When the final year students at the University of Liverpool sign my office wall with their favourite accounting standard as they end their term, there are plenty of scribbles for IFRS 16, Leases, IFRS 2, Share-Based Payment, and even IAS 38, Intangible Assets – although that last one is possibly an attempt to win favour with their lecturer.
There are, however, almost no mentions of any of the financial instrument standards. This is probably in part due to their complexity, echoing the thoughts of a prominent standard-setter who said of IAS 39, Financial Instruments: Recognition and Measurement: ‘If you understand the standard, you probably haven’t read the standard.’
Financial instruments are baffling for many but crucial for others
For many companies, financial instruments are a complex mystery that they hope do not hit their balance sheet. For others, it is central to their reporting. With that in mind, it is worth looking at the three projects that the International Accounting Standards Board (IASB) has in progress that relate to financial instruments.
FICE
The first discussion paper relating to financial instruments with characteristics of equity (FICE) was released way back in 2008. When discussing whether an instrument was debt or equity, the advice dispensed by David Tweedie, the former chairman of the IASB, was that ‘if it looks like a duck, walks like a duck and quacks like a duck, then it’s a duck’.
There is a debate about the distinction between liabilities and equity
It’s a nice soundbite and may still hold true for the more simple financial instruments, but the landscape has since changed. Continuing financial innovation has led to a growing number of complex financial instruments, fuelling an ongoing debate about the underlying rationale of the distinction between liabilities and equity. This has resulted in a diversity of accounting treatments in practice, making it difficult to assess just how these financial instruments affect companies’ financial position and performance.
An exposure draft for the FICE project was released in November 2023, with feedback closing in March 2024. Even though that is now over a year ago, deliberations continue, and final conclusions are not expected until late 2026.
The aim of the project is not to change the classification of a vast number of items. Most simple instruments will have no change in classification. For the more complex ones, the aim is that there will be a clearer rationale for classification and that better information will be provided for the users of financial statements in the form of enhanced disclosures.
DRM
The dynamic risk management (DRM) project has been in existence since 2014 but gained momentum in its current form only in 2022. The aim is to develop a new accounting standard to replace the existing requirements of IAS 39 on portfolio hedge accounting.
The objective of the proposed DRM model is to better reflect an entity’s dynamic risk management strategies and activities in the financial statements. It aims for a stronger interaction between asset/liability and internal risk management.
Applying the DRM model is likely to require considerable work
This new model is looking to introduce key terms such as current net open risk position (CNOP), where an entity designates eligible financial assets and liabilities to calculate the CNOP and give a net risk view that is hopefully consistent with how the risk is managed. Another key element to be introduced is the DRM adjustment, which will be a balance sheet adjustment. Behind both of these elements exists significant complexity alongside the inevitable increase in disclosures.
The DRM model is likely to be optional, but if it is not applied then firms must provide disclosures explaining its approach to risk management. If the DRM model is applied, it is likely to require considerable work to ensure it is implemented correctly and is likely to have a significant impact on financial institutions in particular. An exposure draft on the project is expected in late 2025.
Amortised cost
The final project to mention is the newest, and perhaps the simplest. It is looking at some principles relating to the amortised cost measurement method where there is diversity in application. This project began in 2024, and in June 2025 the IASB agreed to move it to the standard-setting phase, with the aim of releasing an exposure draft in the second half of 2026.
Amortised cost has the furthest to go but also the biggest likely impact
The initial work on this project will focus on how changes in expected cashflows can affect the effective interest rate, which is central to the amortised cost principle. It will also consider how these changes in expected cashflows affect the carrying amount, including interaction with impairment.
Amortised cost is the project with the furthest to go, but is the most likely of the three to have impacts on the widest range of businesses. It is the project that most non-financial institutions are likely to have to keep the closest eye on.
Ongoing
Work continues on these three incredibly technical areas. It will be work that many people do not notice and will almost inevitably lead to increased disclosure for the businesses it does relate to. Either way, it is safe to assume that financial instruments will not be making an appearance on the leaderboard of favourite accounting standards any time soon.
