Learn the standards: Adding IFRS 9 to your financial reporting repertoire

By Alexis Brown

The most enduring music is often the result of successful iteration: great songwriters know how to start with what’s proven then expose it to new ideas to produce something of lasting quality. The same can be said of the world of financial reporting standards, where the International Accounting Standards Board (IASB) strives to improve them through a process of careful refinement.

One of its more recent achievements is International Financial Reporting Standard 9 Financial Instruments (2014) (“IFRS 9 (2014)”) — the culmination of an effort to simplify the accounting of financial instruments to the benefit of those who prepare, audit and use financial statements. This new standard, set to become mandatory for fiscal years beginning on or after January 1, 2018, holds many advantages over its predecessor, IAS 39 Financial Instruments: Recognition and Measurement. The most notable of these are:

• principle-based, as opposed to rule-based, classification and measurement categories for financial assets;
• a single, forward-looking impairment model that will result in more timely recognition of impairment losses on financial assets;
• new requirements for handling changes in the fair value of an entity’s own debt, in order to address the “own credit” issue; and
• a new hedge accounting model that allows entities to better reflect their risk management activities.

Although we’re still a few years away from the mandatory effective date, organizations should be getting ready to tackle the work needed to make the transition. They should clearly understand the changes in classification and measurement, impairment and hedge accounting requirements, how these changes will impact them and the level of effort needed to make the transition.

Can we adopt early?
Organizations don’t have to wait until 2018 to start using IFRS 9 (2014). They can adopt the standard in its entirety if they’d like to begin taking advantage of it sooner. Whether or not this is worth doing depends on the industry and types of financial instruments the entity holds. Here are some things to consider:

• New classification and measurement categories will change an entity’s approach to determining which assets are carried at amortized cost and which are at fair value.
• Financial assets will be subject to a new impairment model. Those in the financial services industry will probably be the most affected by this part of the new standard, but others with financial assets carried at amortized cost will need to consider the impacts as well.
• Entities that deal in commodities or enter into derivative transactions may want to early-adopt to benefit from the simplified hedge accounting guidance. 
• The new hedging guidance will particularly benefit entities that currently hedge non-financial items such as commodities, since component risks of these assets can now be designated as hedged items. In addition, hedge accounting may be considered to be easier to access and maintain under IFRS 9.

What if I already adopted an earlier version of IFRS 9?
You may have adopted one of the earlier versions (including 2009, 2010 or 2013).  You’ll still be required to adopt the full standard, IFRS 9 (2014), on the mandatory effective date, which means you’ll have to revisit any decisions based on sections that have been changed in IFRS 9 (2014) and readjust as necessary as of January 1, 2018.

What do I need to know about restating on adoption?
The transitional provisions are a complex part of the new standard. Entities have some discretion about restating comparatives, and will have to weigh factors such as the overall comparability of financial statements and the perception of stakeholders. These are the key provisions regarding restatement:

• The application of IFRS 9 is generally retrospective. However, comparative information need not be restated and restatement is only allowed if it can be done without the use of hindsight.
• Hedging relationships that qualified for hedge accounting under IAS 39 will be regarded as continuing hedge relationships as long as all of the IFRS 9 qualifying criteria would have been met at the date of initial application.
• Hedge accounting cannot be applied for new relationships until the appropriate hedge documentation is in place.

Results worth the effort?
The changes introduced by IFRS 9 are much-needed improvements to the reporting of financial instruments. The logical, principle-based approach to classification and measurement, a single forward-looking impairment model and a substantially-reformed approach to hedge accounting will all enhance investor and stakeholder confidence. The challenge for entities adopting IFRS 9 will be in understanding the scoping, planning and execution needed to ensure a successful implementation.

Learn more about IFRS 9

Alexis Brown is a financial instruments specialist at Deloitte.