IASB Completes Reform of Financial Instruments Accounting
On 24th of July 2014, IASB (The International Accounting Standards Board) issued revised IFRS 9: Financial Instruments. The changed made by IASB in IFRS 9 includes changes with respect to classification and measurement. The impairment of financial assets shall be recorded using ‘expected loss’ approach. Also, significant changes have been made in approach to hedge accounting. The standard shall be applicable from January 2018 with an option of early adoption.
Classification and Measurement:
Classification and measurement refers to how the financial assets and financial liabilities are presented and valued on statement of financial position and statement of comprehensive income. IASB has issued a revised method for classification of financial assets which is based on nature of their cash flows and their business purpose. This method replaces the current method which was very difficult to understand and use. IFRS 9 has also introduced new method for impairment accounting. The method for recording impairment is fairly simple compared to previous method and is based on ‘expected losses’.
During the times of economic crunch, a weak area was identified in International Accounting Standard (IAS) 39 which was used to delay recording of impairment on financial assets. Revised IFRS 9 has presented a new impairment method based on ‘expected –loss ’. This method allows timely recording of provision of expected losses on financial instruments. To be more specific, it requires companies to estimate expected losses at the time of initial recognition of financial instrument and record foreseen losses in the correct period. The IASB intends to make a group which shall assist concerned parties to move towards new impairment requirements of revised IFRS.
Significant changes have been made in revised IFRS regarding hedge accounting. These reforms require increased disclosures regarding risk managing activities. This allows companies to disclose their risk management activities in a better way. Further other stake holders will have better understanding of risk management activities and impact of hedge accounting on financial statements.
Revised IFRS also diminishes the unpredictability in statement of comprehensive income by not allowing to record gains on financial liabilities caused by downgrade in company’s own credit rating. Early adoption of this requirement is allowed by IASB.
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