Abstract

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.

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.

Financial assets

When an entity first recognises a financial asset, it classifies it based on the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows:
• Amortised cost-a financial asset is measured at amortised cost if both of the following conditions are met:
     o    the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
     o    the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
• Fair value through other comprehensive income-financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
• Fair value through profit or loss-any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss.
When, and only when, an entity changes its business model for managing financial assets it must reclassify all affected financial assets

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.

Tab.1 Differences between IAS 39 and IFRS 9

The new standards identified by the IASB in IFRS 9 will also ensure a more timely recognition of expected losses. The goal of these changes is to simplify the existing rules and strengthen investor confidence in the financial statements of banks and the financial system.

The new rules will apply from 1 January 2018 with the possibility of early adoption.

“Classification and Measurement”
Classification determines how financial assets are accounted for in financial statements and, in particular, how they are measured on an ongoing basis. Requirements for classification and measurement are the foundation of the accounting for financial instruments.

Many application problems emerged from IAS 39 regarded classification and measurement of financial assets, because characterized by various classification categories and models of value associated. For these reasons, the IASB to make it easier, for users of financial statements, the understanding of the information provided for the replacement of previous models.

IFRS 9 introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle -based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult to apply. The new model also results in a single impairment model being applied to all financial instruments, thereby removing a source of complexity associated with previous accounting requirements.

Tab. 2: Process for determining the classification and measurement of financial assets

“Impairment”

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. As part of IFRS 9,the IASB has introduced a new, expected -loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognized and to recognize full lifetime expected losses on a more timely basis. The IASB has already announced its intention to create a transition resource group to support stakeholders in the transition to the new impairment requirements.

“Hedge accounting”

IFRS 9 introduces a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new model represents a significant overhaul of hedge accounting that aligns the accounting treatment with risk management activities, enabling entities to better reflect these activities in their financial statements.

In addition,as a result of these changes, users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements.

“Own credit”

IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss. Early application of this improvement to financial reporting, prior to any other changes in the accounting for financial instruments, is permitted by IFRS 9.

References

ABATE E., ROSSI P. and VIRGILIO A. (2010) IAS/IFRS -US GAAP. Principi contabili italiani. Confronto e differenze, Ernest & Young, Egea

DELOITTE website, IFRS 9 - Financial Instruments (http://www.iasplus.com/en/standards/ifrs/ifrs9)

IFRS FOUNDATION (2014) ASB completes reform of financial instruments accounting, press release, 24 July (http://www.fondazioneoic.eu/wp-content/uploads/downloads/2014/08/2014-07-24-Comunicato-stampa-IFRS-9.pdf)

IFRS FOUNDATION (2014) IFRS 9 Financial Instruments, Project summary, 24 July https://www.ifrs.org/-/media/project/financial-instruments/project-summaries/ifrs-9-project-summary-july-2014.pdf)

MARCON C  and ZANON G. (2013) La contabilizzazione dei derivati dallo IAS 39 all’IFRS 9, Univ. Ca’ Foscari, Venezia

MARCON C. and PEGORARO M. (2012) AS 39-IFRS 9: Cambiamenti nella rilevazione e valutazione delle attività e delle passività finanziarie, Univ. Ca’ Foscari, Venezia

KPMG website, IFRS 9 - the complete standard (http://www.kpmg.com/global/en/topics/global-ifrs-institute/ifrs-topics/pages/classification-and-measurement.aspx)

Editor: Giovanni AVERSA

2018 ASSONEBB