IFRS 9 is a set of international financial reporting standards issued by the International Accounting Standards Board (IASB) that replaces International Accounting Standard 39 (IAS 39). It applies to the classification, measurement, and recognition of financial instruments and is effective for annual periods beginning on or after January 1, 2018.
The main objectives of IFRS 9 are to ensure that the financial statements provide information that is relevant, reliable, and comparable, and to improve the transparency and comparability of financial reporting by eliminating the inconsistencies and complexities that arose under IAS 39.
One of the key changes in IFRS 9 is the introduction of a new classification and measurement model for financial instruments. Under this model, financial instruments are classified into one of three categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVPL).
The classification of financial instruments depends on the business model in which they are held and the contractual cash flows that they are expected to generate. Financial instruments that are held for collection of contractual cash flows and that do not have significant changes in fair value due to credit risk are classified as amortized cost. Financial instruments that are held for collection of contractual cash flows and that have significant changes in fair value due to credit risk are classified as FVOCI. Financial instruments that are held for trading purposes or that are designated as at FVPL are also classified as FVPL.
Financial instruments classified as amortized cost are measured at amortized cost using the effective interest method, which is a method of calculating the periodic interest expense on a loan or other debt instrument that takes into account the impact of the compounding of interest. Financial instruments classified as FVOCI are measured at fair value, with the resulting changes in fair value recognized in other comprehensive income (OCI) rather than in profit or loss. Financial instruments classified as FVPL are measured at fair value, with the resulting changes in fair value recognized in profit or loss.
Another significant change introduced by IFRS 9 is the introduction of a new expected credit loss (ECL) model for the impairment of financial assets. The ECL model replaces the incurred loss model under IAS 39 and is based on the expected credit losses that a financial asset is expected to incur over its expected life. The ECL model is designed to provide a more forward-looking approach to credit impairment by requiring entities to recognize expected credit losses at an earlier stage.
Under the ECL model, entities are required to recognize an impairment allowance for financial assets that are not measured at FVPL. The impairment allowance is calculated as the difference between the asset’s amortized cost and the present value of the expected cash flows, discounted using the asset’s original effective interest rate. For financial assets measured at FVPL, entities are required to recognize an impairment loss when the fair value of the asset is less than its carrying amount.
In addition to the changes to the classification and measurement and impairment of financial instruments, IFRS 9 also introduces new requirements for the recognition and derecognition of financial instruments. It requires entities to recognize a financial asset or liability when they become a party to the contractual terms of the instrument, and to derecognize a financial asset or liability when the contractual rights to the asset or the obligations under the liability are extinguished or transferred.
In conclusion, IFRS 9 financial instruments is a major overhaul of the accounting standards for financial instruments that aims to improve the relevance, reliability, and comparability of financial reporting.
Challenges in implementing IFRS 9 financial instruments
One of the challenges in implementing IFRS 9 is the need for entities to make significant changes to their systems and processes in order to comply with the new requirements. This can be a significant undertaking, especially for entities with a large number of financial instruments and a complex financial reporting environment.
Another challenge is the potential impact of IFRS 9 on financial statements. The new classification and measurement model and the ECL model may result in different accounting outcomes compared to those under IAS 39, which could affect an entity’s financial performance and position. For example, the recognition of expected credit losses at an earlier stage may result in an increase in the impairment allowance and a decrease in profit or loss, while the classification of financial instruments as FVOCI may result in the recognition of changes in fair value in other comprehensive income rather than in profit or loss.
To assist entities in implementing IFRS 9, the IASB has issued a number of supporting documents and guidance, including the IFRS 9 Implementation Guide, which provides practical guidance on how to apply the standard.
In summary, IFRS 9 financial instruments is a significant update to the accounting standards for financial instruments that aims to improve the relevance, reliability, and comparability of financial reporting. It introduces a new classification and measurement model for financial instruments and a new expected credit loss model for the impairment of financial assets, as well as new requirements for the recognition and derecognition of financial instruments. While implementing IFRS 9 may be challenging for some entities, it is an important step towards improving the quality and transparency of financial reporting.
