IFRS 9:  Update on the classification and measurement of financial instruments

Resulting from discussions on the Global Financial Crisis, the G20 developed a list of action points.

Some of them were directed at standard setters with the IASB being specifically asked to review its current accounting standards in relation to financial instruments, and improve them both for users and preparers.

Whilst the IASB had the replacement of IAS 39 on its workplan agenda before the GFC, the demands of the G20 required it to put in place an accelerated timetable.  The IASB’s response was a commitment to break the project into three distinct phases and to publish Phase 1 – improvements to the classification and measurement of financial instruments – in time to allow its use by 31 December 2009 reporters.

In November 2009, the IASB published IFRS 9 Financial Instruments but it only covers the requirements for classifying and measuring financial assets.  The scope of this standard was reduced from the initial scope because there were a number of unresolved issues on how best to account for financial liabilities.  Guidance on how to classify and measure financial liabilities is expected later this year.

Although IFRS 9 is available for early adoption and can now be applied, its mandatory application date is for any annual reporting period beginning on or after 1 January 2013.

Key features of IFRS 9

• Financial assets are held at either amortised cost or fair value. This determination is based on the business model of the entity and the intention of holding the assets
• Equity instruments will be held at fair value. An irrevocable election can be made to allow changes in fair value and gains/losses on sale to be taken through other comprehensive income (FVOCI) on initial recognition, otherwise movements are taken through profit or loss
• Impairment testing is required only for assets held at amortised cost
• Embedded derivatives are required to be separated only if the host contract is not within the scope of IAS 39
• Reclassification of financial assets between categories is permitted only if the entity’s business model changes

Next steps

The IASB’s tentative project plan for the replacement of IAS 39 consists of the following three phases:

Phase 1:  Classification and measurement 

• The chapters of IFRS 9 dealing with classification and measurement of financial assets have been published
• Financial liability classification and measurement are currently been considered and proposals are expected to be released in 2010

Phase 2:  Impairment  

An exposure draft which proposes an expected loss model (rather than an incurred loss model) to determine impairment has just been released and it closes for comment in June 2010.

Phase 3:  Hedge accounting  

The IASB is continuing deliberations with constituents in this phase in order to try to reduce the complexity of the current hedge accounting rules. An exposure draft is expected in the first quarter of 2010.

A final standard address all three phases is expected in early 2011.

What does this mean for my organisation?

Entities should consider the requirements of IFRS 9 and whether it would be appropriate for them to early adopt the classification and measurement of financial assets

It is important to note that the transition provisions are complex. However, there is a very useful optional exemption on retrospective application if IFRS 9 is adopted prior to 1 January 2012.

Where can I get further information?

Grant Thornton has produced a technical accounting alert on IFRS 9 which can be accessed by clicking here, otherwise you can speak to your usual Grant Thornton advisor or a member of the NAS team on nas@grantthornton.com.au.