-jellyfish
IFRS 9 is a 'work in progress' and will
eventually replace IAS 39 in its entirety
On 12 November 2009, the IASB issued
IFRS 9
Financial Instruments
as the first step in its project to
replace IAS 39
Financial
Instruments: Recognition and
Measurement
. IFRS 9 introduced new
requirements for classifying and
measuring financial assets that had to be applied
starting 1 January
2013, with early
adoption permitted. Click for
IASB
Press Release
(PDF 101k).
On
28 October 2010, the IASB reissued IFRS 9,
incorporating new requirements on accounting for
financial liabilities, and carrying
over from IAS 39 the requirements for
derecognition of financial assets
and
financial liabilities (the Basis for Conclusions
was also restructured, and IFRIC 9 and the 2009
version of IFRS 9 were withdrawn).
Click for
IASB Press Release
(PDF 33k).
On 16 December 2011, the
IASB issued
Mandatory Effective Date
and Transition Disclosures
(Amendments
to IFRS 9 and IFRS 7)
, which amended
the effective date of IFRS 9 to annual periods
beginning on or after 1 January 2015,
and modified the relief from restating comparative
periods and the
associated disclosures
in IFRS 7.
On 19 November 2013, the
IASB issued IFRS 9
Financial
Instruments (Hedge Accounting and
amendments to IFRS 9, IFRS 7 and IAS
39)
amending IFRS 9 to include the new
general hedge
accounting model, allow
early adoption of the treatment of fair value
changes due to own credit on
liabilities designated at fair value
through profit or loss and remove the 1 January
2015 effective date.
The IASB intends
to expand IFRS 9 to add new requirements for
impairment of financial assets
measured
at amortised cost and include limited amendments
to the classification and measurement
requirements. When these projects are
completed an effective date will be added and IFRS
9 will be a
complete replacement for
IAS 39.
Other sub-projects in the
IASB's comprehensive project to replace IAS 39:
o
Impairment of
financial assets measured at amortised
cost
o
Limited reconsideration of IFRS
9
o
Macro hedge accounting
(now
being treated as a separate project).
Overview of IFRS 9
Initial
measurement of financial instruments
All financial instruments are initially
measured at fair value plus or minus, in the case
of a financial asset
or financial
liability not at fair value through profit or
loss, transaction costs. [IFRS 9, paragraph 5.1.1]
Subsequent measurement of financial
assets
IFRS 9 divides all
financial assets that are currently in the scope
of IAS 39 into two classifications - those
measured at amortised cost and those
measured at fair value. Classification is made at
the time the
financial asset is
initially recognised, namely when the entity
becomes a party to the contractual
provisions of the instrument. [IFRS 9,
paragraph 4.1.1]
Debt
instruments
A debt
instrument that meets the following two conditions
can be measured at amortised cost (net of any
write down for impairment) [IFRS 9,
paragraph 4.1.2]:
o
Business model test:
The
objective of the entity's business model is to
hold the financial asset to
collect the
contractual cash flows (rather than to sell the
instrument prior to its contractual maturity
to realise its fair value changes).
o
Cash flow
characteristics test:
The contractual
terms of the financial asset give rise on
specified
dates to cash flows that are
solely payments of principal and interest on the
principal outstanding.
All other debt
instruments must be measured at fair value through
profit or loss (FVTPL). [IFRS 9,
paragraph 4.1.4]
Fair value
option
Even if an instrument
meets the two amortised cost tests, IFRS 9
contains an option to designate a
financial asset as measured at FVTPL if
doing so eliminates or significantly reduces a
measurement or
recognition
inconsistency (sometimes referred to as an
'accounting mismatch') that would otherwise arise
from measuring assets or liabilities or
recognising the gains and losses on them on
different bases. [IFRS
9, paragraph
4.1.5]
IAS 39's AFS and HTM categories
are eliminated
The
available-for-sale and held-to-maturity categories
currently in IAS 39 are not included in IFRS 9.
Equity instruments
All equity investments in scope of IFRS
9 are to be measured at fair value in the
statement of financial
position, with
value changes recognised in profit or loss, except
for those equity investments for which
the entity has elected to report value
changes in 'other comprehensive income'. There is
no 'cost
exception' for unquoted
equities.
'Other comprehensive income'
option
If an equity
investment is not held for trading, an entity can
make an irrevocable election at initial
recognition to measure it at fair value
through other comprehensive income (FVTOCI) with
only dividend
income recognised in
profit or loss. [IFRS 9, paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for
all equity investments, IFRS 9 contains guidance
on when cost
may be the best estimate
of fair value and also when it might not be
representative of fair value.
Subsequent measurement of financial
liabilities
IFRS 9 doesn't
change the basic accounting model for financial
liabilities under IAS 39. Two
measurement categories continue to
exist: fair value through profit or loss (FVTPL)
and amortised cost.
Financial
liabilities held for trading are measured at
FVTPL, and all other financial liabilities are
measured
at amortised cost unless the
fair value option is applied. [IFRS 9, paragraph
4.2.1]
Fair value option
IFRS 9 contains an option to designate
a financial liability as measured at FVTPL if
[IFRS 9, paragraph
4.2.2]:
o
doing so
eliminates or significantly reduces a measurement
or recognition inconsistency
(sometimes
referred to as an 'accounting mismatch') that
would otherwise arise from measuring
assets or liabilities or recognising
the gains and losses on them on different bases,
or
o
the
liability is part or a group of financial
liabilities or financial assets and financial
liabilities that is
managed and its
performance is evaluated on a fair value basis, in
accordance with a documented
risk
management or investment strategy, and information
about the group is provided internally on
that basis to the entity's key
management personnel.
A financial
liability which does not meet any of these
criteria may still be designated as measured at
FVTPL when it contains one or more
embedded derivatives that would require
separation. [IFRS 9,
paragraph 4.3.5]
IFRS 9 requires gains and losses on
financial liabilities designated as at fair value
through profit or loss to
be split into
the amount of change in the fair value that is
attributable to changes in the credit risk of the
liability, which shall be presented in
other comprehensive income, and the remaining
amount of change
in the fair value of
the liability which shall be presented in profit
or loss. The new guidance allows the
recognition of the full amount of
change in the fair value in the profit or loss
only if the recognition of
changes in
the liability's credit risk in other comprehensive
income would create or enlarge an accounting
mismatch in profit or loss. That
determination is made at initial recognition and
is not reassessed. [IFRS 9,
paragraphs
5.7.7-5.7.8]
Amounts presented in other
comprehensive income shall not be subsequently
transferred to profit or loss,
the
entity may only transfer the cumulative gain or
loss within equity.
Derecognition of
financial assets
The basic
premise for the derecognition model in IFRS 9
(carried over from IAS 39) is to determine
whether the asset under consideration
for derecognition is: [IFRS 9, paragraph 3.2.2]
o
an asset in its
entirety or
o
specifically identified cash flows from
an asset (or a group of similar financial assets)
or
o
a fully
proportionate (pro rata) share of the cash flows
from an asset (or a group of similar financial
assets). or
o
a fully proportionate (pro rata) share
of specifically identified cash flows from a
financial asset (or a
group of similar
financial assets)
Once the asset under
consideration for derecognition has been
determined, an assessment is made as
to
whether the asset has been transferred, and if so,
whether the transfer of that asset is subsequently
eligible for derecognition.
An asset is transferred if either the
entity has transferred the contractual rights to
receive the cash flows,
or the entity
has retained the contractual rights to receive the
cash flows from the asset, but has assumed
a contractual obligation to pass those
cash flows on under an arrangement that meets the
following three
conditions: [IFRS 9,
paragraphs 3.2.4-3.2.5]
o
the entity has no obligation to pay
amounts to the eventual recipient unless it
collects equivalent
amounts on the
original asset
o
the entity is prohibited from selling
or pledging the original asset (other than as
security to the
eventual recipient),
o
the entity has
an obligation to remit those cash flows without
material delay
Once an entity has
determined that the asset has been transferred, it
then determines whether or not it
has
transferred substantially all of the risks and
rewards of ownership of the asset. If
substantially all the
risks and rewards
have been transferred, the asset is derecognised.
If substantially all the risks and
rewards have been retained,
derecognition of the asset is precluded. [IFRS 9,
paragraphs 3.2.6]
If the entity has
neither retained nor transferred substantially all
of the risks and rewards of the asset,
then the entity must assess whether it
has relinquished control of the asset or not. If
the entity does not
control the asset
then derecognition is appropriate; however if the
entity has retained control of the asset,
then the entity continues to recognise
the asset to the extent to which it has a
continuing involvement in
the asset.
[IFRS 9, paragraph 3.2.9]
These various
derecognition steps are summarised in the decision
tree in paragraph B3.2.1.
Derecognition
of financial liabilities
A
financial liability should be removed from the
balance sheet when, and only when, it is
extinguished,
that is, when the
obligation specified in the contract is either
discharged or cancelled or expires. [IFRS 9,
paragraph 3.3.1] Where there has been
an exchange between an existing borrower and
lender of debt
instruments with
substantially different terms, or there has been a
substantial modification of the terms of
an existing financial liability, this
transaction is accounted for as an extinguishment
of the original
financial liability and
the recognition of a new financial liability. A
gain or loss from extinguishment of the
original financial liability is
recognised in profit or loss. [IFRS 9, paragraphs
3.3.2-3.3.3]
Derivatives
All derivatives, including those linked
to unquoted equity investments, are measured at
fair value. Value
changes are
recognised in profit or loss unless the entity has
elected to treat the derivative as a hedging
instrument in accordance with IAS 39,
in which case the requirements of IAS 39 apply.
Embedded derivatives
An embedded derivative is a component
of a hybrid contract that also includes a non-
derivative host, with
the effect that
some of the cash flows of the combined instrument
vary in a way similar to a stand-alone
derivative. A derivative that is
attached to a financial instrument but is
contractually transferable
independently of that instrument, or
has a different counterparty, is not an embedded
derivative, but a
separate financial
instrument. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept of IAS
39 has been included in IFRS 9 to apply only to
hosts that are
not assets within the
scope of the standard, Consequently, embedded
derivatives that under IAS 39
would
have been separately accounted for at FVTPL
because they were not closely related to the
financial host asset will no longer be
separated. Instead, the contractual cash flows of
the financial asset
are assessed in
their entirety, and the asset as a whole is
measured at FVTPL if any of its cash flows do
not represent payments of principal and
interest. The embedded derivative concept of IAS
39 is now
included in IFRS 9 and
continues to apply to financial liabilities and
hosts not within the scope of the
standard (e.g. leasing contracts,
insurance contracts, contracts for the purchase or
sale of a non-financial
items).
Reclassification
For financial assets, reclassification
is required between FVTPL and amortised cost, or
vice versa, if and
only if the entity's
business model objective for its financial assets
changes so its previous model
assessment would no longer apply. [IFRS
9, paragraph 4.4.1]
If reclassification
is appropriate, it must be done prospectively from
the reclassification date. An entity
does not restate any previously
recognised gains, losses, or interest.
IFRS 9 does not allow reclassification
where:
o
the
'other comprehensive income' option has been
exercised for a financial asset, or
o
the fair value
option has been exercised in any circumstance for
a financial assets or financial
liability.
Hedge
accounting
The hedge
accounting requirements in IFRS 9 are optional. If
certain eligibility and qualification criteria
are met, hedge accounting allows an
entity to reflect risk management activities in
the financial
statements by matching
gains or losses on financial hedging instruments
with losses or gains on the risk
exposures they hedge.
The
hedge accounting model in IFRS 9 is not designed
to accommodate hedging of open, dynamic
portfolios. As a result for a fair
value hedge of interest rate risk of a portfolio
of financial assets or
liabilities an
entity can apply the hedge accounting requirements
in IAS 39 instead of those in IFRS 9.
[IFRS 9 paragraph 6.1.3]