IFRS 9 - financial instruments

The IASB has published IFRS 9 – Financial Instruments - which will be effective for periods commencing on or after 1 January 2018. This replaces the notoriously complex requirements of IAS 39 Financial Instruments: Recognition and Measurement.

Whilst the changes will significantly impact financial institutions, all entities will need to consider whether the changes affect their financial instruments, and hence their financial statements.

So how will it impact entities that are not financial institutions?

  • Financial assets may need to be measured differently, as they will be classified on the basis of the cash flows associated with the asset and the entity’s business model instead of whether they meet defined criteria for different categories of financial asset, as they are currently.

  • Fair value gains and losses arising on the re-measurement of certain financial assets previously classified as 'available-for-sale' under IAS 39 (eg some investments in debt instruments) will be recognised in profit or loss rather than in other comprehensive income.

  • There is no longer the requirement to separate out derivatives embedded in financial assets from host contracts. Instead it is likely that the host contract will be measured at fair value with movements recognised in profit or loss.

  • Impairment losses will be recognised earlier due to the implementation of a new impairment loss model, which is based on expected rather than incurred losses.

  • The new hedging requirements are easier to interpret and are more closely aligned with the risk management objectives and strategies of the business. Specifically, there is more flexibility to apply hedge accounting to groups of items, including net positions, so you can adopt hedging accounting on a more ‘entity wide’ basis. This could make hedge accounting a more accessible and worthwhile approach for some businesses.

  • There will be no impact on the recognition and measurement of financial liabilities unless a liability has been designated as fair value through profit or loss in which case changes in the fair value of the liability attributable to changes in credit risk of the borrower are presented in other comprehensive income. 

What action do you need to take?

  • Identify the financial instruments that you currently have and note how each one is measured.

  • For financial assets that were in the scope of IAS 39, identify the nature of the cash flows associated with them and the business reasons for holding them, as this will impact on their measurement.

  • Earlier recognition of impairment losses may impact on key performance indicators and covenant breaches so it is important to identify how the new model will impact these.

  • Consider whether the new hedge accounting requirements could be applied.

  • Look at the transitional arrangements and options available and how they should be applied.

How we can help

RSM has the experience and the expertise to help:

  • assess the impact of the new standard on your financial statements, tax cash flows and distributable profits;

  • assess the available options for the presentation of fair value gains or losses, the impact these will have and the actions that will need to be taken;

  • value your financial instruments; and

  • assess whether hedge accounting could be applied and if so develop procedures for measuring hedge effectiveness. 

For more information on IFRS 9, please get in touch with your usual RSM contact.