THE ROAD TO EUROPE: PROGRAM OF ACCOUNTING REFORM AND
INSTITUTIONAL STRENGTHENING
with generous support of
REPARIS
IFRS 9 Classification and Measurement
Shamim Diouman REPARIS IFRS Seminar for banking supervisors
Croatia National Bank, Zagreb – April 18-19, 2012
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IAS 39 always seen as too complex, rules-based, and difficult to understand
Implementation Guidance and Basis for Conclusion are key to understand IAS 39
For some stakeholders IAS 39 is seen as too fair-value oriented and not flexible enough, hence the amendment to allow re-classification at the beginning of the crisis
Replacement of IAS39 initiated in 2009 as a response to requests from G20 and Basel Committee (guiding principles for the revision of IAS39)
The IAS 39 replacement project (IFRS 9)
The project started in 2009 during the crisis and was delayed
several times
Three phases:
Phase 1: Classification and measurement
• Finalised but maybe reopened for limited changes
Phase 2: Amortised Cost and Impairment of financial
assets
• Ongoing discussions
Phase 3: Hedge accounting
• Ongoing discussions
The IAS 39 replacement project with IFRS 9
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The replacement project has 3 phases
Only one phase has been completed: Classification and
Measurement
Endorsement will have to wait for the other 2 phases
Proposed effective date is now 2015
New concerns were raised recently about default category
being fair value through P&L
Use of Other Comprehensive Income back on the discussion
table
The IAS 39 replacement project with IFRS 9
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Objectives of the session
IFRS 9 Classification and Measurement
Classification and Measurement
Classification: two categories
Amortised cost v/s fair value
Fair Value Option
Measurement Hierarchy
Reclassification
Outline
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IFRS 9 phase 1: Classification and Measurement published
in November 2009
Requirements for financial liabilities were added to IFRS 9 in
October 2010
Most of the requirements for financial liabilities were carried
forward unchanged from IAS 39
Some changes were made to the fair value option for financial
liabilities to address the issue of own credit risk
Exposure draft to change the mandatory effective date of
IFRS 9 to annual periods beginning on or after 1 January
2015 from January 2013
Phase 1 – Classification and Measurement
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IFRS 9 Classification
IAS 39
Fair value through P&L
Available for sale
Loans and receivables
Held to Maturity
IFRS 9
Fair value through P&L
Amortised cost
From 4 categories to 2 categories
+ Tainting rules Tainting rules
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Classification on the basis of both:
Business model and
Contractual cash flows characteristics
Amortised cost - must be used where asset held to
collect contractual cash flows and on specified dates
interest. Interest is consideration for the time value of
money and credit risk for the period
Fair Value – all assets that are not measured at
amortised cost
IFRS 9 – Classification: amortised cost v/s fair value
Allowed to designate a financial asset at fair value if this
eliminates or reduces an accounting mismatch to produce
more relevant information
Example: Assets and liabilities for insurance IFRS 9 B4.1.30 (a)
“The following example show when this condition could be met. In all cases, an
entity may use this condition to designate financial assets or liabilities at fair
value through P&L only if it meets the principle of in paragraph 4.1.5. or
4.2.2(a)
(a) An entity has liabilities under insurance contracts whose measurement
incorporates current information( as permitted by IFRS 4 Para 24)and financial
assets it considers related that would otherwise be measured at amortised
cost
IFRS 9 – Classification: Fair Value Option
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Level 1 - Quoted prices
“The best evidence of fair value is quoted prices in an
active market”
Level 2 – Valuation technique making maximum use
of maximum of market inputs observable inputs
Reference to the current fair value of another instrument
that is substantially the same, discounted cash flow
analysis, and option pricing models
Valuation technique commonly used by market particpants
and demonstrated to provide reliable estimates of prices
obtained in actual market transactions
Level 3 – Valuation technique with no market
observable input
IFRS 9 – Measurement Hierarchy
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Is allowed when business model changed
Not allowed for any financial liability
Are not considered as reclassification: a cash flow hedge
derivative that was previously or becomes a designated
and effective hedging instrument in a cash flow hedge or
net investment hedge no longer qualifies as such
IFRS 9 – Reclassification
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IFRS 9 reopen for discussions in 2012 to:
Align US GAAP and IFRS on Financial Instruments
List instruments eligible to amortized cost
measurement
To having instrument measured at FVTOCI
IFRS 9 – Recent discussions
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The views expressed in this presentation do not
necessarily reflect those of the Executive Directors of
The World Bank or the governments they represent.
Thank you
