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Entities dealing in commodities or those entering into derivative transactions may want to early adopt IFRS 9 (2014) to benefit from the simplified hedge accounting guidance


Published on March 27, 2015

The IASB published the final version of IFRS 9 (2014) – Financial Instruments (“IFRS 9 (2014)”) in July 2014. It is a single, integrated standard that deals with all aspects of accounting for financial instruments, except for macro hedging, which is still in development. The release of IFRS 9 (2014) represents a culmination of more than five years of effort; it incorporates all of the previous versions of the standard, bringing together the classification and measurement, impairment and hedge accounting phases of the project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 (2014) has a mandatory effective date for fiscal years beginning on or after January 1, 2018, but early adoption is permitted.

Although mandatory adoption seems a long way off, there is a lot of work to be done to implement the new standard. Entities should start developing their understanding of IFRS 9 so they can begin to identify the changes that will impact them most, and the level of effort that will be required to transition to the new requirements. So what should entities be asking themselves at this point? We have come up with a list of questions that we believe will help entities and stakeholders understand the complexities involved in adoption and what they should be considering now.

Should we early adopt?

The advantages of early adopting will likely depend on an entity’s industry and the types of financial instruments the entity holds. Entities that deal in commodities or enter into derivative transactions may want to early adopt IFRS 9 (2014) so as to benefit from the simplified hedge accounting guidance. The new hedge accounting model in IFRS 9 (2014) more closely focuses on how an entity manages its risks and applies a principles-based approach to determining whether a hedging relationship qualifies for hedge accounting. The new hedging guidance will be particularly beneficial to entities that currently hedge non-financial items (like commodities) as component risks of non-financial items can now be designated as hedged items. For example, the specified benchmark commodity price in a sales contract of a commodity can now be designated as a hedged item in a hedging relationship. Adopting IFRS 9 (2014) for the hedging guidance effectively means, however, that amendments in the other areas of financial instruments accounting need to be adopted as well, so early adoption of hedge accounting has wider implications on the other aspects of accounting for an entity’s financial instruments. The earlier versions of IFRS 9  addressed classification and measurement of financial assets and liabilities, as well as impairment of financial assets. For a very limited time, as discussed further below, different versions of IFRS 9 can be adopted.

Classification and measurement of financial assets will change an entity’s approach to determining which assets are carried at amortized cost and which are at fair value, as well as whether fair value gains and losses are recorded in the income statement or in other comprehensive income.

The changes to the impairment provisions of the standard will have a significant impact on entities in the financial services industry. It will be critical for entities in this industry to understand the potential impacts that the new impairment model for expected credit losses will have on regulatory capital requirements given that loan loss provisions are expected to increase. Entities in other industries with financial assets that are shorter term in nature, or that have a higher credit quality, will also be affected by the new impairment requirements but perhaps to a lesser extent.

What version of IFRS 9 is available for early adoption?

If an entity decides to adopt IFRS 9 in the first quarter of 2015 it has a decision to make in regards to which version of the standard it will adopt. This is because prior to February 1, 2015, an entity can early adopt any of the versions of IFRS 9 (i.e. 2009, 2010, 2013, or 2014). It should be noted that if a later version of the standard is selected for early adoption, all other previous versions would also need to be adopted. For example a public company with a December 31, 2015 fiscal year end could select to adopt IFRS 9 (2013) prior to the end of Q1 2015 to take advantage of the new hedge accounting guidance; this would mean the entity would also need to adopt the classification and measurement guidance issued in the previous versions of IFRS 9.

This has two distinct disadvantages: 1) on the mandatory effective date entities would be forced to revisit the classification and measurement decisions that were implemented because changes were made to classification and measurement guidance in IFRS 9 (2014) and 2) entities would be undertaking two adoptions instead of one because they would also be required to adopt the full standard, IFRS 9 (2014) on the mandatory effective date. From a practical perspective, unless an entity has specific challenges to implementing the impairment guidance in the standard, the adoption of IFRS 9 will be far less complex if an entity simply chooses to apply IFRS 9 (2014).

Entities early adopting IFRS 9 subsequent to February 1, 2015 must adopt IFRS 9 (2014) in its entirety with two exceptions: 1) entities can choose to apply the guidance in IFRS 9 related to the presentation of ‘own credit risk’ of financial liabilities designated as Fair Value Through Profit / Loss without any other parts of IFRS 9 and, 2) entities can choose to early adopt IFRS 9 (2014) with the exception of the hedge accounting chapter and continue to apply hedge accounting under IAS 39.

Do I need to restate on adoption?

There are many complexities to the new standard, and the transitional provisions are no exception. The application of IFRS 9 is generally retrospective; however there is an exemption from the requirement to restate comparative information for classification and measurement, including impairment. For example, if a calendar year-end company does not early adopt and elects to not restate comparative information, it should generally recognize any adjustments on transition in opening retained earnings as of the date of initial application. It should be noted that entities are only allowed to restate if they can do so without the use of hindsight. This can be a challenging hurdle given that once an event has occurred it is often difficult to assess a condition that existed previously without the bias of hindsight. Additionally, entities should consider the impact that not restating comparatives will have on the overall comparability of the financial statements and how that could be perceived by stakeholders.

Hedge accounting under IFRS 9 is generally applied prospectively with some exceptions. Hedging relationships that qualified for hedge accounting under IAS 39 will be regarded as continuing hedge relationships as long as all of the IFRS 9 qualifying criteria would have been met at the date of initial application. It is also important to point out that IFRS 9 hedging documentation for hedge relationships needs to be in place in order to achieve hedge accounting. In other words, prior periods would not be restated for hedge accounting unless the IFRS 9 compliant hedge designation and documentation were in place from the commencement of the hedge.

If I don’t want to early adopt what should I be doing now?

Though 2018 may seem like a long way off, IFRS 9 (2014) can be complex and will require careful project scoping, planning and execution to ensure a successful implementation. Deloitte has a number of resources available to assist financial statement preparers and stakeholders with their understanding of IFRS 9 (2014). To access these resources and to keep informed on future activities and developments please visit our Web site. Also, if you missed our most recent IFRS webcast on March 25, which discussed IFRS 9 transition issues, you can access the replay here. Lastly, we encourage you to reach out to any member of our team of experienced professionals who can assist your organization in developing an action plan to implement the new Standard and answer any questions you may have.

Alexis Brown Alexis Brown
Senior Manager, National Services

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