By Jason Goh
The final version of IFRS 9 brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 is built on a logical, single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Built upon this is a forward-looking expected credit loss model that will result in more timely recognition of losses and is a single model that is applicable to all financial instruments subject to impairment accounting.
In addition, IFRS 9 addresses the so-called ‘own credit’ issue, whereby financial institutions book gains through profit or loss as a result of the value of their own debt falling due to a decrease in credit worthiness when they have elected to measure that debt at fair value. The Standard also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment.
IFRS 9 is effective for annual periods beginning on or after 1 January 2018. However, the Standard is available for early application. In addition, the own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments.
Phase 1 – Classification and Measurement
IFRS 9 introduces a single classification and measurement model dependent on:
The entity’s business model objective for managing financial assets, and
The contractual cash flow characteristics of financial assets
Type of classification:
Fair value through other comprehensive income (FVOCI)
Fair value through profit and loss
Phase 2 – Impairment
A forward-looking impairment model to recognize expected losses base on 3 stages:
Phase 3 – Hedge Accounting
Incorporated major overhaul of hedge accounting and introduce significant improvements, principally by aligning the accounting more closely with risk management. As a principle-based approach, IFRS 9 looks at whether a risk component can be identified and measured.
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