IFRS 9

IFRS 9 Financial Instruments: A Complete Overview

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.

What Is IFRS 9 In Simple Terms? 

IFRS 9 is an international set of standards for financial reporting, developed by the International Accounting Standards Board (IASB).

What is the Purpose & Objective of IFRS 9? 

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.

What Are the Components of IFRS 9? 

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.

What Are Financial Assets Under IFRS 9? 

Amortized cost 

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.

Who Does IFRS 9 Affect?

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 Concerns

Cost  

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.

Systems Infrastructure

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.

Possible Consequences of IFRS 9 

• Increased volatility of income statements
• Future credit losses need to be recognized during first reporting period
• Newer, updated systems are required for more complex processes

IFRS 9 Implementation Checklist 

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:

• Determine your testing process
• Define your business model test
• Understand your solely payments of principal and interest (SPPI) process
• Create your expected credit loss (ECL) model
• Review your securities
• Update your General Ledger
• Update your reporting

Find the complete IFRS implementation checklist here.

Implementing IFRS 9 with Clearwater Analytics

Clearwater helps clients plan and implement IFRS 9 through our comprehensive solution by:

• Consuming client provided SPPI and ECL data
• Providing accounting options to manage the equity securities to be recognized at FVTPL
• Automating impairment journal entries
• Offering IFRS 9 disclosures for Allowance, Staging, and Carrying amount

To learn more, download Clearwater’s in-depth IFRS 9 eGuide here.