IAS 39 vs IFRS 9-difficulty and complexity 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 This means that currently, IFRS 9 has not been finished yet—it is still in progress. 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. Other than that, old IAS 39 still applies, but IASB works hard on replacement of other parts. For example, impairment approach is under hard discussion right now and so is hedge accounting. Now be careful. Companies must apply new IFRS 9 for the periods beginning on or after 1 January 2015. This is mandatory. If some company wants to apply IFRS 9 prior 2015, it is possible and allowable, but the financial statements of such a company must clearly state that IFRS 9 is adopted earlier. What should we apply—IAS 39 or IFRS 9? As I have just written above, you have a choice until 2015. As IFRS 9 is mandatory only effective 2015, until that time you can either: apply IAS 39 fully, or apply IFRS 9 with regard to classification and measurement of financial assets and liabilities + apply IAS 39 to the remaining issues such as hedge accounting and impairment. Which choice is better for me? First of all, remember that IFRS 9 will be mandatory and latest in 2015 you will have to apply IFRS 9 and forget IAS 39. This choice applies only in the transitory period. 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. 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) 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. further details will inform you later........
Posted on: Thu, 15 Aug 2013 16:28:05 +0000