International
Accounting standard(IAS)
What is the International financial reporting standards (IFRS-9)? Describes in details:
IFRS-9(International Financial Reporting Standard-9) is a standard issued by the International Accounting Standards Board (IASB) that governs the classification, measurement, and impairment of financial instruments. It replaced IAS 39 and introduced a more simplified and forward-looking approach to accounting for financial instruments.
Key aspects of IFRS 9 include:
1.Classification and Measurement of Financial Assets:
Financial assets are classified into three categories:
Amortized Cost:
For assets held within a business model whose objective is to hold assets to collect contractual cash flows that are solely payments of principal and interest (e.g., loans and receivables).
Fair Value through Other Comprehensive Income (FVOCI):
For assets held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets (e.g., debt securities).
Fair Value through Profit or Loss (FVPL):
For assets that do not meet the criteria for amortized cost or FVOCI (e.g., derivatives, equity investments not held for trading).
2.Classification and Measurement of Financial Liabilities:
Financial liabilities are generally measured at amortized cost, except for those held for trading or those designated at fair value through profit or loss (e.g., derivatives or liabilities under a fair value option).
3.Impairment of Financial Assets:
IFRS 9 introduces the expected credit loss (ECL) model for impairment, which requires the recognition of credit losses earlier than under the previous incurred loss model. It applies to financial assets that are measured at amortized cost or FVOCI.
The ECL model requires entities to estimate credit losses based on forward-looking information, considering factors such as the probability of default, exposure at default, and loss given default.
4.Hedge Accounting:
IFRS 9 provides an improved and more flexible approach to hedge accounting, aligning the accounting for hedging relationships more closely with risk management practices.
The standard allows for a wider range of hedging instruments and hedged items to be eligible for hedge accounting, and it focuses on the economic relationship between the hedged item and the hedging instrument.
5.Fair Value Measurement:
IFRS 9 requires that financial assets and liabilities be measured at fair value (using the market prices when available) for items classified as FVPL or FVOCI.
The fair value measurement should take into account market conditions at the reporting date, and IFRS 9 provides guidance on the fair value hierarchy (Levels 1, 2, and 3) for determining the reliability of fair value estimates.
6.Simplification and Implementation:
IFRS 9 simplifies the previous rules under IAS 39 by reducing the number of categories for financial assets and introducing a more consistent framework for financial instruments.
In short, IFRS 9 enhances transparency and consistency in financial reporting by providing clearer rules for the classification, measurement, and impairment of financial instruments. It focuses on more proactive, forward-looking assessments, particularly for credit losses, and allows for better alignment between accounting and risk management practices.