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In Focus Risk

The introduction of IFRS 9: what will need to change?

The reform of financial instruments accounting has led to the replacement of IAS 39 with IFRS 9

Rajib Chakravorty Senior project manager – data management, HSBC

IFRS 9 replaces IAS 39, as per the reform of financial instruments accounting, which was one of the areas identified in the Norwalk Agreement of 2002 between the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB). It becomes operative from 2018 but can be adopted earlier as well. In order to reconcile the differences

between International Financial Reporting Standards and US GAAP, work on IFRS 9 was accelerated and was enhanced to respond to the nuances of financial crisis. Some of the major stakeholders like the G20, the Financial Crisis Advisory Group and others, highlighted the timeliness of recognition of expected credit losses, the complexity of multiple impairment models and own credit as areas which need to be considered. The IASB has worked closely with the FASB for the development of IFRS 9 but it has failed to close the gaps as per US GAAP. IFRS 9 can be broadly classified into the

following themes: l Classification and measurement of assets and liabilities. l Impairment – new generation, forward- looking expected-loss models to forecast impairments based on current and past scenarios. l Hedge accounting.

October 2015

Classification and measurement IFRS 9 applies one classification approach for all types of financial assets, including those that contain embedded derivative features. Financial assets are, therefore, classified

in their entirety rather than being subject to complex bifurcation requirements. Two criteria are used to determine how

financial assets should be classified and measured: l The entity’s business model for managing the financial assets. l The contractual cashflow characteristics of the financial asset.

Impairments The main objective of the new impairment requirements is to provide users of financial statements with more useful information about an entity’s expected credit losses on financial instruments. The model requires an entity to recognise

expected credit losses at all times and to update the amount of expected credit losses, recognised at each reporting date, to reflect changes in the credit risk of financial instruments. This model is forward-looking and it

eliminates the threshold for the recognition of expected credit losses, so that it is no longer necessary for a trigger event to have occurred before credit losses are recognised. Consequently, more timely information is required to be provided about expected credit losses.

The main objective of the new impairment requirements is to provide users of financial statements with more useful information about an entity’s expected credit losses on financial instruments

Hedge accounting The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk-management activities when they use financial instruments to manage exposures arising from particular risks and those risks could affect profit or loss, or other comprehensive income, in the case of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income. CCR 43

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