On July 24th, 2014, the International Accounting Standards Board (IASB) published the final version of IFRS 9 in replacement of the IFRS 39 in terms of the financial instruments. The Standard has a mandatory effective date for annual periods beginning on or after 1 January 2018. However, the Standard is available for early application.
The new IFRS 9 is built on a single logical approach for classification and measurement of financial instruments as regards to the expected losses, the value degradation model, and the approach of sustainable improvements in the hedge accounting.
Classification and Measurement
The classification identifies the way of calculating the financial assets and liabilities in the financial statements, particularity the way of continuous measurement of assets and liabilities. The IFRS 9 introduces a logical approach for classification of financial assets led by the characteristics of the cash flow and the business model used to maintain the asset. Such principle based approach is to replace the current rule based approach which is generally more difficult and complicated in terms of application. The standard addresses also the deterioration of value of assets through a single way for all financial statements, which consequently removes the source of complications related to the previous accounting requirements.
Deterioration of Value in the Financial Instruments
During the financial turmoil of 2008, the resultant late recognition of the credit losses in terms of loans (as well as other financial instruments) was considered as a weak point in the financial standards applicable at that time. Therefore, the IASB has incorporated the IFRS 9 with a new model to record the losses expected from the deterioration of value. The standard requires the rapid recognition of the expected credit losses; it requires business entities to record the expected credit losses on timely basis in order to recognize the financial instruments. In addition, the expected losses throughout the life of the financial instruments must be recognized in a timely fashion. The IASB has already expressed its intention to establish a group of transitional resources to support the stakeholders throughout the transition to the new requirements of the deterioration of value of the financial instruments.
The IFRS 9 introduces the largely reformed model of hedge accounting, while improving the disclosures related to the activities of the Risk Management Department. The new model marks a comprehensive structural amendment of the hedge accounting, which allows alignment between the accounting treatment and the activities of the Risk Management Department and enables the business entities to better reflect such activities in their financial statements. In addition, and as a result of such amendments, the users of the financial statements will be provided with better information regarding risk management and impact of the hedge accounting on the financial statements.
The IFRS 9 eliminates the fluctuations of profits and losses, arising from the change of the credit risks of the liabilities required to be measured at the fair value. Such change in the change accounting indicates that the profits arising from the decrease of any entity’s self credit risks of such liabilities are no longer realized in the statement of profit or loss. IFRS 9 permits early application of such improvement in the financial reports before any other amendments in the accounting of financial instruments.
In this regard, Mr., Hisham Sorour – Managing Partner of Baker Tilly Kuwait, pointed out that such substantial amendments incorporated in IFRS 9 are very important, especially in the time being, will enhance the presentation of the financial statements, and are in line with the stability requirements and the taking of provisions for loan losses. He added that the application of the new standard will improve the investor’s trust in bank’s balance sheets and the financial system as a whole.
The Central Bank of Kuwait requested the local banks to study the effects that would arise from the application of the new standard on the financial statements of banks, and to proposed solutions to address the expected effects of application.
In addition, on December 30th, 2009, the Ministry of Commerce and Industry, represented by the Technical Committee, decided to postpone the early application of any accounting standard, unless by virtue of a notice from the Ministry that allows such application.
Baker Tilly Service
Noteworthy is that Baker Tilly, which ranks 8 among international firms in the field of audit, provides accounting consulting services to the banks and investment companies desirous to study the effects arising from the application of IFRS 9 on their financial statements before the effective date of application on January 1st, 2018. In addition, Baker Tilly provides training and workshop services for financial managers and accountants wishing enrich their knowledge of the new standard.