Financial instruments are found on the balance sheets of most companies, from the corner café to large corporates. Examples of financial instruments include loans, trade receivables and trade payables, share investments, cash, bank overdrafts, and more complex instruments such as interest rate swaps and forward exchange contracts.
The new standard, called IFRS 9: Financial Instruments, addresses all financial instruments and is applicable to entities who prepare their financial statements using IFRS.
While the classification and measurement of financial liabilities has been left mostly unchanged, IFRS 9 has resulted in significant changes to the categories and categorisation of financial assets. The new categories for financial assets under IFRS 9 are: Amortised Cost, Fair Value through Other Comprehensive Income, and Fair Value through Profit or Loss.
The categorisation of financial assets has shifted to a principle-based system which centres around two principles: the business model the entity applies in managing its financial assets in order to generate cash flows and create value, and whether or not the cash flows are solely payments of principal and interest.
The new approach to impairment contained within IFRS 9 is known as the expected credit loss model. Under the expected credit loss model, it is no longer necessary for an impairment event to have occurred before credit losses are recognised. Rather, entities are required to continuously account for expected credit losses.
The expected credit loss model applies a three-stage approach to recognising expected credit losses: Stage 1: 12-month expected credit losses; Stage 2: lifetime expected credit losses; Stage 3: credit impaired lifetime expected credit losses. The model is expected to result in more timely recognition of credit losses.
Hedge accounting has been fundamentally revised in IFRS 9. The revisions align hedge accounting more closely with risk management practices of an entity. Like the categorisation of financial instruments, the new hedge accounting is a more principle-based method.
The new standard is effective for years beginning January 1 2018 and is available for early adoption. If an entity elects to apply IFRS 9 early, it is required to apply all of its requirements simultaneously.
Source: The Times
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