IASB issues IFRS 9 'Financial Instruments'

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12 Nov 2009

Today, the IASB issued IFRS 9 'Financial Instruments' as the first step in its project to replace IAS 39 Financial Instruments: Recognition and Measurement.

IFRS 9 introduces new requirements for classifying and measuring financial assets. Those requirements must be applied starting 1 January 2013, with earlier adoption permitted including for 2009. The IASB intends to expand IFRS 9 during 2010 to add new requirements for classifying and measuring financial liabilities, derecognition of financial instruments, impairment, and hedge accounting. By the end of 2010, IFRS 9 will be a complete replacement for IAS 39 – mandatory for 2013 and optional in earlier years. Click for IASB Press Release (PDF 103k). In a letter accompanying a mailing of the new standard to key stakeholders, IASB Chairman Sir David Tweedie wrote:

"The completion of the first phase of the project responds directly to the recommendation of the G20 Leaders and other stakeholders to reduce the complexity of accounting for financial instruments. As requested, we have completed this first phase in time for companies to use, optionally, the new standard for year-end 2009 financial statements. Given the particular importance of this standard and the broad interest in its development, we undertook unprecedented efforts to consult stakeholders around the world in order to refine the proposals we published in July 2009 for public consultation. Furthermore, in response to concerns that were raised during our consultations the IASB has made various modifications to the proposals to improve the final product."

Concurrent with issuing IFRS 9, the IASB published a Project Summary and Feedback Statement (PDF 133k) outlining how the Board has responded to comments received during the development of the new standard. The IASB also published a separate Summary of Responses to European Concerns (PDF 25k).

Overview of IFRS 9 Financial Instruments

IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications – those measured at amortised cost and those measured at fair value – based on the following principles:

  • Debt instruments. A debt instrument that meets two conditions can be measured at amortised cost:
    • Business model test. The objective of the entity's business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes).
    • Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.
    All other debt instruments must be measured at fair value through profit or loss (FVTPL). Even if an instrument meets the two amortised cost tests, IFRS 9 contains an option to measure such instruments at FVTPL, with some restrictions. The available-for-sale and held-to-maturity categories currently in IAS 39 are not included in IFRS 9.
  • Equity instruments. All equity investments in scope of IFRS 9 are to be measured at fair value in the balance sheet, value changes recognised in profit or loss. There is no 'cost exception' for unquoted equities. However, if the equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at fair value through other comprehensive income (FVTOCI) with only dividend income recognised in profit or loss. Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when cost may be the best estimate of fair value and also when it might not be representative of fair value.
  • Derivatives. All derivatives, including those linked to unquoted equity investments, are measured at fair value.
  • Embedded derivatives. The embedded derivative concept of IAS 39 is not included in IFRS 9. Consequently, embedded derivatives that under IAS 39 would have been separately accounted for at FVTPL because they were not closely related to the financial host asset will no longer be separated. Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if any of its cash flows do not represent payments of principal and interest.
  • Reclassification. For debt instruments, reclassification is required between FVTPL and amortised cost, or vice versa, if the entity's business model objective for its financial assets changes so its previous model assessment would no longer apply.
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including added disclosures about investments in equity instruments designated as at FVTOCI.

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