The International Accounting Standards Board (IASB) recently issued a new International Financial Reporting Standard (IFRS) on the classification and measurement of financial assets. Publication of the IFRS represents the completion of the first part of a three-part project to replace International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, with a new standard - IFRS 9, Financial Instruments. Proposals addressing the second part, the impairment methodology for financial assets, were published for public comment at the beginning of November; while proposals on the third part, hedge accounting, continue to be developed. Further, the IASB has begun the process of giving further consideration to the classification and measurement of financial liabilities, and those final requirements are expected to be issued in 2010.
IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the many different rules in IAS 39. Financial assets now are classified in one of two measurement categories, instead of in four classes per IAS 39. The classification approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The category into which the asset is classified determines whether it is measured on an ongoing basis at amortized cost or fair value. The IASB also has reduced the complexity of IAS 39 as follows:
- The complex and rule-based requirements in IAS 39 for embedded derivatives have been eliminated by no longer requiring that embedded derivatives be separated from financial asset host contracts;
- The “tainting rules” that forced entities to reclassify to fair value all instruments in a class that had been classified as held to maturity in the event that one of those instruments is sold have been eliminated; and
- There is a single impairment method for all financial assets not measured at fair value, and impairment reversals are permitted for all assets, eliminating the many different impairment methods used by IAS 39 and its inconsistent requirements on impairment reversal.
Additional disclosures are required by IFRS 9, reflecting the revised classification and measurement guidance. The effective date for mandatory adoption of IFRS 9 is January 1, 2013. Early adoption is permitted including 2009 year-end financial statements. |
