As you might know, we have some revised accounting standards from IFRS. IFRS 9 and IFRS 15 become effective on 1st of January 2018, while IFRS 16 is slated for 2019. These accounting standards are replacing the existing ones with an aim to bring in simplicity and reduce ambiguity.
Let us learn the changes IFRS 9 will bring about and its impact the various accounting treatments in the near future.
IFRS – 9 (Earlier IAS – 39)
As per official definition by the IFRS, IAS 39 establishes principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. It also prescribes principles for derecognizing financial instruments and for hedge accounting. IAS 39 was considered as one of the most difficult accounting standards. In order to reduce the complexity, IASB has come out with IFRS 9. You will have to go through the earlier standard (IAS 39) to appreciate the following:
Changes in scope:
- Financial instruments that are in the scope of IAS 39 are also in the scope of IFRS 9. However, in accordance with IFRS 9, an entity can designate certain instruments subject to the own-use exception at Fair Value through Profit or Loss (FVTPL). Hence, IFRS 9 will apply to these instruments.
- The IFRS 9 impairment requirements apply to all commitments and contract assets in the scope of IFRS 15 Revenue from Contracts with Customers.
- More income statement volatility: IFRS 9 will raise the risk that more assets will have to be measured at fair value with changes in fair value recognized in profit and loss as they rise. (In simple terms, fair value through profit and loss recognition increases the volatility of profit and loss)
- Earlier recognition of impairment losses on receivables and loans, including trade receivables:Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books – even if it is highly likely that the asset will be fully collectible.
- Significant new disclosure requirements: the more significantly new systems and processes to collect the necessary data.
- Impairment of financial assets – Investments in equity instruments: IFRS 9 eliminates impairment assessment requirements for investments in equity instruments because, they now can only be measured at FVPL or FVOCI and not fair value and fair value changes to profit and loss.
Changes in Classification and Measurement but not limited to:
- The classification under IAS 39 of held to maturity, loans and receivables, FVTPL, and available-for-sale determine their measurement. These are replaced in IFRS 9 with categories that reflect the measurement, namely amortized cost, fair value through other comprehensive income (FVOCI) and FVTPL.
- IFRS 9 rests classification of financial assets on the contractual cash flow characteristics and the entity’s business model for managing the financial asset, whereas IAS 39 bases the classification on specific definitions for each category. Overall, the IFRS 9 financial asset classification requirements are considered more principle based than under IAS 39.
- Under IFRS 9, embedded derivatives are not separated if the host contract is an asset within the scope of the standard. Rather, the entire hybrid contract is assessed for classification and measurement. This removes the complexity of IAS 39 bifurcation assessment for financial asset host contracts.
- Loans and receivables, including short-term trade receivables: IFRS 9 establishes a new approach for loans and receivables, including trade receivables—an “expected loss” model that focuses on the risk that a loan will default rather than whether a loss has been incurred.
In the next post we give you the lowdown on IFRS 15 and decode its impact on the accounting treatment. So, stay hooked to our blog for more insights on IFRS.
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