IASB concludes its response to the global financial crisis
The International Accounting Standards Board (IASB) completed the final element, impairment, of its comprehensive response to the global financial crisis by issuing IFRS 9 ‘Financial Instruments’. The package of improvements introduced by IFRS 9 includes a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model, and a substantially-reformed approach to hedge accounting. The new standard will come into effect on 1 January 2018, early application permitted.
Impairment: During the financial crisis, the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards. As part of IFRS 9, the IASB has introduced a new, expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a timelier basis.
Hedge accounting: IFRS 9 introduces a substantially-reformed model for hedge accounting, including enhanced disclosures about risk-management activity. The new model represents a significant overhaul of hedge accounting that aligns the accounting treatment with risk-management activities, enabling entities to reflect better these activities in their financial statements. In addition, as a result of these changes, those who use financial statements will be provided with better information about risk management and the effects of hedge accounting on them.
Own credit: IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognised in profit or loss.
Classification and measurement: Classification determines how financial assets and financial liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis. IFRS 9 introduces a logical approach to the classification of financial assets that is driven by cash-flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult to apply. The new model also results in a single impairment model being applied to all financial instruments, removing a source of complexity associated with previous accounting requirements.