Financial Reporting FR

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments
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IFRS 9 is the accounting standard for financial instruments, which was introduced by the International Accounting Standards Board (IASB) in July 2014. It replaced the previous standard, IAS 39, and provides guidance on the classification, measurement, and recognition of financial instruments.

Classification: IFRS 9 requires entities to classify financial assets into three categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). The classification is based on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

Measurement: Financial assets measured at amortized cost are measured at their historical cost, adjusted for any impairment losses. Financial assets measured at FVOCI are initially measured at fair value and subsequently measured at fair value with changes in fair value recognized in other comprehensive income. Financial assets measured at FVTPL are measured at fair value with changes in fair value recognized in profit or loss.

Recognition: IFRS 9 requires entities to recognize financial assets and financial liabilities when they become a party to the contractual provisions of the instrument.

Impairment: IFRS 9 introduced a new expected credit loss model, which requires entities to recognize impairment losses based on expected credit losses rather than incurred credit losses. The expected credit loss model requires entities to consider all reasonable and supportable information, including both historical information and forward-looking information.

Hedge accounting: IFRS 9 introduced new hedge accounting requirements that are more principles-based and provide greater flexibility for entities to apply hedge accounting. The new requirements also allow for more effective accounting for hedging relationships that involve non-financial risks.

New developments: Since its introduction, IFRS 9 has undergone several amendments and interpretations. In June 2021, the IASB issued amendments to IFRS 9 that provide relief to entities from applying certain aspects of the standard in response to the COVID-19 pandemic. The amendments provide entities with an option to apply practical expedients to simplify the application of IFRS 9 in specific areas.

Example: An entity has a portfolio of loans that it manages with the objective of collecting contractual cash flows. The loans have fixed interest rates and are not traded in an active market. The entity has not elected to measure the loans at FVTPL. The loans are classified as financial assets measured at amortized cost, and the entity recognizes interest income based on the effective interest rate method. The entity also recognizes impairment losses based on the expected credit loss model.

Case study: A company has a portfolio of bonds that it manages with the objective of trading. The bonds are traded frequently in an active market. The company has elected to measure the bonds at FVTPL. The bonds are classified as financial assets measured at FVTPL, and the company recognizes changes in fair value in profit or loss. The company also recognizes impairment losses based on the expected credit loss model.

In conclusion, IFRS 9 provides guidance on the classification, measurement, and recognition of financial instruments. The standard has introduced a new expected credit loss model, new hedge accounting requirements, and has undergone several amendments and interpretations since its introduction. It is important for entities to stay up to date with the developments in IFRS 9 to ensure they are in compliance with the accounting standards

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