IFRS 9 Financial Instruments
30 July 2017
IFRS 9 introduces new requirements that will affect entities across all industry sectors. Although it is true the most significant effects will be for entities in the financial sector, it would be a mistake to assume there will be limited effects elsewhere.
Revisions to the boundary between amortised cost and fair value measurement will change the profile of balance sheets and whether changes in fair value are recognised in profit or loss or other comprehensive income. The new forward looking expected credit loss impairment model may require significant changes to systems and processes, with provisions being greater in size and recognised earlier than under the current incurred loss model. Hedge accounting requirements will also change, with these being more closely linked to internal risk management practices.
The effects of the revised classification and measurement requirements will vary, depending on the precise facts and circumstances, but will be relevant across a wide range of industry sectors. For example, regardless of whether it is in the financial sector, an entity might invest in government or corporate bonds. If these investments might be sold significantly prior to their contractual maturity, IFRS 9 analyses them as being in a business model that is designed to generate cash inflows by collecting contractual cash flows (interest) and by selling the asset.
Because cash flows will be collected via interest income and realisation of the fair value of the investment, IFRS 9 requires these investments to be recorded on balance sheet at fair value, with entries in profit or loss being based on amortised cost measurement which requires the application of the expected loss impairment model. The balance is recorded in other comprehensive income, with the related reserve being recycled to profit or loss on the disposal of the investment. As a result, it is necessary to maintain dual fair value and amortised cost accounting records.
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