IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early application permitted.
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:
- the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
- 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.
In April 2001 the International Accounting Standards Board (Board) adopted IAS39Financial Instruments: Recognition and Measurement, which had originally been issued by the International Accounting Standards Committee in March 1999.
The Board had always intended that IFRS9Financial Instrumentswould replace IAS39 in its entirety. However, in response to requests from interested parties that the accounting for financial instruments should be improved quickly, the Board divided its project to replace IAS39 into three main phases. As the Board completed each phase, it issued chapters in IFRS9 that replaced the corresponding requirements in IAS39.
In November 2009 the Board issued the chapters of IFRS9 relating to the classification and measurement of financial assets. In October 2010 the Board added the requirements related to the classification and measurement of financial liabilities to IFRS9. This includes requirements on embedded derivatives and how to account for changes in own credit risk on financial liabilities designated under the fair value option.
In October 2010 the Board also decided to carry forward unchanged from IAS39 the requirements related to the derecognition of financial assets and financial liabilities. Because of these changes, in October 2010 the Board restructured IFRS9 and its Basis for Conclusions. In December 2011 the Board deferred the mandatory effective date of IFRS9.
In November 2013 the Board added a Hedge Accounting chapter. IFRS 9 permits an entity to choose as its accounting policy either to apply the hedge accounting requirements of IFRS 9 or to continue to apply the hedge accounting requirements in IAS 39. Consequently, although IFRS 9 is effective (with limited exceptions for entities that issue insurance contracts and entities applying theIFRS for SMEsStandard), IAS 39, which now contains only its requirements for hedge accounting, also remains effective.
In July 2014 the Board issued the completed version of IFRS9. The Board made limited amendments to the classification and measurement requirements for financial assets by addressing a narrow range of application questions and by introducing a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments. The Board also added the impairment requirements relating to the accounting for an entity’s expected credit losses on its financial assets and commitments to extend credit. A new mandatory effective date was also set.
In May 2017 when IFRS17Insurance Contractswas issued, it amended the derecognition requirements in IFRS9 by permitting an exemption for when an entity repurchases its financial liability in specific circ*mstances.
In October 2017 IFRS9 was amended byPrepayment Features with Negative Compensation(Amendments to IFRS9). The amendments specify that particular financial assets with prepayment features that may result in reasonable negative compensation for the early termination of such contracts are eligible to be measured at amortised cost or at fair value through other comprehensive income.
In September 2019 the Board amended IFRS 9 and IAS 39 by issuingInterest Rate Benchmark Reformto provide specific exceptions to hedge accounting requirements in IFRS 9 and IAS 39 for (a) highly probable requirement; (b) prospective assessments; (c) retrospective assessment (IAS 39 only); and (d) separately identifiable risk components.Interest Rate Benchmark Reformalso amended IFRS 7 to add specific disclosure requirements for hedging relationships to which an entity applies the exceptions in IFRS 9 or IAS 39.
In August 2020 the Board issuedInterest Rate Benchmark Reform―Phase 2which amended requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to:
• changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities;
• hedge accounting; and
• disclosures.
The Phase 2 amendments apply only to changes required by the interest rate benchmark reform to financial instruments and hedging relationships.
Other Standards have made minor consequential amendments to IFRS9. They includeSevere Hyperinflation and Removal of Fixed Dates for First-time Adopters(Amendments to IFRS1) (issued December 2010),IFRS10Consolidated Financial Statements(issued May 2011),IFRS11Joint Arrangements(issued May 2011),IFRS13Fair Value Measurement(issued May 2011),IAS19Employee Benefits(issued June 2011),Annual Improvements to IFRSs 2010–2012 Cycle(issued December 2013), IFRS15Revenue from Contracts with Customers(issued May2014), IFRS16Leases(issued January 2016),Amendments to References to the Conceptual Framework in IFRS Standards(issued March 2018),Annual Improvements to IFRS Standards 2018–2020(issued May 2020) andAmendments to IFRS 17(issued June 2020).
As a financial reporting expert with extensive knowledge of International Financial Reporting Standards (IFRS), I aim to shed light on the complex yet critical topic of IFRS 9. My understanding of IFRS 9 is rooted in a thorough grasp of its historical context, development phases, and subsequent amendments.
The International Accounting Standards Board (IASB) initiated the journey towards IFRS 9 to replace its predecessor, IAS 39, which dealt with the recognition and measurement of financial instruments. The transition to IFRS 9 occurred in multiple phases, with the Board issuing chapters corresponding to the completion of each phase. This phased approach allowed for a more agile response to the need for improved accounting standards for financial instruments.
In November 2009, the Board released the chapters of IFRS 9 related to the classification and measurement of financial assets. Subsequently, in October 2010, the requirements for financial liabilities, including embedded derivatives and fair value option considerations, were added to IFRS 9. The derecognition requirements of financial assets and liabilities, unchanged from IAS 39, were also retained.
In November 2013, a Hedge Accounting chapter was introduced, offering entities the choice to apply either the hedge accounting requirements of IFRS 9 or continue with those in IAS 39. This flexibility was maintained even though IFRS 9 became effective, with limited exceptions for certain entities.
The completion of IFRS 9 in July 2014 included amendments to the classification and measurement requirements for financial assets, addressing specific application questions. Notably, a 'fair value through other comprehensive income' measurement category for certain simple debt instruments was introduced. Additionally, impairment requirements related to expected credit losses on financial assets and commitments to extend credit were incorporated.
In May 2017, the issuance of IFRS 17 on Insurance Contracts led to amendments in the derecognition requirements of IFRS 9, allowing exemptions for specific circ*mstances of financial liability repurchases. Subsequent amendments in October 2017, known as "Prepayment Features with Negative Compensation," specified the measurement eligibility of financial assets with certain prepayment features.
Further amendments in September 2019, titled "Interest Rate Benchmark Reform," provided exceptions to hedge accounting requirements in IFRS 9 and IAS 39 for various scenarios. A subsequent phase, "Interest Rate Benchmark Reform―Phase 2," in August 2020, introduced changes related to contractual cash flows, hedge accounting, and disclosures.
Minor consequential amendments to IFRS 9 have been made by other standards, such as Severe Hyperinflation, Removal of Fixed Dates for First-time Adopters, IFRS 10, IFRS 11, IFRS 13, IAS 19, Annual Improvements to IFRSs 2010–2012 Cycle, IFRS 15, IFRS 16, Amendments to References to the Conceptual Framework in IFRS Standards, Annual Improvements to IFRS Standards 2018–2020, and Amendments to IFRS 17.
In conclusion, my expertise in IFRS 9 extends beyond its core concepts to include its historical evolution, phased development, and subsequent amendments, providing a comprehensive understanding of this vital accounting standard.
