The concept IFRS 9 Vs IAS 39 STATES that the key difference is in relation to the approach to ‘IMPAIRMENT’. IFRS 9 uses ‘Expected Credit Losses‘ (ECLs) to recognize impairment losses on financial assets, while IAS 39 ‘Incurred Losses‘.
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What is IFRS 9?
IFRS 9 the International Financial Reporting Standard that replaced IAS 39. It provides guidance on how companies should RECOGNIZE and MEASURE financial instruments.
IFRS 9 is based on three key principles:
- Classification and Measurement;
- Impairment; AND
- Hedge Accounting.
1. Classification and Measurement
IFRS 9 requires financial instruments to be CLASSIFIED into three categories: Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI), and Fair Value through Profit or Loss (FVPL). The classification of a financial instrument depends on the entity’s business model for managing the financial instruments and the characteristics of the contractual cash flows of the financial instruments.
Amortized Cost is used for financial assets that are held for collection of contractual cash flows and meet certain criteria, such as being held within a business model that is solely focused on COLLECTING the contractual cash flows and having contractual cash flows that are solely payments of principal and interest. Fair Value through Other Comprehensive Income (FVOCI) is used for financial assets that are held for collection of contractual cash flows and meet certain criteria, but are not held within a business model that is solely focused on COLLECTING the contractual cash flows. Fair Value through Profit or Loss (FVPL) is used for financial assets that do NOT meet the criteria for amortized cost or fair value through OCI.
2. Impairment
IFRS 9 requires entities to RECOGNIZE ‘Impairment Losses‘ on financial assets based on Expected Credit Losses (ECLs). ECLs are the expected credit losses that are likely to occur over the life of the financial instrument, taking into account the credit risk of the instrument and the expected future economic conditions. IFRS 9 requires entities to USE reasonable and supportable information, INCLUDING forward-looking information, in estimating ECLs.
3. Hedge Accounting
IFRS 9 provides guidance on ‘Hedge Accounting‘, which allows entities to reduce volatility in their financial statements by offsetting gains and losses on financial instruments that are used for hedging purposes. Hedge accounting is only ALLOWED if the hedging relationship meets certain criteria and is documented appropriately.
What is IAS 39?
IAS 39 the International Accounting Standard that was in use before IFRS 9. It provides guidance on the recognition, measurement, and disclosure of financial instruments.
IAS 39 is based on four key principles:
- Classification and Measurement;
- De-recognition;
- Impairment; AND
- Hedge Accounting.
1. Classification and Measurement
IAS 39 also requires financial instruments to be CLASSIFIED into different categories: Held-to-Maturity, Loans and Receivables, Available-for-Sale, and Financial Instruments at Fair Value through Profit or Loss (FVPL). The classification of a financial instrument depends on its characteristics and the entity’s intention for holding the instrument.
2. De-Recognition
IAS 39 requires entities to REMOVE a Financial Asset or Liability from their balance sheet when they no longer have control over the asset or liability. The de-recognition rules in IAS 39 are complex and have been criticized for their lack of clarity.
3. Impairment
IAS 39 requires entities to RECOGNIZE Impairment Losses on financial assets based on incurred losses. ´Incurred Losses´ are losses that have already occurred, and entities are required to recognize these losses when they have objective evidence of impairment.
4. Hedge Accounting
IAS 39 provides guidance on ‘Hedge Accounting’, but it is LESS flexible than the guidance in IFRS 9. Hedge accounting is only ALLOWED if the hedging relationship meets certain criteria.
IFRS 9 Vs IAS 39 – 4 Key Differences
One of the main differences in relation to IFRS 9 Vs IAS 39 is the approach to IMPAIRMENT. IFRS 9 requires entities to use ‘Expected Credit Losses’ (ECLs) to recognize impairment losses on financial assets, while IAS 39 requires entities to use ‘Incurred Losses’. The use of ECLs allows entities to recognize losses earlier and can lead to more timely and accurate recognition of credit losses. However, the use of ECLs requires entities to make forward-looking estimates, which can be more complex and uncertain.
Another difference i.e. IFRS 9 Vs IAS 39 is the CLASSIFICATION and MEASUREMENT of financial instruments. While both standards classify financial instruments into different categories, the criteria for classification are different. IFRS 9 focuses on the entity’s business model for managing the financial instruments and the characteristics of the contractual cash flows, while IAS 39 focuses on the nature of the financial instrument and the entity’s intention for holding the instrument.
IFRS 9 also introduces a new CATEGORY of financial instruments, Fair Value through Other Comprehensive Income (FVOCI), which was NOT available under IAS 39. This category is used for Financial assets that are held for collection of contractual cash flows but are not held within a business model that is solely focused on collecting the contractual cash flows. This allows entities to recognize gains and losses on these instruments in OCI, which can reduce volatility in the income statement.
Finally, the guidance on HEDGE ACCOUNTING is also different between IFRS 9 and IAS 39. IFRS 9 allows for more Flexibility in the application of hedge accounting, INCLUDING a broader range of eligible hedging instruments and hedged items. IAS 39 is more Prescriptive in its requirements for hedge accounting, which can lead to more complex Accounting Treatment.
The Bottom Line
The concept IFRS 9 Vs IAS 39 helps to ensure that entities financial statements are Accurate, Transparent, and Comparable, and that they are able to effectively Manage the risks associated with their financial instruments.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia