8 April 2013
In November 2009, the IASB issued the chapters of IFRS 9 that relate to the classification and measurement of financial assets. The key principles of the new rules can be summarized as follows:
- According to the new approach, all financial assets shall be classified either at “amortised cost” or at “fair value” depending on:
- the entity’s business model for managing the financial assets and
- the contractual cash flow characteristics of the financial asset.
- If a financial asset is measured at fair value, changes in fair value will generally be measured in profit or loss. However, fair value changes in equity instruments not held for trading may also be recognised in other comprehensive income under certain circumstances, without subsequent reclassification to profit or loss.
In October 2010, the IASB added to IFRS 9 the requirements for classifying and measuring financial liabilities, which correspond with the requirements in IAS 39 in most respects. Differences exist mainly regarding the issue of “own credit risk”.
At the same time, the requirements in IAS 39 relating to the derecognition of financial assets and financial liabilities were carried forward unchanged to IFRS 9.
IAS 39 applies a so-called incurred loss model to determine impairment of financial instruments. Under that model, an impairment loss is only recognised after a loss event (e.g. a delinquency in payments of principal or interest) has already occurred (recognition threshold). During the financial crisis, this approach was criticised for resulting in recognising credit losses too late.
Following years of discussion and published proposals, the IASB published a revised Exposure Draft in March 2013. The ED is based on a more forward-looking approach which also takes into account expected credit losses resulting from default events that are expected to occur in the future (expected loss model). Under that model, recognition of a credit loss no longer depends on the entity first identifying a loss event that occurred prior to the reporting date. The possibility of credit losses must be considered even if that probability is low. A more detailed summary of the ED can be found in our “Latest IASB Exposure Drafts: Expected Credit Losses and Novation of Derivatives” article.
At the moment, the IASB is planning to issue a final version of the new general hedge accounting requirements, for both financial and non-financial instruments, in the second (or third) quarter of 2013. In a further project, the IASB is also addressing risk management strategies related to open portfolios (macro hedging). A discussion paper on macro hedge accounting is planned for the second (or third) quarter of 2013.
IFRS 9 was originally to be mandatory for periods beginning on or after January 1, 2013. Due to the delays in completing this project, the IASB postponed compulsory implementation of IFRS 9 and changed the effective date to January 1, 2015.
As described above, the IASB issued chapters of IFRS 9 in November 2009 and October 2010, specifying the classification and measurement of financial assets and financial liabilities. Although IFRS 9 will only be mandatorily effective from 2015, the IASB already proposes amendments to these chapters to:
- reduce key differences with the corresponding tentative US requirements;
- address specific application questions relating to IFRS 9 raised by interested parties; and
- take into account the interaction with its project on insurance contracts.
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