU 49,500 by measuring the net long position
at the mid-price (i.e. CU 100 × 500 = CU 50,000) adjusted by a bid-offer reserve (CU 1 × 500 = CU 500).
Entity A allocates the resulting measurement (i.e. CU 49,500) to the individual (10,000) financial assets and (9,500)
financial liabilities. In accordance with paragraph 51 of the IFRS, Entity A performs this allocation on a reasonable
basis that is consistent with previous allocations of that nature using a methodology appropriate to the circumstances.
1026 Chapter 14
In response to this proposal, some respondents raised concerns because they believed there
was a risk that constituents may infer principles from this simple example that could lead to
unintended consequences. Respondents noted that the illustrative example did not address:
• other scenarios and circumstances to which the portfolio approach would apply.
For example, situations where the instruments in the portfolio are categorised
within Level 2 or Level 3 of the fair value hierarchy or for which different Level 1
prices are available; and
• allocation of the resulting measurement to each instrument in the portfolio for
disclosure purposes.
The proposed illustrative example also raised questions about the interaction between
the portfolio exception and the use of mid-market pricing as a practical expedient in
accordance with paragraph 71 of IFRS 13 and may have required clarification of the term
‘bid-offer reserve adjustment’ used in the example. Despite these concerns, the majority
of the respondents agreed that the proposed additional illustrative example
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 202
