By: Jason Goh
The new International Financial Reporting Standard 9 (IFRS 9) is built on a logical, single classification and measurement approach. It’s meant for financial assets that reflect 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 provides more timely recognition of losses. This single model is applicable to all financial instruments subject to impairment accounting.
In addition, IFRS 9 addresses the ‘own credit’ issue. Own credit is when 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. IFRS 9 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 applied early 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:
- Amortized cost
- Fair value through other comprehensive income (FVOCI)
- Fair value through profit and loss
Phase 2 - Impairment
IFRS 9 creates a forward-looking impairment model to recognize expected losses based 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.
IFRS 9 overhauls hedge accounting and introduces significant improvements 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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