IFRS 9

Definition

IFRS 9 is an International Financial Reporting Standard that addresses the accounting for financial instruments, including their classification, measurement, and impairment. This standard significantly changed how entities recognize and measure financial assets and liabilities, focusing on a forward-looking approach to credit loss assessments.

5 Must Know Facts For Your Next Test

1. IFRS 9 replaces the previous standard, IAS 39, and introduces a more principles-based approach to the classification and measurement of financial instruments.
2. Entities must classify their financial assets into three categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL).
3. The ECL model under IFRS 9 requires companies to recognize an allowance for expected credit losses at each reporting date, which impacts the income statement and balance sheet.
4. Hedging relationships are also redefined under IFRS 9, allowing for more flexibility in risk management strategies and their accounting treatment.
5. The implementation of IFRS 9 has led to increased transparency and comparability in financial statements as entities adopt a more consistent approach to reporting their financial instruments.

Review Questions

• How does IFRS 9 change the way entities classify and measure financial instruments compared to its predecessor, IAS 39?
  • IFRS 9 introduces a more principles-based approach compared to IAS 39, requiring entities to classify financial assets based on their contractual cash flow characteristics and the entity's business model for managing them. Under IFRS 9, assets are classified into three categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). This contrasts with IAS 39, which had a more complex classification system that was often challenging to apply.
• Discuss the implications of the Expected Credit Loss (ECL) model introduced by IFRS 9 on an entity's financial reporting.
  • The Expected Credit Loss (ECL) model requires entities to estimate credit losses based on expected future losses rather than just incurred losses. This forward-looking approach impacts the income statement as entities need to recognize an allowance for credit losses at each reporting date. Consequently, this can lead to earlier recognition of losses and may affect profitability, asset valuations, and overall financial position, making it crucial for entities to have robust credit risk assessment processes in place.
• Evaluate how the changes in hedging relationships under IFRS 9 may affect an entity's risk management strategies and financial outcomes.
  • Under IFRS 9, the redefinition of hedging relationships allows entities greater flexibility in how they align their risk management strategies with accounting practices. This means that more economic hedging activities can be reflected in the financial statements without stringent documentation requirements previously enforced by IAS 39. As a result, entities can better demonstrate how their hedging activities mitigate risk exposure, potentially leading to improved financial outcomes by providing clearer insights into their risk management effectiveness.

Related terms

Financial Instruments: Contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Expected Credit Loss (ECL): A model introduced by IFRS 9 for estimating credit losses on financial instruments based on expected future losses rather than incurred losses.

Amortized Cost: The value at which a financial asset or liability is recognized initially minus any principal repayments, plus or minus the cumulative amortization of any difference between that initial amount and the maturity amount.