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IFRS 9

Introduction

Information:

On 22 November 2016, the EU approved the content of International Financial Reporting Standard 9 — Financial Instruments. The standard applies to reporting periods for the period beginning on or after 1 January 2018.

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Introduction

Information:

On 22 November 2016, the EU approved the content of International Financial Reporting Standard 9 — Financial Instruments. The standard applies to reporting periods for the period beginning on or after 1 January 2018.

The package of amendments under IFRS 9 contains, inter alia, new principles for the classification and measurement of financial instruments depending on the so-called ‘business model’. In addition, IFRS 9 introduces a new model of accounting for impairment, i.e. the expected credit losses (ECL) model. This model is an amendment to the guidelines of IAS 39 and the response to the criticism concerning the historical losses model.  The new principles mean that upon the initial recognition of financial assets without impairment, entities will have to recognise the loss as at day 1 in the amount of the 12-month expected credit loss (or expected credit losses over the life of a financial asset in the case of trade receivables). The standard also introduces amendments related to hedge accounting.

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Classification and measurement of financial instruments

* Other comprehensive income

The new regulations provide for a different classification of financial instruments. 

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Classification and measurement of financial instruments

* Other comprehensive income

The new regulations provide for a different classification of financial instruments. 

Under IFRS 9, an entity will classify financial instruments into two categories (IAS 39 distinguished 4 categories):

  1. Financial instruments measured at amortised cost
  2. Financial instruments measured at fair value

The new classification depends on two criteria:

  1. Adopted business model for managing the financial assets
  2. A financial asset’s contractual cash flow characteristics

An entity accounts for a financial instrument as measured at amortised cost, if it meets the following conditions:

  1. The adopted business model is to hold the asset to collect the contractual cash flows
  2. The contractual cash flows for the instrument are solely payments of principal and interest.

Financial instruments not meeting the aforementioned criteria are measured at fair value.

The aforementioned criteria point to the fact that all equity instruments are measured at fair value.

The general principle under IFRS 9 provides that gains and losses from the measurement are recognised in profit or loss.

However, there is an exception to this rule. This exception applies to equity instruments which are not held for trading. Gains and losses on such instruments may be presented by an entity in other comprehensive income if the entity choses so upon initial recognition. It should be noted here that such a choice is irrevocable.

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Impairment

IFRS 9 introduces the level of expected credit losses which applies to:
- all debt instruments (including bank deposits, trade receivables and debt securities)
- instruments measured at both amortised costs and fair value through other comprehensive income.

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Impairment

IFRS 9 introduces the level of expected credit losses which applies to:
- all debt instruments (including bank deposits, trade receivables and debt securities)
- instruments measured at both amortised costs and fair value through other comprehensive income.

In addition, this model will apply to:
- contract assets and lease receivables;
- loan commitments;
- financial guarantee contracts that are not measured at fair value through profit or loss.

Impairment will be recognised in three stages:
Stage 1: upon initial recognition of a financial instrument, a part of credit losses estimated in the period of the first 12 months from the date of initial recognition will be recognised for all financial instruments — as an approximation of expected credit losses for a particular financial instrument.
Stages 2 and 3: due to an increase in credit risk since the initial recognition, an entity will be required to recognise the full value of credit losses expected over the lifetime of the instrument.

The difference between Stage 2 and Stage 3 is as follows:
- in Stage 2, the deterioration of credit quality is assessed for a group of assets
- in Stage 3, it is possible to assess a particular asset individually (e.g. a default in payment).

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