In 2014 the IASB (International Accounting Standards Board) issued the new standard (IFRS 9) for the accounting of financial instruments. The reason for this new standard is that many financial institutions experienced that the requirements in the current standard (IAS 39) were difficult to understand, apply and interpret. To address the deficiencies of the current standard, a new standard (IFRS 9) for the financial reporting of financial instruments that is more principle-based is being introduced. IFRS 9 replaces most of the guidance in IAS 39. The IASB decided to accelerate its project to replace IAS 39 due to the financial crisis. IFRS 9 is divided into three main phases:
The first phase of the IFRS 9 provides revised guidance on the classification and measurement of financial assets by introducing a fair value through other comprehensive income category for certain debt instruments. IFRS 9 requires that all financial assets are subsequently measured at:
Whether a financial asset is classified as amortized cost, FVOCI or FVPL is mainly based on the business model assessment and the SPPI-Test (Solely Payments of Principal & Interest).
The main change in the classification and measurement of financial liabilities is the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss.
IFRS 9 contains requirements for a new impairment model which will result in earlier recognition of credit losses. The main difference with the current standard (IAS 39) is the change from using an incurred loss model to an expected loss model. The new requirements on impairment provide institutions with more useful information in their financial statements about their expected credit losses on financial instruments. With this information institutions can notice financial risks earlier.
The new general hedge accounting requirements added to IFRS 9 reflect the IASB’s goal to simplify hedge accounting. The standard aligns also hedge accounting more closely with the risk management activities undertaken by institutions and provides decision-useful information about an entity’s risk management strategies. The new hedge accounting model makes it possible for institutions to present their risk management activities better in their financial statements and is more principal-based than the previous IASB model. The changes on hedge accounting include the requirements for the general hedge accounting. IASB is working on a separate project to address the accounting for hedges of open portfolios (macro hedge accounting).
Our team has experience in helping financial institutions successfully complete the transition to new accounting standards. As well as helping you to get the numbers right and we can guide you through the operational challenges. Our flexible and scalable methodology focuses on effective knowledge transfer, in order for you to get lasting benefits. We can help you to prepare for IFRS 9 with:
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