Dear,
Last months I have given several workshops of Bank Analyzer, and the implications of the new IFRS 9 regulation, which was issued by the International Accounting Standard Board on 24 July 2014, and it is mandatory from 1 January 2018.
In some cases, I’ve seen that the IFRS 9 regulation and its implications is not fully understood; this made me think about the opportunity of writing this blog.
IFRS 9 is the new Accounting Standard for Financial Instruments, which is replacing the former IAS 39, and it covers the following topics.
- Classification and measurement of financial instruments
- Impairment of Financial Assets.
- Hedge Accounting.
The Classification and measurement part establishes that Financial Instruments must be classified according to the business model, which must be determined by the company executives, and the nature of the cash flows.
IFRS 9 also establishes two measurement category, depending on the Financial Instrument classification: Fair Value and Amortized Cost.
Amortized Cost is available for assets that meet two conditions:
1) The assets must be held in a business model whose objective is to collect the contractual cash-flows.
2) The contractual cash-flows must represent repayment of principal and interest on principal.
IFRS 9 proposes the following classification of Financial Assets:
- Debt instruments at amortized cost.
- Debt instruments at fair value through other comprehensive income with cumulative gains and losses reclassified to profit or loss upon derecognition.
- Debt instruments, derivatives and equity instruments at fair value through profit or loss.
- Equity instruments designated as measured at fair value though other comprehensive income, with gains and losses remaining in other comprehensive income.
Finally, IFRS 9 permits reclassifications when the company changes its business model or the holding of the assets.
The Impairment of Financial Assets topic has changed from the model of incurred losses on IAS 39, based on the principle that the Loans are repaid unless there’s an event producing the losses, to the model of expected losses that are recognized during the life-cycle of the Financial Asset.
Some advantages of this new approach are:
- Reduce the complexity of impairment measurements to a unified model.
- Avoids late recognition of the credit losses, as it happened during the 2008 Financial Crisis.
The Hedge Accounting part has been redesigned towards an approach which aligns Hedge Accounting with Risk Management, with the following requirements.
- Increase the available information for Risk Management, including the integration of the Risk Management policies in the Financial Statements.
- Support Hedge Accounting with internal information for Risk Management.
- Disclose the impact and effectiveness of the Risk Management and Hedge Accounting measures in the Financial Statements, including the impact of the Derivatives in the future cash-flows.
This is just a short introduction of the new IFRS 9 regulation, but this is a very important topic and we will look at it in future blogs.
Looking forward to read your opinions.
Kind Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
Last months I have given several workshops of Bank Analyzer, and the implications of the new IFRS 9 regulation, which was issued by the International Accounting Standard Board on 24 July 2014, and it is mandatory from 1 January 2018.
In some cases, I’ve seen that the IFRS 9 regulation and its implications is not fully understood; this made me think about the opportunity of writing this blog.
IFRS 9 is the new Accounting Standard for Financial Instruments, which is replacing the former IAS 39, and it covers the following topics.
- Classification and measurement of financial instruments
- Impairment of Financial Assets.
- Hedge Accounting.
The Classification and measurement part establishes that Financial Instruments must be classified according to the business model, which must be determined by the company executives, and the nature of the cash flows.
IFRS 9 also establishes two measurement category, depending on the Financial Instrument classification: Fair Value and Amortized Cost.
Amortized Cost is available for assets that meet two conditions:
1) The assets must be held in a business model whose objective is to collect the contractual cash-flows.
2) The contractual cash-flows must represent repayment of principal and interest on principal.
IFRS 9 proposes the following classification of Financial Assets:
- Debt instruments at amortized cost.
- Debt instruments at fair value through other comprehensive income with cumulative gains and losses reclassified to profit or loss upon derecognition.
- Debt instruments, derivatives and equity instruments at fair value through profit or loss.
- Equity instruments designated as measured at fair value though other comprehensive income, with gains and losses remaining in other comprehensive income.
Finally, IFRS 9 permits reclassifications when the company changes its business model or the holding of the assets.
The Impairment of Financial Assets topic has changed from the model of incurred losses on IAS 39, based on the principle that the Loans are repaid unless there’s an event producing the losses, to the model of expected losses that are recognized during the life-cycle of the Financial Asset.
Some advantages of this new approach are:
- Reduce the complexity of impairment measurements to a unified model.
- Avoids late recognition of the credit losses, as it happened during the 2008 Financial Crisis.
The Hedge Accounting part has been redesigned towards an approach which aligns Hedge Accounting with Risk Management, with the following requirements.
- Increase the available information for Risk Management, including the integration of the Risk Management policies in the Financial Statements.
- Support Hedge Accounting with internal information for Risk Management.
- Disclose the impact and effectiveness of the Risk Management and Hedge Accounting measures in the Financial Statements, including the impact of the Derivatives in the future cash-flows.
This is just a short introduction of the new IFRS 9 regulation, but this is a very important topic and we will look at it in future blogs.
Looking forward to read your opinions.
Kind Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
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