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The International Financial Reporting Standard (IFRS) 9, issued by the International Accounting Standards Board (IASB), is a pivotal standard for financial instruments. It replaced IAS 39 and aims to enhance the transparency and reliability of financial reporting. This guide provides an overview of IFRS 9, focusing on its key components: classification and measurement, impairment, and hedge accounting.
1. Classification and Measurement
IFRS 9 introduces a new approach to the classification and measurement of financial assets and liabilities. The classification is based on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.
Financial Assets: These are classified into three categories:
Amortized Cost: Financial assets held to collect contractual cash flows.
Fair Value Through Other Comprehensive Income (FVOCI): Financial assets held to collect contractual cash flows and for sale.
Fair Value Through Profit or Loss (FVTPL): Financial assets that do not meet the criteria for amortized cost or FVOCI.
Financial Liabilities: These are generally measured at amortized cost, except for those designated at FVTPL, which include derivatives and liabilities held for trading.
2. Impairment
One of the most significant changes introduced by IFRS 9 is the forward-looking expected credit loss (ECL) model for impairment. This model requires entities to recognize ECLs at all times and to update the amount of ECLs recognized at each reporting date to reflect changes in the credit risk of financial instruments.
Three-Stage Approach:
Stage 1: At initial recognition, entities recognize a 12-month ECL.
Stage 2: If credit risk increases significantly, a lifetime ECL is recognized.
Stage 3: If the financial asset is credit-impaired, a lifetime ECL is recognized, and interest revenue is calculated on the net carrying amount.
3. Hedge Accounting
IFRS 9 aims to align hedge accounting more closely with risk management activities. It introduces a more principles-based approach, allowing for a broader range of hedging instruments and strategies.
Types of Hedges:
Fair Value Hedges: Protect against changes in the fair value of recognized assets or liabilities.
Cash Flow Hedges: Protect against variability in cash flows.
Net Investment Hedges: Protect against foreign currency exposure of net investments in foreign operations.
IFRS 9 represents a significant shift in the accounting for financial instruments, promoting greater transparency and consistency in financial reporting. By understanding and applying its principles, entities can better manage financial risks and provide more reliable financial information to stakeholders.
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