IFRS 9: Recognition, Measurement & Impairment of Financial Instruments

IFRS 16: LEASE ACCOUNTING
July 20, 2018
AUDIT EXPECTATION GAP
September 6, 2018

IFRS 9: Recognition, Measurement & Impairment of Financial Instruments

IFRS 9
Recognition, Measurement &Impairment of Financial Instruments

Introduction to IFRS 9

►Overview of IAS 39 and its draw backs.
►Classification and measurement under IFRS 9
►Impairment of financial instruments under IFRS 9

Initial measurement
►Financial assets and liabilities @ FVTPL→ Fair value
►Financial assets not @ FVTPL→ Fair value plus transaction costs (IFRS 5)
►Financial liabilities not @ FVTPL →Fair value less transaction costs
Subsequent measurement
• Financial assets (HALF)
•  Held-to-maturity(HTM)→Amortized cost
• Available-for-sale (AFS) → Fair value (Recognize in OCI)
• Loans and receivables (L&R) → Amortized cost
•  Fair value through profit or loss (FVTPL)→ Fair value (Recognize in P or L)
• Financial liabilities
• Fair value through profit or loss (FVTPL) → Fair value
• Other financial liabilities → Amortized cost (Trade Payables)

WEAKNESS OF IAS 39
Insufficient and delayed provision
Under the incurred loss model as prescribed by IAS 39, the accrual of the credit losses was “too little and too late”. In addition, there are
different credit loss benchmarks for AFS and Loans & Receivables,
where the fair value is for the former and the expected future cash
recovery for the latter
Inconsistent classification
The classification logic of IAS 39 is less consistent, which is difficult to understand and implement. For instance, the Loans & Receivables’ category is defined by the legal form, while available for sale (AFS) is classified by the holder’s intention and ability, and finally the held to maturity (HTM) is defined by all above factors.

IFRS 9 APPLIES TO THE FOLLOWING
• Loan receivables
• Trade receivables
• Other receivables
• Investment in bonds and treasury bills measured at amortized cost (AC) and FVOCI
• Lease receivables
• Loan commitment
• Financial guarantee contracts
• Inter-company receivables/inter-company loan receivables
• Loan receivables from employees
• Placement with banks
• Demand deposits with banks (Savings and Current accounts)

Measurement of financial instruments under IFRS 9
• Initial measurement
• Financial Instruments shall be initially measured at:
• Fair value: All financial instruments at fair value through profit or loss;
• Fair value plus transaction cost: All other financial instruments (at amortized cost or fair value through other comprehensive income).
• Subsequent measurement
• Financial assets shall be subsequently measured either at fair value or at amortized cost;
• Financial liabilities are measured at amortized cost unless the fair value option is applied.

Subsequent measurement of Financial Liability
• Financial liabilities are measured at FVTPL when they:
• ►Meet the definition of held for trading, or
• ►Are designated as such on initial recognition using the fair value option
• ►Financial liabilities designated as at FVTPL:
• ►Fair value gains and losses attributable to changes in the entity own credit risk are recorded in OCI
• ►Other fair value changes are recognized in profit or loss
• ►Unless recognizing such fair value changes in OCI would create or enlarge an accounting mismatch in P or L

Impairment of financial instruments under IFRS 9
• IFRS 9 impairment is a forward-looking expected credit loss (ECL) model.
• ►IFRS 9 ECL applies to the following:
• ►Loan receivables
• ►Trade receivables
• ►Other receivables
• ►Investment in bonds and treasury bills measured at amortized cost (AC) and FVOCI
• ►Lease receivables
• ►Loan commitment
• ►Financial guarantee contracts
• ►Inter-company receivables/inter-company loan receivables
• ►Loan receivables from employees
• ►Placement with banks
• ►Demand deposits with banks (Savings and Current accounts)

Approaches for ECL under IFRS 9 include:
►General approach: Recognizes loss allowance depending on the stage in which the financial asset is
– Stage 1 – Performing assets: Loss allowance is recognized in the amount of 12-month expected credit loss;
-Stage 2 – Financial assets with significantly increased credit risk: Loss allowance is recognized in the amount of lifetime expected credit loss, and
-Stage 3 – Credit-impaired financial assets: Loss allowance is recognized in the amount of lifetime expected credit loss and interest revenue is recognized based on amortized cost.
►Simplified approach: Loss allowance is recognized always at a lifetime expected credit loss.

Impact of the ECL model on Companies
• This model requires lots of reliable information
• Need to consider forecasts of future economic conditions
• Earlier recognition of credit losses
• Increased use of models

Challenges of compliance with IFRS 9 in Nigeria
• Lack of sufficient professionals with required skills
• Knowledge gap on the part of the regulators
• Insufficient internal historical data required to support model
building
• Insufficient external rating data
• Upgrading the business and accounting system
• Managing the fluctuations of the profits and KPIs

ADOPTION DATES
IFRS 9 will be mandatorily applicable for periods starting
1 January 2018 or later.

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