This article, "IFRS 9 – Making this big standard more digestible!," originally appeared on GAAPDynamics.com.
IFRS 9 fundamentally changed the way financial instruments were accounted for and reported under IFRS. The standard was issued in various phases, taking years to develop and issue. Given the topic and the extent of the changes in the standard, it generally takes hours of training to cover its principles. But sometimes we don’t have that much time and just want to capture a high-level overview, before digging deeper later. That’s where our 1-hour eLearning overview course comes in!
IFRS 9 covers four main areas, including:
- Classification and measurement of financial assets and liabilities
- Impairment of financial assets
- Hedge accounting
- Derecognition of financial assets and liabilities
Each of these areas includes new and often complex analysis involving significant judgment. Often when we are asked to provide training to our clients, particularly those in the financial services industry, each of these topic areas requires anywhere from 2 to 4 hours of training. In total, that’s a lot of hours of training!
At GAAP Dynamics, we’ve seen the benefits of a hybrid learning model where learners are exposed to a combination of self-paced eLearning and live-webinar (or in classroom) training. eLearning provides a baseline knowledge of accounting topics to level set a group of learners, whereas the live training option allows for more advanced, application based learning where issues can be discussed and debated.
Our Overview of IFRS 9 course hits the highlights of all the key aspects of the standard in an efficient 1-hour training.
After a brief introduction covering the key definitions and scope of the standard, we jump into each of the four main phases of the standard.
Classification and measurement – While the classification and measurement of financial assets may seem similar to the predecessor guidance under IAS 39, the devil is in the details! While fair value through P&L (FVTPL), fair value through OCI (FVOCI), and amortized cost are still the outcomes of the classification and measurement analysis, how we end up at any of these categories is quite different. This analysis involves assessment of both the cash flow characteristics of the instrument and the entity’s business model for holding the investment. The fair value option has also been amended to apply in more limited instances, and when applied to financial liabilities, special accounting of changes in fair value through OCI must be applied.
Impairment – One of the most long awaited and contentious changes relates to the new expected credit loss (ECL) model under IFRS 9. Rather than recognizing impairment on losses that have been “incurred” as of the reporting date, IFRS 9 requires recognition of “expected” credit losses in the future. How far in the future depends on the financial asset being assessed and whether it has experienced a significant increase in credit risk since inception. This determines whether the credit loss analysis is in Bucket 1 (12-month ECL), Bucket 2 (lifetime ECL), or Bucket 3 (lifetime ECL and interest determined on net carrying amount). While the intention of these principles is to recognize impairment earlier, application that requires consideration of the future is inevitably highly judgmental.
Hedge accounting – Prior to IFRS 9, hedge accounting rules were seen as difficult to apply and largely inconsistent with the risk management strategies of the entity trying to apply them. IFRS 9 aims to simplify the hedge accounting requirements and better align them with risk management strategies. While the fundamental hedge accounting models and related accounting remain largely unchanged, the requirements to prove the hedging relationship is highly effective have changed from a quantitative assessment to a qualitative assessment. This allows for more hedging relationships to qualify for hedge accounting. There is also a rebalancing requirement for hedges that have become ineffective over time to ensure the hedge relationship continues to qualify for hedge accounting (assuming the risk management strategy has not changed). While these changes are intended to improve the principles for hedge accounting, they represent significant changes from previous guidance.
Derecognition – Derecognition of financial assets and liabilities is the one area where IFRS 9 does not change past principles in IAS 39. However, derecognition of financial assets might be one of the more challenging areas of the standard, given its complex series of assessments related to transfer of risks and rewards and control over the asset(s) transferred.
While our 1-hour IFRS 9 overview course was not designed to not make you an expert in financial instruments, it is an efficient way to begin your journey to explore the standard in greater depth in subsequent training, or simply provide you with a baseline knowledge of the key aspects of the standard and enable you to understand its basic components. We want to help you get there!
About GAAP Dynamics
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