F
or most accountants
without specialised
technical experience, IAS 39
is generally
regarded as one of the most
daunting accounting standards to
apply in practice. IAS 39 has been
with us for a number of years
now, yet it is arguably the one
accounting standard that
continues to cause the most
headaches for accounting
practitioners. IAS 39 was first
issued in March 1999 by the then
International Accounting
Standards Committee, and the
standard was subsequently
inherited by the successor
standard setting body, the
International Accounting
Standards Board (IASB).
Throughout its existence over the
last decade, the standard has
undergone countless revisions
and amendments by both bodies,
and compared to other
accounting standards, it is
probably the one of the most
amended and revised standard in
the entire body of IFRSs. The main
reason for these frequent
changes is that IAS 39 is perceived
to be a very complicated
standard.
Whether this is because of the
standard itself, or rather the
underlying subject matter of the
standard is a topic that has
caused considerable debate, but
the fact remains that IAS 39 in its
current form remains a standard
that is difficult to understand,
apply and interpret.
The IASB's project to overhaul the
standards dealing with financial
instruments began some time
ago, and one of the first major
steps in this project was the
issuing of IFRS 7 in August 2005. IFRS 7
replaced IAS 30 and
most of IAS 32 , but apart from
various 'patch-up' amendments
and revisions, the basic principles
in IAS 39 remained unchanged.
Even now that the IASB’s project
to overhaul the recognition and
measurement standard for
financial instruments is finally
underway, the process is nowhere
near complete. The issuing of IFRS
9 during November 2009 was the
first step in what will be a lengthy
process. The ultimate plan is for
IFRS 9 to completely replace IAS
39, but in the meantime, thefirst
phase of IFRS 9 that was issued in
November 2009 deals only with
the classification and
measurement of financial assets.
The remaining aspects dealing
with the classification,
recognition, and measurement of
other financial instruments will be
completed on a piecemeal basis,
and as each phase is completed,
new chapters will be created in
IFRS 9 and the replaced portions
of IAS 39 will cease to be
effective. The IASB's original
intention was to have completed
this process by the end of 2010,
but at the time of writing this
article, it appears as if a date
some time in 2011 is more likely.
The spirit of IFRS 9
Part of IAS 39's perceived
complexity arose from the
numerous categories of financial
instruments, and the myriad of
rules applicable to each category.
This was further exacerbated by
the fact that
many entities were forced into
accounting for certain financial
instruments a particular way as a
result of the financial instruments
falling into various categories
purely by virtue of their nature
and the definitions applicable to
those categories. This was despite
the fact that the entity would
have had no intention of dealing
with the financial instruments in
such a manner.
In contrast to the very rulesoriented IAS 39, IFRS 9 follows a
more principles-based approach,
especially with regard to the
classification and measurement of
financial assets.
In terms of IFRS 9, all financial
assets are to be:
!
• on the basis of
the entity's "#$ %&!
for managing the
financial assets and the
contractual cash flow
characteristics of the
financial asset
!
'
• $ ( % #) at
) * #
plus, in the case
of a financial asset not at
fair value through profit
or loss, particular
transaction costs
'
• #" +# $ (
% #) !
either at
%&)' ! &' )
or
* # ,
depending on the
nature of the instrument
at hand. This is covered
below.
The IASB's ultimate aim is for a
single impairment method for
financial instruments (although
the impairment phase of IFRS 9 is
not yet complete).
Scope
IFRS 9 applies to all financial
assets that presently fall within
the scope of IAS 39.
Defined terms
At this point, IFRS 9 applies the
same definitions as currently exist
in IAS 32 and IAS 39, and in fact
continues to refer to those
standards directly. Once those
standards are completely
replaced, it is the scope
paragraphs and the definitions
will be incorporated into IFRS 9.
The only new defined term in IFRS
9 relates to the definition of
'reclassification date', which is the
first day of the first reporting
period following the change in
business model that results in an
entity reclassifying financial assets
(more on reclassification later).
Initial recognition of financial
assets
The initial recognition of financial
assets under IFRS 9 is very similar
to that of IAS 39.
An entity recognises a financial
asset in its statement of financial
position when it becomes party to
the contractual provisions of the
instrument.
Regular way purchases or sales of
financial assets continue to be
accounted for in accordance with
IAS 39.*
Classification of financial
assets
Effectively, three classifications
exist:
Financial assets at
amortisedcost
*
A regular way purchase or sale is a
purchase or sale of a financial asset
under a contract whose terms
require delivery of the asset within
the time frame established generally
by regulation or convention in the
marketplace concerned. This refers
to a situation where there may be a
compulsory timing difference
between the point in time when the
entity commits to the purchase or
sale of a financial asset and the
eventual delivery of the asset.
for this classification,
both of the following
conditions must be met:
the asset is held
within a business model
whose objective is to hold
assets in order tocollect
contractual cash flows
AND
the contractual terms
of the financial asset give
rise on specified dates to
cash flows that are solely
payments of principal and
interest on the principal
amount outstanding
(The standard provides detailed
guidance on how to interpret and
apply these conditions)
Financial assets at fair value
this classification applies to
all financial assets that do not
meet both of the conditions
forfinancial assets at amortised
cost above
Financial assets designated at
fair value through profit or loss
This classification is available
at initial recognition if doing so
will eliminate or
significantlyreduce a
measurement or recognition
inconsistency (also known as an
'accounting mismatch') that
would otherwise arise from
measuring assets or liabilities or
the gains and losses from these
on different bases (this particular
rule is basically the same as its
current equivalent inIAS 39, and
the standard actually directly
refers to IAS 39 in this regard).
Embedded derivatives
If a hybrid contract contains a
host that is within the scope of
IFRS 9, the classification
requirements ofIFRS 9 are applied
to the entire hybrid contract
without the need for separation
of the embedded derivative from
the host contract.
If a hybrid contract contains a
host that is not within the scope
of IFRS 9, an entity should apply
IAS39to determine whether the
embedded derivative must be
separated fromthe host. If
separation is necessary, the
derivative is classified in
accordance with either IFRS 9 or
IAS39, and the host is accounted
for in accordance with the
applicable IFRS.
Reclassification
Reclassification may only occur
when an entity changes its
business model for managing
financial assets. Where such
reclassification is deemed
necessary, any changes to be
made are only permissible with
effect from the beginning of the
next financial period. This is to
avoid situations where entities
would manipulate the accounting
for their financial instruments to
achieve a particular financial
effect.
Initial measurement
Initial measurement of all
financial assets is at fair value
plus, in the case of financial assets
$&'
at fairvalue through profit or
loss, transaction costs that are
directly attributable to the
acquisition of thefinancial assets.
For items that are carried at fair
value through profit or loss, any
transaction costs are expensed at
acquisition.
Subsequent measurement
Subsequent measurement of
financial assets is either at fair
value or amortised cost,
depending on theclassification of
the financial assets.
Financial assets at amortised cost
are subject to the impairment
requirements of IAS 39.
Financial assets that are
designated hedged items are
subject to the hedge accounting
requirements ofIAS 39.
Measurement on
reclassification
Reclassification is applied
prospectively from the
reclassification date. Restatement
of previouslyrecognised gains,
losses or interest is prohibited.
If a financial asset is reclassified
from amortised cost to fair value,
its fair value is determined at
thereclassification date. Any gain
or loss arising from a difference
between the previous carrying
amountand the fair value is
recognised in profit or loss.
If a financial asset is reclassified
from fair value to amortised cost,
its fair value at reclassification
datebecomes its new carrying
amount.
Gains and losses
A gain or loss on a financial asset
measured at fair value that is not
part of a hedging relationship
isrecognised in profit or loss,
unless the financial asset is an
investment in an equity
instrument and theentity has
elected to present gains and
losses on that investment in other
comprehensive income.
A gain or loss on a financial asset
measured at amortised cost that
is not part of a hedging
relationship isrecognised in profit
or loss when the financial asset is
derecognised, impaired or
reclassified, andthrough the
amortisation process.
Gains or losses on financial assets
that are hedged items are
accounted for in accordance with
IAS 39.
Gains or losses on financial assets
that are accounted for using
settlement date accounting are
accounted for in accordance with
IAS 39.
that thetransitional provisions
permit otherwise. However, it
must not be applied to financial
assets that havealready been
derecognised at the date of initial
application. The transitional
provisions are very detailed,and
will not be covered in this article.
Investments in equity
instruments
At initial recognition, an entity
may make an irrevocable election
to present in other
comprehensiveincome
subsequent changes in the fair
value of an investment in an
equity instrument within the
scopeof IFRS 9 that is not held for
trading (i.e. long term
investments in equity
instruments). If such anelection is
made, dividends from these
investments are recognised in
profit or loss when the
entity'sright to receive payment
of the dividend is established, in
accordance with IAS 18 Revenue.
It must, however, be noted that
any gains and losses recognised in
other comprehensive income will
not be recycled on disposal of the
investment and, as such, this will
ultimately have an impact on the
earnings per share and headline
earnings per share calculations of
the entity.
Application guidance
IFRS 9 is accompanied by detailed
application guidance. Due to the
detailed nature of this guidance,
itwill not be covered in this
summary.
Effective date
IFRS 9 must be applied for annual
periods beginning on or after 1
January 2013.
Early application is permitted. If
an entity early-adopts IFRS 9, that
fact must be disclosed.
Transitional provisions
IFRS 9 must be applied
retrospectively, in accordance
with IAS 8, except to the extent
Conclusion
Based on the fact that IFRS 9
presently deals only with financial
assets, and considering the
numerouscross-references to the
very standard that it is intended
to replace (IAS 39), it is clear that
IFRS 9 is verymuch a work in
progress at this point. By the time
the IASB’s remaining projects on
overhauling financialinstruments
are finally completed, it is
possible that the version of IFRS 9
covered in thissummary may have
been amended extensively.
However, it must be
acknowledged that, in its current
form,IFRS 9 has taken some
positive steps in adopting a more
principles-based approach in
accounting forfinancial assets as
compared to its predecessor.
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"
Blaise Colyvas (CA(SA), RA) is a
technical director at
W.consulting. His areas of
expertise include IFRS/SA GAAP,
IFRS for SMEs, and GRAP. He
provides technical consulting
services and training to the firm’s
clients on these frameworks.
This article summarises the most important aspects of IFRS 9 Financial Instruments and should not be utilised as a substitute for the actual standard. The
summary and/or opinions expressed are those of the author and do not constitute official views of W.consulting. No party may rely upon the accounting
opinions expressed during this article for any purpose whatsoever. W.consulting, its directors, employees and agents shall not be liable to anyone in respect
of any reliance placed on information received from or views expressed during this seminar. Should you wish to obtain an official view on a specific issue or
structure, please contact W.consulting and we will be happy to assist you once the specific facts and circumstances of your query have been fully
understood. All rights reserved. No part of this publication may be translated, reprinted or reproduced in any form either in whole or in part or by any
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