People are very creative and inventive. So they created and invented numerous kinds of financial instruments. Just admit it—are you really versed well in derivatives, various share options, warrants, certificates, convertible bonds and many others?
This area happens to be so complicated and difficult to understand, also from IFRS accounting and reporting point of view. Adding to the complications—there are two different standards about financial instruments: IAS 39 and IFRS 9.
To clarify this matter a bit here I’d like to explain:
- Why do we currently have 2 IFRS standards dealing with financial instruments? (IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments—oh gosh, they have even almost identical name!)
- What is the current status?
- Should we apply IAS 39 or IFRS 9?
The reason for IAS 39 and IFRS 9
Standard IAS 39 in its current form came to effect in 2005. Its aim was to prescribe unified rules for reporting of the financial instruments so that companies presented them in a transparent and a consistent way.
But the opposite happened. IAS 39 was extremely complicated and contained too many exceptions, inconsistencies and derogations. Companies really struggled and paid high fees for consultants just to apply IAS 39 correctly.
Therefore, International Accounting Standards Board (IASB) decided to rewrite and replace IAS 39. The new standard got the name IFRS 9 Financial Instruments.
However, it is not very easy to replace such a complicated standard. Therefore, replacement process evolves 3 main phases:
- Classification and measurement
- Impairment methodology
- Hedge Accounting
Currently, IFRS 9 has been fully completed.
The current status of IAS 39 vs. IFRS 9
In fact, Phase 1 on Classification and measurement has been completed. Requirements for classification and measurement of financial assets were rewritten and issued in new IFRS 9 in November 2009. Financial liabilities followed in October 2010 and hedge accounting in November 2013.
In July 2014, IASB issued final requirements related to impairment of financial assets, own credit and amendments to hedge accounting. This means IFRS 9 is fully completed.
What should we apply—IAS 39 or IFRS 9?
Mandatory effective date of IFRS 9 is 1 January 2018, so you have a choice until then. You can either:
- apply IAS 39, or
- apply IFRS 9.
However, this choice is available only until 1 January 2018 and you’ll have to apply IFRS 9 after that. Be a bit careful here, because you need to present comparative information, too – so in fact, you’d need to restate your financial instruments in line with IFRS 9 for the comparative period starting 1 January 2017, too.
Which choice is better for me?
If you have only small amounts of financial instruments, the impact of switch from IAS 39 to IFRS 9 would be probably minimal.
But if you work for some financial institution like bank or investment house, then I would definitely recommend performing thorough analysis of the different impacts that IAS 39 and IFRS 9 can have. I will write about IAS 39 and IFRS 9 in other articles, but let me quickly draft the idea.
You should assess the types of financial assets that you have in your books.
Simply speaking, IFRS 9 introduces an option to value equity investments (for example, shares in other companies) and certain debt instruments at fair value through other comprehensive income. Thus, there is no necessity to put all your revaluation gains and losses to profit or loss and it can mean significantly lower volatility in your profits. If you like more stable presentation of income to your shareholders, IFRS 9 would be goodie for you.
But some institutions will prefer old IAS 39. For example, IFRS 9 puts tougher guidelines on asset reclassifications, or removes separate accounting for embedded derivatives—and based on specific situation, that might be unappealing for some institutions, indeed.
That was it in short. I will write about IAS 39 and IFRS 9 more in the future because I know very well about its difficulty and complexity compared to other standards. Please, leave comments or e-mail me with additional questions so that I can cover that in my articles and give you some assistance.