Take This Quiz & Predict Your Score in the coming CA CS or CMA Exam!
  • How important it is for you to pass the exam in this attempt?
  • What percentage of course you have finished well so far roughly?
  • How many hours you study in a day?
  • How many times you have revised the topics you have finished
  • Have you taken online or pen drive or live class from a renowned faculty?
  • What percentage of the classes you have watched?
  • Have you attempted mock tests or practice tests yet?
  • Are you planning to attempt mock tests conducted by external bodies- ICAI, ICSI, ICMAI or other institute?
  • How many tests you have taken?
  • Did you manage to finish the test papers on time?
  • Are you strictly following study material provided by the exam conducting authority such as ICAI/ICSI/ICMAI/Other Body?
  • How is your health in general?
  • How is your food habit?
  • Any interest in yoga or exercise or play sports regularly?
  • Planning to sleep well nights before the exams?
  • Planning to have light food and water before exams?

The IASB approach to replacing IAS 39 IFRS 9

The IASB approach to replacing IAS 39 IFRS 9

The IASB approach to replacing IAS 39 IFRS 9: In December 1998, the International Accounting Standards Board (IASB), the main institution responsible for international accounting standards, issued the accounting standard IAS 39 with the aim to define the principles for the recognition, measurement and disclosures of financial and non-financial instruments. Later, the ever-changing of markets and the creation of new financial instruments, has involved a number of improvements and additions to the accounting standard IAS 39, until 2007. After the start of the economic crisis in 2008, the IASB decided to issue the standard IFRS 9 with a particular attention to calssification and measurement of financial instruments. The IASB published the final version of IFRS 9 in July 2014 replacing IAS 39. The main new features include a new model of “classification and measurement”, impairment, hedge accounting and own credit. The new standard will apply from 1 January 2018 but early application is allowed.

From the IAS 39 to IFRS 9. New model of classification and measurement of financial instruments

Work on IFRS 9 was accelerated in response to the financial crisis. The global financial crisis has involved, among its effects, the spread of the conviction that the accounting rules have contributed, at least for acceleration and escalation, to the worsening economic crisis. Especially, for the excessive use of fair value as a benchmark for the financial instruments accounting. During the financial crisis, the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards. For this reason, after the beginning of the global crisis, the accounting standards have been subject to evaluation by IASB  regulators. These reviews have highlighted the weaknesses of the accounting models used by companies to edit the financial statements and the need to modify accounting standard IAS 39. Therefore, the 12/11/2009, IFRS 9 comes into force with the aim to improve issues arising from the method of accounting for financial instruments.

Overall, the changes include the introduction of a new model of classification and measurement (see Table 1), the adoption of a new evaluation criteria of expected losses and the definition of new rules recognition for derivatives.

The IASB approach to replacing IAS 39 IFRS 9

IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting. It will replace the earlier IFRS for financial instruments, IAS 39, when it becomes effective in 2018.

IFRS 9 began as a joint project with the Financial Accounting Standards Board (FASB), which promulgates accounting standards in the United States. The boards published a joint discussion paper in March 2008 proposing an eventual goal of reporting all financial instruments at fair value, with all changes in fair value reported in net income (FASB) or profit and loss (IASB).As a result of the financial crisis of 2008, the boards decided to revise their accounting standards for financial instruments to address perceived deficiencies which were believed to have contributed to the magnitude of the crisis.

The boards disagreed on several important issues, and also took different approaches to developing the new financial instruments standard. FASB attempted to develop a comprehensive standard that would address classification and measurement, impairment and hedge accounting at the same time, and issued an exposure draft of a standard addressing all three components in 2010. In contrast, the IASB attempted to develop the new standard in phases, releasing each component of the new standard separately. In 2009, IASB issued the first portion of IFRS, covering classification and measurement of financial assets. This was intended to replace the asset classification and measurement sections of IAS 39, but not supersede other sections of IAS 39. In 2010, IASB issued another portion of IFRS 9, primarily covering classification and measurement of financial liabilities and also addressing aspects of applying fair value option and bifurcating embedded derivatives.

The IASB approach to replacing IAS 39 IFRS 9

Certain elements of IFRS 9 as issued were criticized by some key IASB constituents. The model for classifying debt instrument assets permitted only two approaches, fair value with all changes in fair value reported in profit and loss (FVPL), or amortized cost.This represented a significant deviation from FASB decisions, which would also have a category of fair value with certain changes in fair value reported in other comprehensive income (FVOCI). In addition to creating significant divergence with FASB, the lack of a FVOCI category would have been inconsistent with the accounting model being developed by the IASB for insurance contracts. There were also concerns that the criteria for qualifying for the amortized cost category were overly stringent and would force many financial instruments to be reported at fair value even though they could be appropriately accounted for at amortized cost. To address these concerns, IASB issued an exposure draft in 2012 proposing limited amendments to the classification and measurement of financial instruments.

Meanwhile, IASB and FASB worked together to develop a model for impairment of financial assets. IASB issued an exposure draft proposing an impairment model in 2013. FASB decided to propose an alternative impairment model. IASB was also developing its hedge accounting model independently of FASB, and issued that portion of the IFRS 9 standard in 2013. The final IFRS 9 standard, including hedge accounting, impairment, and the amended classification and measurement guidance, was issued on 24 July 2014.

The IASB approach to replacing IAS 39 IFRS 9

Early evidence on the market reaction to the IFRS 9 in Europe suggests overall a positive response to the IFRS 9, although heterogeneities across countries exist.

As amended, IFRS 9 had four possible classification categories for financial assets, including a FVOCI classification for debt instruments. The classification is dependent on two tests, a contractual cash flow test (named SPPI as Solely Payments of Principal and Interest) and a business model assessment. Unless the asset meets the requirements of both tests, it is measured at fair value with all changes in fair value reporting in profit and loss (FVPL). In order to meet the contractual cash flow test, the cash flows from the instrument must consist of only principal and interest. Among the amendments to classification and measurement made in the 2014 update, de minimis and “non-genuine” features can be disregarded from the test, meaning that a de minimis feature would not preclude an instrument from being reported at amortized cost or FVOCI. However, equity instruments, derivatives and instruments that contain other than de minimis embedded derivatives would have to be reported at FVPL.

The IASB approach to replacing IAS 39 IFRS 9

If the asset passes the contractual cash flows test, the business model assessment determines how the instrument is classified. If the instrument is being held to collect contractual cash flows, i.e., it is not expected to be sold, it is classified as amortized cost. If the business model for the instrument is to both collect contractual cash flows and potentially sell the asset, it is reported at FVOCI. For a FVOCI asset, the amortized cost basis is used to determine profit and loss, but the asset is reported at fair value on the balance sheet, with the difference between amortized cost and fair value reported in other comprehensive income. For any other business model, such as holding the asset for trading, the asset is reported at FVPL.

IFRS 9 retained most of the measurement guidance for liabilities from IAS 39, meaning most financial liabilities are held at amortized cost, the only change relating to liabilities that utilize the fair value option.For those liabilities, the change in fair value related to the entities own credit standing is reported in other comprehensive income rather than profit and loss.

IFRS 9 retained the concept of fair value option from IAS 39, but revised the criteria for financial assets.Under a fair value option, an asset or liability that would otherwise be reported at amortized cost or FVOCI can use FVPL instead. IFRS 9 also incorporated a FVOCI option for certain equity instruments that are not held for trading. Under this option, the instrument is reported at FVOCI similar to FVOCI for debt. However, this version of FVOCI does not permit “recycling.” Whereas when debt instruments using FVOCI are sold, the gain or loss on sale is “recycled” from other comprehensive income to profit and loss,for FVOCI equities the gain or loss is never reported in profit and loss, but rather remains in other comprehensive income.

The IASB approach to replacing IAS 39 IFRS 9 provides India’s top IFRS faculty video classes – online & in Pen Drive/ DVD – at very cost effective rates. Get IFRS Video classes from  to do a great preparation for primary Student.

Watch IFRS sample video lectures  visit
Watch  IFRS  sample lecture books   visit
Watch IFRS free downloads   visit

Leave a comment

Your email address will not be published. Required fields are marked *