AccountingWEB.co.uk guide to IFRS 9

IFRS 9 is replacing IAS 39 as the standard for measuring financial instruments. Steve Collings explains the differences between the two.

The latest accounting standard, IFRS 9 ‘Financial Instruments’ was released in November 2009 and is intended to completely replace IAS 39 ‘Financial Instruments: Recognition and Measurement’ by the end of 2010.

Anybody who has knowledge of IAS 39 will agree that this standard was by far one of the most complex standards currently in issue. The IASB is currently revising the way entities account for financial instruments in an attempt to simplify the process of accounting for them.

IFRS 9 applies for accounting periods beginning on or after 1 January 2013, but earlier adoption is permitted.

Initial recognition of financial assets
All financial assets are initially measured at fair value plus, in the case of a financial asset not at fair value, through profit or loss transaction costs.

Preparers of financial statements who use IFRS should note that IFRS 9 only deals with the classification and measurement of financial assets. A consistent theme of IFRS 9 is that it requires financial assets to be classified on initial recognition at amortised cost or fair value.

Financial assets are measured at amortised cost dependant on how the entity manages its financial instruments in its business model (see below). If the entity’s business model is to hold financial assets in order to collect contractual cash flows, then the financial asset can be measured at amortised cost.

However, the contractual terms must give rise (on specified dates), to cash flows that are solely payments of capital and interest (also referred to as ‘principal’ and ‘interest’) on the capital amount (principal amount) outstanding. The financial asset concerned cannot be recognised at amortised cost if the entity intends to sell it to realise its fair value changes. IFRS 9 does contain several examples to illustrate this condition.

Any other financial asset that does not meet this criteria is measured at fair value.

The business model for recognition of financial assets
Management and key personnel are responsible for their entity’s business model in relation to how it manages its financial instruments. (Management and key personnel are dealt with and defined in IAS 24 ‘Related Party Disclosures’). This approach was considered appropriate by the IASB because it aligns the accounting for financial assets with the way the entity deploys the assets in the business.

Withdrawal of other types of financial asset
IAS 39 has the following categories of financial assets:

• Held-to-maturity assets.
• Available-for-sale assets.

In IFRS 9 the above categories are eliminated in an attempt to simplify the process of accounting for such financial instruments.

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