BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION:

IFRS 9 Financial Instruments when they were originally issued was 1 January 2013.

On 16 December 2011, the IASB issued Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7), which amended the effective date of IFRS 9 to annual periods beginning on or after 1 January 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7.

On 19 November 2013, the IASB issued IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) amending IFRS 9 to include the new general hedge accounting model, allow adoption of the treatment of fair value changes due to own credit on liabilities designated at fair value through profit or loss, and remove the 1 January 2015 effective date.

On 24 July 2014, the IASB issued IFRS 9 Financial Insturments. This is the final version of the Standard and supersedes all previous versions. The Standard has a mandatory effective date for annual periods beginning on or after 1 January 2018, with earlier application permitted.

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION

 The objective of hedge accounting BC6.76 Hedge accounting is an exception to the normal recognition and measurement requirements in IFRS. For example, the hedge accounting guidance in IAS 39 permitted:
(a) the recognition of items that would otherwise have not been recognised
(b) the measurement of an item on a basis that is different from the measurement basis that is normally required (for example, adjusting the measurement of a hedged item in a fair value hedge).
(c) the deferral of the changes in the fair value of a hedging instrument for a cash flow hedge in other comprehensive income. Such changes in fair value would otherwise have been recognised in profit or loss (for example, the hedging of a highly probable forecast transaction).

The IASB noted that, although hedge accounting was an exception from normal accounting requirements, in many situations the information that resulted from applying those normal requirements without using hedge accounting either did not provide useful information or omitted important information. Hence, the IASB concluded that hedge accounting should be retained.

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION

In the IASB’s view, a consistent hedge accounting model requires an objective
that describes when and how an entity should:

(a) override the general recognition and measurement requirements in IFRS
(ie when and how an entity should apply hedge accounting); and
(b) recognise effectiveness and/or ineffectiveness of a hedging relationship

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION:  The IASB considered two possible objectives of hedge accounting—that hedge accounting should:
(a) provide a link between an entity’s risk management and its financial reporting. Hedge accounting would convey the context of hedging
instruments, which would allow insights into their purpose and effect.

(b) mitigate the recognition and measurement anomalies between the accounting for derivatives (or other hedging instruments) and the
accounting for hedged items and manage the timing of the recognition of gains or losses on derivative hedging instruments used to mitigate cash flow risk.

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION

However, the IASB rejected both objectives for hedge accounting. The IASB thought that an objective that linked an entity’s risk management and financial reporting was too broad: it was not clear enough what risk management activity was being referred to. Conversely, the IASB thought that an objective that focused on the accounting anomalies was too narrow: it focused on the
mechanics of hedge accounting instead of on why hedge accounting was being done.

Consequently, the IASB decided to propose in the 2010 Hedge Accounting Exposure Draft an objective that combined elements of both objectives. The IASB considered that the proposed objective of hedge accounting reflected a broad articulation of a principle-based approach with a focus on the purpose of the entity’s risk management activities. In addition, the objective also provided for a focus on the statement of financial position and the statement of comprehensive income, thereby reflecting the effects of the individual assets and liabilities associated with the risk management activities on those statements. This reflected the IASB’s intention: that entities should provideuseful information about the purpose and effect of hedging instruments for which hedge accounting is applied.  The IASB also noted that, despite that an entity’s risk management activitie  were central to the objective of hedge accounting, an entity would only achieve hedge accounting if it met all the qualifying criteria.

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION

Almost all respondents to the 2010 Hedge Accounting Exposure Draft as well as participants in the IASB’s outreach activities supported the objective of hedge accounting proposed in the 2010 Hedge Accounting Exposure Draft.

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION: Details about IFRS

The International Financial Reporting Standards, usually called the IFRS Standards,are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm.

IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC (the predecessor of IASB) are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards “International Financial Reporting Standards”.

BASIS FOR CONCLUSIONS ON IFRS 9 EFFECTIVE DATE AND TRANSITION

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