IFRS 9 is a set of international financial reporting standards issued by the International Accounting Standards Board (IASB) that outlines the rules for accounting and reporting of financial instruments.
It was first introduced in 2014 and became effective for annual reporting periods beginning on or after January 1, 2018.
IFRS 9 replaces IAS 39, which was criticized for being too complex and allowing too much flexibility in how financial instruments were reported. IFRS 9 aims to simplify the reporting process and provide more transparent and accurate information about financial instruments.
When an entity first recognises a financial asset, it classifies it based on the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows:
- Amortised cost—a financial asset is measured at amortised cost if both of the following conditions are met:
- The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and
- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
- Fair value through other comprehensive income—financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
- Fair value through profit or loss—any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss.
When, and only when, an entity changes its business model for managing financial assets, it must reclassify all affected financial assets.
IFRS 9 vs IAS 39
One of the main changes introduced by IFRS 9 is the classification and measurement of financial instruments. Under IAS 39, financial instruments were classified as either held-to-maturity, available-for-sale, or trading. However, IFRS 9 introduces a new classification model based on the business model in which the financial instrument is held and the characteristics of its cash flows.
Another key change introduced by IFRS 9 is the new expected credit loss (ECL) model for the impairment of financial assets. Under IAS 39, financial assets were only impaired when there was objective evidence of impairment. However, under the new ECL model, impairment is recognized based on an expected credit loss, taking into account both historical and forward-looking information.