Contrary to widespread belief, IFRS 9 affects more than just financial institutions
International Financial Reporting Standard 9 (IFRS 9) responds to criticisms that International Accounting Standard 39 (IAS 39) is too complex, is inconsistent with the way entities manage their businesses and risks, and defers the recognition of credit losses on loans and receivables until too late in the credit cycle.
The new standard is effective for years beginning on or after January 1, 2018, with earlier adoption permitted. Entities whose predominate activities are insurance-related can delay implementation until 2021.
The International Accounting Standards Board developed IFRS 9 in three phases, dealing separately with the classification and measurement of financial assets, impairment and hedging.
- Chris Wood, Partner, Accounting Advisory Services, Toronto
Mandatory redeemable preferred shares and “puttable” instruments (i.e. investments in mutual fund units) which must be classified as FVPL
Freestanding derivative financial assets (e.g. purchased options, forwards and swaps with a positive fair value at the balance sheet date), which must be classified as FVPL
Investments in equity instruments
Entity irrevocably elects at initial recognition to recognize only dividend income on a qualifying investment in profit and loss, with no recycling of changes in fair value accumulated in equity through other comprehensive income. All others should be classified as FVPL.
For more information on classification and measurement, read our publication Financial Instruments: Understanding the basics
For more information on impairment, read our publication Financial Instruments: Understanding the basics
The third major change that IFRS 9 introduces relates to hedging - IFRS 9 allows more exposures to be hedged and establishes new criteria for hedge accounting that are somewhat less complex and more aligned with the way entities manage their risks than under IAS 39. Companies that have rejected using hedge accounting in the past because of its complexity, and those wishing to simplify, refine or extend their existing hedge accounting, may find the new hedging requirements more accommodating than those in IAS 39.
For more information, read our practical guide on hedge accounting
Ultimately, the question of how an entity is affected by IFRS 9 is that “it depends.” Some entities may find that classification and measurement of their financial assets will be substantially the same as they are currently under IAS 39 and that their impairment allowances may not be affected materially. Others will change substantially.
We can help you re-evaluate your accounting policies, financial statement note disclosures and other areas affected by the new requirements. We can also help you identify changes to your accounting systems and internal controls.
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