IFRS 9 is the International Financial Reporting Standard (IFRS) that regulates financial instruments’ classification, measurement, impairment, and hedge accounting. It replaced IAS 39 and brought about a principle-based approach to the accounting of financial assets and liabilities. IFRS 9 financial instruments cover companies from any industry, emphasizing banks and financial institutions. It is important to know what is IFRS 9 to help organizations follow contemporary financial reporting standards. This article overviews IFRS 9, including major topics such as classification, impairment, hedge accounting, and implementation issues.
What is IFRS 9?
IFRS 9 is the International Accounting Standards Board (IASB) accounting standard that replaces IAS 39 financial instruments, recognition, and measurement. The standard introduces a new classification, measurement, and impairment framework for financial instruments with an economic substance focus instead of applying hard rules.
However, based on the information provided by IFRS, practitioners have noticed this new standard inspects the classification and measurement of financial instruments. The standard also streamlines hedge accounting, allowing organizations to more easily manage financial risk exposure and align accounting with risk management practices.
All financial instruments are covered under IFRS 9, including financial assets such as loans, receivables, bonds, and equity investments and financial liabilities such as borrowings, payables, and any debt instrument. The standard’s scope includes derivatives and hedge accounting transactions, providing a unified framework for classifying, measuring, and reporting financial instruments per international accounting standards.
IFRS 9 vs IAS 39
IFRS 9 replaces IAS 39 to enhance financial instrument reporting through a more responsive and transparent approach. It applies a principle-based classification, a forward-looking expected credit loss (ECL) model of impairments, and a reduced hedge accounting model. The changes align accounting practices with risk management and improve the reliability of financial statements.
| Feature | IFRS 9 | IAS 39 |
| Classification | Principle-based | Rules-based |
| Impairment Model | Expected Credit Loss (ECL) | Incurred Loss Model |
| Hedge Accounting | Aligned with risk management | Complex rules |
Classification and Measurement of Financial Instruments under IFRS 9
IFRS 9 introduces a new classification model for financial instruments based on business models and contractual cash flow characteristics.
Classification of Financial Assets Under IFRS 9
IFRS 9 categorizes financial assets into three, amortized cost (AC), fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). Assets in the amortized cost (AC) category are held to receive contractual cash flows and have to pass the sole payments of principal and interest (SPPI) test. Such assets are measured by applying the effective interest rate (EIR) method.
FVOCI is used for assets held for cash flows but is also available for sale where unrealized gains or losses are recorded in other comprehensive income (OCI). Here, assets that do not pass the SPPI test or are held for trading should go to FVTPL, and the changes in their fair value should be reflected directly in the income statement or profit and loss statement. This category ensures financial transparency and allows proper valuation of financial assets.
Classification of Financial Liabilities
Under IFRS 9, most financial liabilities are carried at amortized cost, providing a stable and consistent accounting treatment. Liabilities held for trading or are fair value through profit or loss (FVTPL) are carried at fair value, with gains and losses reported in the profit and loss account.
In addition, derivatives applied to financial arrangements are always valued at fair value, whether or not for a specific purpose. The classification helps ensure that firms report their financial liabilities effectively and transparently, in line with risk management policies and market opportunities.
Difference Between IAS 32 and IFRS 9
Differentiate between the objectives of IAS 32 and IFRS 9 in financial reporting 2. IAS 32, defines financial instruments as a financial liability and equity instruments.
By devising a standard that determines how financial statement items are classified, measured, and impaired, IFRS 9 aims to introduce a level of principle-based and risk-sensitive reporting that wasn’t there as yet. The forward-looking impairment model and new asset classifications in IFRS 9 lead to more accurate financial reporting in line with the needs of modern-day businesses.
| Aspect | IAS 32 (Financial Instruments: Presentation) | IFRS 9 (Financial Instruments) |
| Purpose | Defines how financial instruments should be classified as assets, liabilities, or equity. | Provides rules for recognizing, measuring, and reporting financial instruments. |
| Classification | Focuses on whether an instrument is debt or equity. | Classifies financial assets into amortized cost, FVOCI, or FVTPL. |
| Measurement | Does not cover measurement, only presentation. | Provides guidelines on how to measure financial instruments. |
| Impairment | No guidance on impairment. | Introduces Expected Credit Loss (ECL) model for impairments. |
| Hedge Accounting | Does not cover hedge accounting. | Includes detailed hedge accounting rules. |
Hedge Accounting under IFRS 9
IFRS 9 hedge accounting represents a streamlined, principle-based solution to risk management activities consistent with risk strategies.
IFRS 7 mandates that firms issue comprehensive disclosures regarding their hedging policies, exposure to risk, and valuation of financial instruments. It makes firms transparent because it enables investors to realize how firms deal with financial risks. Some of the disclosures involve the effectiveness of hedge accounting, its effect on financial statements, and methods of valuing hedging instruments.
IFRS 9 simplifies hedge accounting and aligns more closely with actual risk management practices. It enhances the linkage between accounting and risk strategies, reduces income statement volatility and allows businesses to use a broader set of hedging instruments. Such changes allow companies to manage financial risks better while maintaining transparency.
Challenges and Considerations in Implementing IFRS 9
Implementing IFRS 9 financial instruments necessitates well-planned amendments and shifts in financial reporting systems.
- Data and System Upgrades: Firms must enhance IT systems to manage sophisticated financial instrument calculations under IFRS 9. Convergence of risk management and accounting systems ensures accuracy and regulatory compliance. Advanced data analytics and automation facilitate the efficient processing of large amounts of financial data, minimizing errors and enhancing decision-making for financial reporting.
- Regulatory Compliance and Reporting: Under IFRS 9, banks and financial institutions must fulfill stringent capital requirements. The standard also requires additional disclosures following IFRS 7 addressing credit risk, the impairment model, and hedge accounting. Adhering to these laws promotes transparency, minimizes financial risks, and aids businesses in offering adequate global reporting standards.
- Training and Change Management: Extensive training must be conducted with your finance teams and auditors to ensure the correct usage of IFRS 9. Companies must reconfigure internal controls and governance structures to reflect the new standard. Routine workshops and practical educational activities facilitate employees to remain up-to-date to guarantee legitimate money-related reporting and adherence to administrative necessities.
- Impact on Financial Statements: IFRS 9 considerably affects the classification and measurement of financial assets and liabilities. The Expected Credit Loss (ECL) model recognizes credit losses earlier, resulting in financial statements more reflective of risks. These changes promote transparency, enhance risk assessment, and produce a sharper picture of a company’s financial health.
Impairment Requirements: Expected Credit Loss Model in IFRS 9
The expected credit loss (ECL) model supplants the incurred loss model in IAS 39 and renders impairment recognition forward-looking.
IFRS 9 utilizes the expected credit loss (ECL) model based on historical and forward-looking data to determine credit risk. The model requires companies to recognize the decline in credit quality early to record probable losses sooner. The model targets financial instruments, including loans, receivables from trade, and debt securities to enhance the transparency of financial statements.
The ECL model will impact financials through increased bad debt and loan loss provisions resulting in an overall increase in reserves as compared to the CEC model. That can create more volatility on profit and loss statements as credit risks shift. IFRS 9 requires companies to enhance risk management frameworks to assess their finances and prepare for future economic uncertainty accurately.
| Stage | Description | Provision for Credit Loss |
| Stage 1 | Performing assets with low credit risk. | 12-month ECL recognized. |
| Stage 2 | Significant increase in credit risk. | Lifetime ECL recognized. |
| Stage 3 | Credit-impaired assets (defaulted loans). | Full impairment loss recorded. |
Relevance to ACCA Syllabus
IFRS 9 is important to ACCA candidates because it regulates financial instrument classification, measurement, and impairment. It is an important topic in Financial Reporting (FR) and Strategic Business Reporting (SBR) exams. ACCA students need to know how IFRS 9 enhances financial statement disclosure and risk evaluation for companies with financial assets and liabilities.
IFRS 9 ACCA Questions
Q1: IFRS 9 introduces a different approach to credit loss recognition as compared to IAS 39.
A) IAS 39 is expected loss model while IFRS 9 is loss model
B) IAS 39 follows an incurred loss model and IFRS 9 is based on an expected credit loss model
C) The same credit loss model is used for both standards
D) IFRS 9 had removed recognition of credit loss
Ans: B) Expected credit loss model in IFRS 9 Vs Incurred loss model in IAS 39
Q2: How is it affecting the risk management strategies of financial institutions?
A) Promotes early identification of credit risks
B) Decrease in necessary risk assessment
C) Removes the requirement for hedge accounting
D) Is not relevant to financial risk management
Ans: A) Prompting early classification of credit risk
Q3: What are FVTPL assets under IFRS 9?
A) A long term bank loan
B) A bond that is actively traded in the stock market
C) Inventory
D) Assets classified as property, plant, and equipment
Ans: B) A bond actively traded in the stock market
Q4: Are financial statements more volatile with IFRS 9?
A) It uses amortized cost for all financial instruments, which reduces volatility
B) It heightens volatility by reacting to fair value changes much more quickly
C) It removes fair value estimates from the financial statements
D) It does not affect financial statement volatility
Ans: B) More frequent recognition of the changes in fair value increases volatility
Q5: What is the overarching objective of the IFRS 9 impairment model?
A) To defer recognition of credit losses
B) To acknowledge credit losses sooner
C) To reduce impairment losses
D) To rapidly dispose of every financial asset
Ans: B) To provide an earlier acknowledgement of credit losses
Relevance to US CMA Syllabus
The US CMA syllabus comprises financial decision-making and risk management, in which IFRS 9 is crucial. CMA test candidates must know how financial instruments affect cost management, investment choices, and corporate financing plans. IFRS 9 also assists in assessing financial risks of credit losses and impairment.
IFRS 9 US CMA Questions
Q1: The biggest driver for the change from IAS 39 to IFRS 9?
A) Allowing a simplified classification of financial instruments
B) To avoid impairment calculations
C) To introduce measurement on a historical cost basis
D) To eliminate the notion of fair value accounting
Ans: A) Reduce complexity in financial instruments classification
Q2: ECG Model per IFRS 9 for:
A) Non-current financial assets only
All other financial assets at amortised cost or FVOCI
C) Derivative instruments only
D) Only financial liabilities
Ans: B) All financial assets that are measured at amortized cost or FVOCI
Q3: What does IFRS 9 mean for corporation financial decisions?
High-quality information on A) it assists in proactive evaluation of credit risk and impairment losses
B) It helps companies prevent the recognition of financial liabilities
C) It does away with any measurement in fair value
D) It eliminates impairment considerations from financial reporting
Ans: A) It is more proactive in estimating credit risk and impairment losses
Q4: What is a significant characteristic of the impairment model in IFRS 9?
A) Adoption of expected credit losses versus incurred losses
B) Recognition of all losses as they occur
C) All short term financial assets are exempt from impairment testing
D) Only past credit loss data
Ans: A) Adoption of expected credit losses rather than incurred losses
Q5: What is the significance of hedge accounting in IFRS 9?
A) It reconciles accounting treatment with risk management strategies
B) Lazy value appraisal is not a requirement
C) It does not require financial disclosures
D) It causes firms not to account for debt obligations
Ans: A) It aligns accounting treatment and risk management strategies
Relevance to US CPA Syllabus
For CPA candidates, IFRS 9 applies in the FAR exam. As IFRS 9 is consistent with certain provisions of US GAAP’s ASC 326 (CECL model), knowledge of IFRS 9 assists CPAs in assessing the measurement of financial assets, hedge accounting, and impairment testing.
IFRS 9 US CPA Questions
Question 1: What is the impact of IFRS 9 on the valuation of financial instruments?
A) Fair value measurement is required for all instruments
B) Permits both amortized cost and fair value measurement
C) Removes fair value accounting
D) Throws under the bus financial tools that are in cost valuation
Ans: B) Permits amortised cost and fair value measurement.
Q2: Can you summarize how IFRS 9 has a major effect on investment portfolios?
B) Greater volatility in financial reporting
B) Less transparency in financial statements
C) Removal of fair value adjustments
D) Elimination of financial risk factors
Ans: A) More volatility in financial results
Q3. What is the financial asset, whose effective interest rate method is being used in IFRS 9?
A) Financial assets amortized cost
B) Fair value through P/L assets
C) Intangible assets
D) Inventory
Ans: A) Amortized cost of financial assets
Q4: What approach does IFRS 9 take to impairment provisions for financial assets?
A) Model for Expected Credit Loss (ECL)
B) Historical Cost Model
C) Model Straight-Line Depreciation
D) Revenue Recognition Model
Ans: C) Expected Credit Loss (ECL) Model
Q5 — What does IFRS 9 say about hedge accounting?
A) Consistency of risk management strategy and hedge accounting
B) Lack of hedge accounting
C) Valuation at cost
D) Accrual of hedging instruments at cost
Ans: A) Hedging accounting and risk management objectives are aligned
Relevance to CFA Syllabus
Candidates of CFA should interpret financial statements and evaluate investment risks, making IFRS 9 vital for financial analysis. CFA students should comprehend the classification and measurement of financial instruments, the impact of changes in fair value on financial statements, and how impairment models contribute to financial stability.
IFRS 9 CFA Questions
Q1: Why should financial analysts care about IFRS 9?
A) A more transparent framework for classifying and measuring financial instruments
B) It destroys the use of the financial ratios in decision-making
C) It also creates opportunities for earnings manipulation
D) It eliminates fair value measurement from the statements.
Ans: A) It introduces a more transparent regime for the classification and measurement of financial instruments.
Q2: What approach does IFRS 9 adopt for the financial assets impairment?
A) ‘Expected Credit Loss’ (ECL) model
B) Model on the basis of cash impairment
C) Incurred loss model
D) Mark-to-market model
Ans: A) Expected Credit Loss (ECL) model
Q3. What effects does IFRS 9 have on the analysis of financial ratios?
A) Economic statement not take affecting profit, debt, and liquidity ratios also led to fair value asymmetric depreciation of assets
B) It avoids the need for impairment analysis
C) It would not affect financial ratios
D) It eliminates fair value adjustments in financial reporting
Ans: (A) Impact on P&L, fair value adjustments affect the profitability, leverage and liquidity ratios
Q4: What types of financial instruments have to be determined as a fair value according to IFRS 9?
A) Derivative instruments and trading securities
B) Cash and cash equivalents
C) Accounts Payable & Other, Inventory and Property, Plant, and Equipment
D) Bank loans and receivables
Ans: A) Derivative instruments & trading securities
