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Preparing for the International Finance Regulation Standards 9

Preparing for the International Finance Regulation Standards 9
October 04, 2017

A new regulation to replace IAS 39

IAS 39 was introduced in December 1998, delineating the requirements for recognition and measurement of financial assets and liabilities. It stipulated the conditions for fulfilling certain contracts to enable transaction of financial instruments. According to IAS 39, financial instruments are recognized when an entity is party to the implicit contractual provisions. They are subsequently categorized according to types, which helps determine amortized cost/fair value.

In July 2014, IAS 39 was superseded by IFRS 9 (International Financial Reporting Standards). Articulated by IASB (International Accounting Standards Board), the independent standard-setting entity of IFRS Foundation, the new guidelines strive to standardize company accounts for comprehension and comparison across geographies. It puts forth rules for maintaining account books that are reliable and relevant. This entails a gradual replacement of the various national accounting standards.

IFRS 9 is being implemented by banks and financial institutions in UK, European Union (EU), Gulf Cooperation Council (GCC) countries, Russia, India among others. It is also likely to affect other organizations in terms of their asset and investments valuations.

An overview of IFRS 9

IFRS9 is trying to ensure that is better recognition of ‘fair value’ of assets and earlier recognition of changes in asset quality. It also mandates collation and reporting of additional data. The classification of financial instruments will undergo a significant change with the introduction of IFRS 9 –

It also mandates collation and reporting of additional data.

  1. Amortized cost: Contractual cash flows depending on principal and interest
  2. FVOCI: Fair value through other comprehensive income, like contractual cash flows and selling financial assets
  3. FVTPL: Fair value through profit & loss, like loan commitments not measured and instruments held for trading purposes

Subsequently, the measurement calculation is dependent on these factors –

  1. Probability of default(PD)
  2. Exposure at default(EAD)
  3. Loss given default(LGD)
  4. Drawn and undrawn
  5. Expected loss(EL)
  6. Lifetime expected loss(LEL)

The new regulation has a number of revised provisions. Some of the substantial changes in IFRS 9 are as follows—

  • An expected credit loss model as against an incurred loss model in IAS 39
  • Amended transition requirements
  • Additional guidelines on general hedge accounting
  • Fulfillment of contractual cash flow test (or Solely payments of principal and interest’ (SPPI)) criterion) and business model assessment via FVOCI, with the objective of collecting cash flows and selling financial assets
  • New parameters for assessing credit loss, encompassing 12 months expected loss and life time expected loss
  • Evaluation based on a substantial increase in credit risk, since initial recognition
  • Application of single forward-looking expected credit loss model across financial instruments, subject to impairment accounting
  • Improvement of hedge accounting model to streamline economics of risk management with accounting treatment
  • Principle-oriented approach towards the classification, evaluation, and reporting of financial instruments

It’s evident from the above mentioned points that there are significant improvements upon IAS 39. The following are the main differences between IAS 39 and IFRS 9 –


IAS 39


Classification & Evaluation

  • Held  for sale
  • Held to maturity
  • Amortized cost,
  • Fair Value through Other Comprehensive income (FVOCI)
  • Residual Category Fair Value through Profit or Loss(FVTPL)

Classification Methodology

  • Individually significant portfolio
  • Individually non-significant portfolio
  • Three-stage approach based on credit quality at reporting date for individual financial assets assessment
  • Three-stage approach based on credit quality at reporting date for portfolio assessment


  • Restricted
  • Simplified rules

Impairment Model

  • Varying according to the type of financial instrument
  • Uniform model across instruments, subject to impairment accounting

Impairment Model Methodology

  • Incurred loss model
  • Expected loss model --
    A. Stage 1: Performing assets
    B. Stage 2: Underperforming assets
    C. Stage 3: Non-performing assets

Impairment Calculation

  • Identifying impairment loss, if carrying value of an individually significant asset is less than the future estimated cash flow
  • Analyzing the impairment loss based on past events, range of possible outcomes PD’s and LGD, and forward looking estimation

It is therefore evident that the impairment model has been revised under IFRS 9 and is as follows –

Impairment Calculation

Each of the stages have certain regulatory requirements. Stage 1 for example, has four reporting requirements – expected loss provision by geography, expected loss provision by industry, expected loss provision by reportable unit, and lifetime expected loss report. In stage 2, there are three reporting requirements, they are – lifetime expected loss report, report on movement between stages, and report on movement in undrawn disclosure. The final stage has two requirements – report on movement between stages and report on facilities that have been modified.