- IFRS 9 Financial Instruments is mandatory for annual periods starting on or after 1 January 2018
- The standard has progressively replaced IAS 39, setting out clearer and simplified requirements for recognition, classification and measurement of financial instruments (including impairment and hedge accounting)
- Domestic equivalents are AASB 9 Financial Instruments and NZ IFRS 9 Financial Instruments
IFRS 9 Financial Instruments, simplifies the complex requirements of its predecessor, IAS 39/ AASB 139/ NZ IAS 39 Financial Instruments: Recognition and Measurement The revisions also sought to address issues highlighted by the 2008 global financial crisis including:
- the timeliness of recognition of expected credit losses
- the complexity of multiple impairment models
- own credit risk.
The standard retains some of the principles in IAS 39. However, significant changes have been made in three key areas:
- classification and measurement of financial assets
- hedge accounting.
IFRS 9 is mandatory for annual periods starting on or after 1 January 2018.The equivalent local standards are AASB 9 Financial Instruments and NZ IFRS 9 Financial Instruments.Go to the XRB website to access NZ IFRS 9
Changes to consider
Classification and measurement of financial assets
IFRS 9 (Chapter 4) introduces a single classification and measurement approach for financial assets that reflects:
- the business model in which financial assets are managed; and
- the financial assets’ contractual cash flow characteristics.
Categories of financial assets
A financial asset is categorised in one of three ways:
- amortised cost
- fair value through profit and loss (FVTPL), including an irrevocable election to present changes in fair value for certain equity investments in other comprehensive income (OCI)
- fair value through other comprehensive income (FVTOCI).
Financial assets with embedded derivatives
The classification and measurement of financial assets containing embedded derivatives has been simplified (see Chapter 4.3). Bifurcation is no longer required when the host contract is a financial asset within the scope of IFRS 9.
Financial assets must be reclassified between categories when the business model for managing those financial assets changes (see Chapter 4.4). This is the only circumstance under which reclassification is allowed, so such changes are expected to be uncommon. No reclassification of financial liabilities is permitted.
IFRS 9 (Chapter 5.5) requires impairment for a financial asset to be assessed based on an "expected credit loss" model, which replaces the "incurred loss" model used in IAS 39. This change is anticipated to generate more useful information about an entity’s expected credit losses on financial instruments.
Specifically, the standard requires entities to account for expected credit losses from the moment when financial instruments are first recognised, rather than when a trigger event occurs. Entities are required “to update the amount of expected credit losses recognised at each reporting date to reflect changes in credit risk,” according to the International Accounting Standards Board (IASB).
The expected credit loss model applies to all financial instruments that are subject to impairment accounting, including trade receivables and lease receivables. The model measures 12-month expected credit losses and lifetime expected credit losses.
IFRS 9's hedge accounting requirements ( see Chapter 6) aim to:
- make hedge accounting easier to understand
- align hedge accounting more closely with the risks the entity faces, the strategies management is taking to manage the risks, and the effectiveness of those strategies
- ease the burden associated with hedge effectiveness testing
- allow more risks to be hedged.
Macro hedging is not dealt with in IFRS 9. It is the subject of a separate project by the International Accounting Standards Board (IASB). Until that project is complete, entities can choose to:
- apply IFRS 9 hedging requirements, which carry forward guidance from IAS 39 on portfolio fair value hedges; or
- continue applying IAS 39 hedging requirements.