The IFRS 9 is an international financial reporting standard providing comprehensive model for classification, and measurement of financial assets’ expected credit losses impairment. IFRS 9 also introduces substantial reforms in the approach used for hedge accounting and impairment.
Impact on insurance companies
Insurers will make a relatively earlier identification of accounting mismatch that requires an explanation to the market. More financial assets will be held at the fair value via the profit and loss. Hedging will have to be carefully evaluated awaiting the macro hedging proposals.
Impact on existing accounting standards
IFRS 9 greatly affects the IAS 39 rules by clarifying some of the complex rules. The greatest impact will be on the three major areas of accounting for the financial instruments.
Classification and Measurement of Financial Assets
IFRS 9 simplifies the classification of the financial assets by replacing the complex and difficult rule-based approach with one principle approach. The assets are to be classified based on their cash flows characteristics and the business model where such an asset is held. The IFRS 9 approach makes it possible to apply one uniform impairment model to all the financial assets, which brings clarity to the impairment process. The assets are to be measured amortization at cost or their fair value with any increment reported in the fair value profit and loss account.
IFRS 9 requires the firms experiencing losses to make a prompt recognition of their expected credit losses unlike the IAS 39 where firms delayed the reporting during cash crisis. Entities have to account for their expected credit loss from the time when a financial instrument was first recognized. The impairment of the credit losses is to be done using the full time expected either loss or using the 12-month estimation approach. Companies are at liberty to elect the loss impairment approach to use.
IFRS 9 improves the disclosure for the activities taken to manage risks facing entities. The new model creates an alignment of the risk management activities with the accounting procedures. This alignment allows for a more accurate reflection of the activities in the reported financial statements. The result of these models is providing the entities financial statement users with enhanced information concerning the impact of hedge accounting on the statements.
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