As of January 2018, the International Accounting Standards Board (IASB) replaced their IAS 39 standards with IFRS 9. The goal of the update was to streamline how securities are recorded once they are traded. For organizations participating, a more granular approach is now required for all accounting, reporting, and disclosures.
IFRS 9 specifies the requirements for initial recognition and measurement, impairment, derecognition of financial instruments, and general hedge accounting. It also determines how entities measure and classify financial liabilities and assets, along with contracts for buying and selling non-financial items.
Some challenges associated with IFRS 9 implementation include cost and the limited capabilities of the industry’s infrastructure. Many legacy systems have a hard time efficiently managing IFRS 9 requirements.
IFRS 9 is an international set of standards for financial reporting, developed by the International Accounting Standards Board (IASB).
IFRS 9 was created to be a more consumable accounting standard than its predecessors, providing users with updated principles for the financial reporting of their assets and liabilities. IFRS 9 was intended to mitigate risks and increase financial stability.
The three main focuses of IFRS 9 are hedge accounting, impairment of financial assets, and classification and measurement of financial instruments. Requirements for embedded derivatives and credit risk changes for fair value financial liabilities are outlined, in addition to accounting required for the entity’s expected credit losses and extended credit on financial assets.
IFRS 9 requires financial instruments to be classified as Amortized Cost (AC), Fair Value through Other Comprehensive Income (FVOCI), or Fair Value through Profit and Loss (FVTPL). The IAS 39 category of Loans and Receivables has been eliminated under the new IFRS 9 standard.
IFRS 9 requirements were implemented in phases over several years. Classification and measurement of financial assets, derecognition of financial assets and liabilities, and hedge accounting are the main components of IFRS 9. Within these categories, FVOCI, prepayment features, impairment, and interest rate reform are explained.
Assets are measured at amortized cost when they collect contractual cash flows from both principal and interest payments on the outstanding principal amount.
Fair value through other comprehensive income
Assets are considered fair value in this model when selling financial assets and collecting contractual cash flows are achieved together.
Fair value through profit or loss
Financial assets that fall outside of the other two categories are considered fair value through profit or loss.
IFRS 9 is a reporting standard for entities, including banks, insurance companies, government-owned enterprises, and newly privatized companies. Often, it affects entities with shorter-term securities, non-vanilla assets, and equity investments.
IFRS 9 implementation can be costly and can incur additional ongoing expenses to pay for validation, forecasting, and modeling.
Data and modeling
IFRS 9 requires more historical and risk data than the former IAS 39 for expected credit loss (ECL). Additionally, both internal and external resources for firms building an ECL model have proven difficult to find in a timely manner.
A complete system overhaul is needed to complete the complex calculations needed for the substantial amounts of data required for IFRS 9. The infrastructure of many legacy systems is not robust and flexible enough to keep up with new standards.
Capital and Income Volatility
Regulatory capital decreases with IFRS 9 as credit impairment increases substantially. Higher incurred loss to expected loss has reduced overall profit and loss, thus reducing capital. IFRS 9 implementation also increased profit and loss volatility, measured by FVTPL. This affects entities who sell equity instruments in their investment portfolios.
Shifting Product Lines
Due to the effects of IFRS 9, some products are becoming less profitable, which has led some banks to introduce new products and encourage shorter-term investments.
Getting started with IFRS 9 can seem overwhelming. That’s why the experts at Clearwater put together a checklist to provide organizations with the tools and resources they need to succeed. The following steps are a good starting point for businesses to get started with IFRS 9:
Find the complete IFRS implementation checklist here.
Clearwater helps clients plan and implement IFRS 9 through our comprehensive solution by:
To learn more, download Clearwater’s in-depth IFRS 9 eGuide here.
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