As reported in the September 2009 edition of XYZ Financial Reporter, as expected the IASB has now finalised Phase 1 of its IAS 39 replacement project and issued IFRS 9 which deals with the classification and measurement of financial assets.  Financial liabilities are not currently in the scope of the standard.

IFRS 9 is available for early adoption immediately but is not mandatorily applicable until financial years commencing 1 January 2013. To facilitate early adoption, an entity that applies IFRS 9 before financial reporting periods beginning before the first of January 2012 is not required to restate comparatives.

There have been some alterations to the requirements from those in the Exposure Draft discussed.  For clarity, we summaries the key requirements of IFRS 9 below:
  • there are 2 classification categories for financial assets: fair value and amortised cost
  • a debt instrument may be measured at amortised cost if it meets both the business model test and the cash flow characteristics test
  • if the entity intends to hold the financial asset to collect the contractual cash flows to maturity, it will satisfy the business model test
  • if the financial asset has terms giving rise to payments that are entirely principal and interest based on outstanding principal, it will satisfy
  • the cash flow characteristics test even if the two tests are satisfied, an entity may still elect to classify the financial asset as being measured at fair value through profit or loss (FVTPL) if doing so would significantly eliminate an ‘accounting mismatch’
  • all other debt instruments must be measured as being at FVTPL
  • embedded derivatives no longer need to be separated from the host contract.  The contractual cash flows of the financial asset will need to be assessed in their entirety, and the asset as a whole is measured at FVTPL if any of its cash flows do not represent payments of principal and interest.
  • unquoted equity instruments (and derivatives over such instruments) must be measured at fair value, however, in limited circumstances,
  • cost may be an appropriate estimate of fair value.
  • an entity can elect on initial recognition to present the fair value changes on an equity investment that is not held for trading directly in other comprehensive income (OCI). The dividends on such investments must be recognised in profit and loss but gains or losses are not recycled.
  • if and only if an entity’s business model changes, it is required to reclassify affected financial assets.
The AASB will discuss the issue of IFRS 9 at its December board meeting.