IFRS 9

Definition

IFRS 9 is an International Financial Reporting Standard that provides guidance on the classification and measurement of financial instruments, including their impairment and hedge accounting. This standard aims to enhance transparency and consistency in financial reporting, particularly regarding the recognition of expected credit losses and the treatment of hedging activities.

5 Must Know Facts For Your Next Test

1. IFRS 9 became effective on January 1, 2018, and replaced the earlier standard IAS 39.
2. Under IFRS 9, financial instruments are classified into three categories: amortized cost, fair value through profit or loss (FVTPL), and fair value through other comprehensive income (FVOCI).
3. The standard introduces a new model for calculating expected credit losses, requiring companies to recognize these losses earlier than before.
4. Hedge accounting under IFRS 9 allows entities to better align the accounting for hedging instruments with the underlying risks they manage.
5. IFRS 9 emphasizes the importance of risk management practices in determining the classification and measurement of financial assets and liabilities.

Review Questions

• How does IFRS 9 improve the recognition of expected credit losses compared to its predecessor?
  • IFRS 9 improves the recognition of expected credit losses by adopting a forward-looking approach known as the Expected Credit Loss (ECL) model. Unlike the previous incurred loss model under IAS 39, which required evidence of a loss event before recognizing a loss, IFRS 9 mandates that entities assess the risk of default over the life of the financial instrument and recognize losses based on that assessment. This change enhances the timeliness of loss recognition and promotes more accurate financial reporting.
• Discuss how IFRS 9’s classification and measurement principles impact hedge accounting practices.
  • IFRS 9's classification and measurement principles significantly impact hedge accounting practices by providing more flexibility in how entities can designate hedging relationships. The standard allows entities to link hedging instruments more closely with their risk management objectives, which can lead to better alignment between accounting outcomes and actual risk management strategies. As a result, entities can achieve hedge accounting more easily under IFRS 9, reducing profit or loss volatility stemming from fluctuating values of hedged items.
• Evaluate the overall implications of adopting IFRS 9 on a company’s financial statements and risk management strategy.
  • The adoption of IFRS 9 has profound implications for a company's financial statements and risk management strategy. Financial statements may reflect increased volatility due to earlier recognition of expected credit losses, which can affect key financial ratios and stakeholder perceptions. Moreover, companies may need to enhance their risk management practices to align with the new classification criteria and improve their ECL estimation processes. This shift emphasizes a proactive approach to managing credit risk and reinforces the importance of integrating risk management into overall business strategy.

Related terms

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

Expected Credit Losses (ECL): A forward-looking approach to estimating credit losses on financial instruments, replacing the previous incurred loss model.

Hedge Accounting: An accounting method that aims to reduce the volatility in profit or loss resulting from changes in fair value or cash flows of hedged items.