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IFRS amendments after
financial crisis
international financial reporting
standards, and int. valuation stand.
Supervised by:
Yrd.Doç.Dr.:Müge Saltoğlu
PhD program of Accounting and
finance
Social science institute
Marmara University
Prepared by:
Mohammed Al Ashi
1

Before crisis ….
Objectives of IFRS 39
Financial instruments
classification
establish principles for
recognising and measuring
financial assets, financial
liabilities and some contracts
to buy or sell non-financial
items
 A financial asset or financial
liability at fair value through
profit or loss
 Held-to-maturity
investments
 Loans and receivables
 Available-for-sale financial
assets.
2

an entity is
precluded from
reclassifying
financial
instruments into or
out of this category.
3

Initial measurement of financial assets and financial liabilities
 When a financial asset or
financial liability is
recognised initially, an
entity shall measure it at
its fair value plus, in the
case of a financial asset or
financial liability not at fair
value through profit or
loss, transaction costs that
are directly attributable to
the acquisition or issue of
the financial asset or
financial liability.
 Fair value is the amount for
which an asset could be
exchanged, or a liability
settled, between
knowledgeable, willing
parties in an arm’s length
transaction.
4

New to Reclassifications
 permits an entity to reclassify
non-derivative financial
assets (other than those
designated at fair value
through profit or loss by the
entity upon initial
recognition) out of the fair
value through profit or loss
category in particular
circumstances.
 The amendment also permits
an entity to transfer from the
available-for-sale category to
the loans and receivables
category a financial asset that
would have met the
definition of loans and
receivables (if the financial
asset had not been
designated as available for
sale), if the entity has the
intention and ability to hold
that financial asset for the
foreseeable future.
5

After the crisis
 The Board intends that IFRS 9 will ultimately replace
IAS 39 in its entirety. However, in response to requests
from interested parties that the accounting for
financial instruments should be improved quickly
6

Procedures after the crisis
 the Board divided its project to replace IAS 39 into
three main phases. As the Board completes each
phase, it will delete the relevant portions of IAS 39 and
create chapters in IFRS 9 that replace the
requirements in IAS 39.
7

…continue procedures after the crisis
 Phase 1: Classification and measurement of financial
assets and financial liabilities.
 Phase 2: Impairment methodology.
 Phase 3: Hedge accounting.
8

Phase 1: Classification and measurement of
financial assets and financial liabilities.
 In November 2009 the Board issued the chapters of
IFRS 9 relating to the classification and measurement
of financial assets.
 Those chapters require all financial assets to be
classified on the basis of the entity’s business model
for managing the financial assets and the contractual
cash flow characteristics of the financial asset.
9

…Cont. Phase 1: Classification and measurement
of financial assets and financial liabilities.
 Assets are initially measured at fair value plus, in the
case of a financial asset not at fair value through profit
or loss, particular transaction costs. Assets are
subsequently measured at amortised cost or fair value.
10

In details … Phase 1: Classification and measurement of
 In October 2010 the Board added to IFRS 9 the
requirements related to the classification and
measurement of financial liabilities.
 Most of the requirements in IAS 39 for classification
and measurement of financial liabilities were carried
forward unchanged to IFRS 9.
11

 Under IAS 39 most liabilities were subsequently
measured at amortised cost or bifurcated into a host,
which is measured at amortised cost, and an
embedded derivative, which is measured at fair value.
 Liabilities that are held for trading (including all
derivative liabilities) were measured at fair value.
12

…so, we can say
 the Board decided to retain most of the requirements
in IAS 39 for classifying and measuring financial
liabilities because constituents told the Board that
those requirements were working well in practice.
Consistently with its objective to replace IAS 39 in its
entirety, the Board relocated those requirements from
IAS 39 to IFRS 9.
13

 Consistently with the requirements in IFRS 9 for
investments in unquoted equity instruments (and
derivative assets linked to those investments), the
exception from fair value measurement was eliminated
for derivative liabilities that are linked to and must be
settled by delivery of an unquoted equity instrument.
Under IAS 39, if those derivatives were not reliably
measurable, they were required to be measured at
cost. IFRS 9 requires them to be measured at fair
value.
14

 The requirements related to the fair value option for
financial liabilities were changed to address own credit
risk. Those improvements respond to consistent
feedback from users of financial statements and others
that the
15

Phase 2: Impairment methodology.
 In June 2009 the Board published a Request for
Information on the feasibility of an expected loss
model for the impairment of financial assets. This
formed the basis of an exposure draft, Financial
Instruments: Amortised Cost and Impairment,
published in November 2009.
16

Phase 3: Hedge accounting.
 The Board is considering how to improve and simplify
the hedge accounting requirements of IAS 39. It
expects to publish proposals for a comprehensive new
approach before the end of 2011.
17

In addition to the three phases
Derecognition
The Board published in March 2009 an exposure draft
Derecognition (proposed amendments to IAS 39 and
IFRS 7 Financial Instruments: Disclosures). However,
in June 2010 the Board revised its strategy and work
plan and decided to retain the existing requirements
in IAS 39 for the derecognition of financial assets and
financial liabilities but to finalise improved disclosure
requirements. The new requirements were issued in
October 2010 as an amendment to IFRS 7 and have an
effective date of 1 July 2011.
18

In addition to the three phases
 Later in October 2010 the requirements in IAS 39
related to the derecognition of financial assets and
financial liabilities were carried forward unchanged to
IFRS 9.
19

Financial Instruments: Disclosures
 Amendments to the IFRS, issued in March 2009,
require enhanced disclosures about fair value
measurements and liquidity risk. These have been
made to address application issues and provide useful
information to users.
20

Financial Instruments: Disclosures
Disclosures—Transfers of Financial Assets
(Amendments to IFRS 7), issued in October 2010,
amended the required disclosures to help users of
financial statements evaluate the risk exposures
relating to transfers of financial assets and the effect of
those risks on an entity’s financial position.
21

New announcement….
On 4 August 2011, the Board issued an exposure draft
proposing to change the mandatory effective date of
IFRS 9 to annual periods beginning on or after 1
January 2015 rather than being required to apply them
for annual periods beginning on or after 1 January 2013
as currently required. Early application of both would
continue to be permitted. The comment period for the
exposure draft closes on 21 October 2011.
22

Comparison between
IAS 39 & IFRS 9
23

Classification
of debt
instruments
Fair Value Through
Profit & Loss
(FVPL)
Available-for-sale
(AFS)
Held-to-maturity
(HTM)
Loan and
Receivable (LAR)
Fair Value Through
Profit & Loss
(FVPL)
Amortised Cost
(AC)
24

Classification
of equity
instruments
Fair Value
Through Profit
& Loss (FVPL)
Available-for-
sale (AFS)
Fair Value
Through
Profit & Loss
(FVPL)
Fair Value
Through Other
Comprehensive
Income (FVOCI)
25

Basis of
classificatio
n
Intention to hold till
maturity, trading for short
term profits, derivative,
loan or receivable, or
intentional designation
subject to certain
restrictions
Classification based
on business model
and the contractual
cash flow
characteristics
26

Measurement
- Debt Instruments
Measured at amortised cost if
classified as held-to-maturity or
as loan or receivable.
Other classifications are
measured at fair value.
Measured at amortised cost
(AC) if business model
objective is to collect the
contractual cash flows and the
contractual cash flows
represent solely payment of
principal and interest on the
principal amount outstanding.
Debt instruments meeting the
above criteria can still be
measured at fair value through
profit or loss (FVPL) if such
designation would eliminate or
reduce accounting mismatch.
If not, measured at fair value
through profit or loss (FVPL) 27

Measurement
- Equity Instruments
Measured at fair value.
Exception: Unquoted
equity
investments are
measured at cost where
fair valuation is not
sufficiently reliable.
Measured at fair value
through profit or loss.
An entity can
irrevocably designate at
initial recognition as
fair value through other
comprehensive income,
provided the equity
investment is not held
for trading.
28

Reclassifications
- Debt instruments
Reclassification between the
various four categories
allowed under specific
circumstances with the
gain/loss being treated
differently depending upon
the movement between the
classifications.
Reclassification from held-to-
maturity (HTM) is viewed
seriously if does not fall
within the permitted
exceptions.
If entity’s business model
objective changes,
reclassification is permitted
between FVPL and AC or vice
versa. Such changes should
be demonstrable to external
parties and are expected to be
very infrequent.
29

References:
 Maria Carmen Huian, IMPACT OF CURRENT FINANCIAL CRISIS ON DISCLOSURES
ON FINANCIAL INSTRUMENTS, “Al. I. Cuza” University Iaşi /Romania
 Jamil khatri,akeel master, ifrs9: financial instrument s: the new “avatar”,bombay
chartered accountant journal, February 2010
 vincent y.y.,tsang, similarities and differences between FAS 157 and ifrs , society of
actuaries.
 http://www.iasplus.com/standard/ifrs09.htm
 Interantional reporting standard 9:financial instrument
30

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Ifrs amendments after financial crisis

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