October 28, 2021

Accounting for financial instruments: How IFRS 9 is set to replace IAS 39

IFRS 9 and IAS 39 are the two most important
accounting standards for corporate treasurers.
They deal with a way to account for economic instruments, or how they’re
measured on an ongoing basis. IFRS o is the more recent standard that will
replace most of the guidance in IAS 36 regarding recognition and measurement.
In order to recognize their implications on threat management, inner controls
and procedures and tax, treasures ought to take a look at those requirements
closely. If you are looking to gain insights into these standards, then
continue reading. In this article, you will find an explanation for some of the
main standards of IFRS 9.

What is IFRS 9?

IFRS 9 is an accounting standard published by
the International Accounting Standards Board (IASB) covering the measurement of
financial instruments, hedge accounting and asset impairment. After about a
decade of consultations and outreaches with different constituents and
stakeholders, the IASB finally issued the complete version of IFRS 9 in 2014. The
new standard came into existence to replace the notoriously cumbersome IAS 39
Recognition and Measurements and will be effective for annual periods on or
after the 1st of January 2018. IFRS 9 consists of 3 main sections which will be
briefly explained in the section below:

Classification and measurement:
This section explains how financial instruments, liabilities or assets are
classified and should be recorded in financial statements. This new trendy
applies a two-step method to categorise all sorts of economic assets, which can
be measured at either fair value or amortised cost. To determine these measures, the
classification of financial assets under IFRS 9 is dependent on the business
model test and contractual cash flow test. Regardless of those tests, an entity
might also additionally designate an economic asset as ‘FVTPL’ if doing so
results in extra applicable statistics and decreases reputation inconsistency
or an accounting mismatch. The classifications of Financial liabilities remain
broadly the same as in IAS 39.

Impairment: The new impairment
necessities are primarily based totally on anticipated credit score losses
which might be an estimate of credit score losses over the life of a monetary
instrument and recognised as a loss allowance or as a loss provision. The
number of expected credit losses to be recognized depends on the extent of
credit deterioration since initial recognition, and an entity will need to take
multiple factors into account such as time value and money, probability-weighted
outcomes due to supportable information that is available without undue cost or
effort. This will result in credit losses being recognized more evenly over the
lives of financial assets. However, this method will also require more
judgement by preparers to estimate the number of expected credit losses.

Hedge accounting: Applying hedge
accounting as a means of risk management strategy to manage exposures to
different risks is a matter of choice for companies. Entities will need to obtain the correct documentation
set out in IFRS 9 and IAS 39. The hedging instrument will be matched with its
corresponding hedge item, this way gains and losses on both the hedging
instruments and hedge item will be recognised in the same accounting period.
Hedging instruments will need to be classified and measured like any other
financial instrument when decided to not apply for hedge accounting.

Get more information!

For more information on IFRS 9 and on more
information on how to do your annual reporting correctly and accordingly, visit
www.annualaccounting.com to obtain helpful information.

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