IAS 39 Financial Instruments: Recognition and Measurement has been the accounting standard for financial instruments since 2001.
Given the recent global credit crisis, the role of the IAS 39 rules on impairment of loans issued by credit institutions came under scrutiny. In essence, IAS 39 credit institutions are prevented from impairing a loan until the loss event occurs. As opposed to predicting when a loan is expected to become impaired and providing for it prospectively. Commentators have argued, that the accounting rules under IAS 39, particularly in relation to impairment, added to the global credit crisis.
In response, IFRS 9 will implement the expected loss impairment model, enabling banks to recognise expected credit losses on loans from the implementation date. The model requires an entity to recognise expected credit losses at all times, from the date of inception. The entity is further required to update the amount of expected credit losses at each reporting date to reflect changes in forecasted future economic conditions. This is a huge task for credit institutions which hold a high quantity and range of financial assets.
Financial Assets
IAS 39 contained four different asset classification categories: trading, loans and receivables, available for sale and held to maturity.
IFRS 9 reduces the number of asset classes to three:
- Amortised cost
- fair value through profit or loss (FVTPL)
- fair value through other comprehensive income (FVOCI)
IFRS 9 also stipulates two criteria to determine how financial assets should be classified and measured: the entity’s business model and the contractual cash flow characteristics of the financial asset.
Financial Liabilities
IFRS 9 requires that all financial liabilities are to be initially measured at fair value and subsequently measured at amortised cost. An option to measure financial liabilities at FVTPL also exists, if by doing so, it results in more relevant information being provided for users of the financial statements.
Conclusion
Given the far reaching impact of the global credit crisis, it was not surprising to see the IASB revising the accounting standards applicable to financial instruments. IFRS 9 establishes principals for the financial reporting of financial assets and financial liabilities, and in particular has overhauled the recognition rules relating to impairment of loans advanced by credit institutions. Only time will tell if the standard achieves its objective.
The above article gives you an insight into the new accounting standard for financial instruments often referred to in areas of Financial Accounting and Auditing. If you are considering studying those or any other accounting modules from AAT, ACCA or CPA please contact us today.
