the financial reporting standard IFRS 9
– Financial Instruments
Welcome to Ronalds LLP IFRS bulletin. In this bulletin, we provide you with a high-level summary of the financial reporting standard IFRS 9 clearly pointing out the distinction between IFRS 9 and its predecessor, IAS 39.
The International Accounting Standards Board (IASB) issued this standard in July 2014 and is effective for annual financial periods beginning on or after 1 January 2018.
The standard brings about significant changes in accounting for financial instruments some of which are highlighted below:
- A shift from the classification of financial instruments in four categories (available for sale, held to maturity, loans receivable fair value through profit or loss) to the amortized cost and fair value in IFRS 9.
- A shift from the incurred loss(IL) financial assets impairment model in IAS 39 to the expected credit loss (ECL)model in IFRS 9.
The objective of IFRS 9.
The objective of IFRS 9 is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing, and uncertainty of an entity’s future cash flows.
The standard covers the recognition and de-recognition, classification, measurement of financial assets and liabilities, impairment of financial assets and hedge accounting. In this bulletin, we shall focus on the recognition of financial assets and financial liabilities.
Recognition and de-recognition of financial assets and financial liabilities.
Recognition refers to the inclusion of a financial asset or financial liability in an entity’s statement of financial position while de-recognition denotes the removal of a previously recognized financial asset or liability from an entity’s statement of financial position.
According to IFRS 9, an entity is required to recognize a financial asset or financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument.
In applying the recognition principle above, paragraph B.3.1.2 of the standard provides the following guidance:
- Unconditional receivables and payables are recognized as assets and liabilities when the entity becomes a party to the contract and, therefore, has a legal right to receive or a legal obligation to pay cash.
- Assets to be acquired and liabilities to be incurred because of a firm commitment to purchase or sell goods or services are generally not recognized until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order does not generally recognize an asset –and the entity that places the order does not recognize a liability –at the time of the commission but, instead, delays recognition until the ordered goods have been shipped, delivered or rendered.
- A forward contract that is within the scope of IFRS 9 is recognized as an asset or a liability on the commitment date, instead of on the date on which settlement takes place.
- Option contracts that are within the scope of IFRS 9 are recognized as assets or liabilities when the holder or writer becomes a party to the contract.
- Planned future transactions, no matter how likely, are not assets and liabilities because the entity has not become a party to a contract.