IFRS 9 follows a principles approach based on assessing the entity's business model for managing financial assets and the contractual cash flow characteristics of the financial asset. Financial assets are then recognised in one of the following three categories:
An entity may have more than one business model in some cases; for example, it may have one portfolio which is held to collect contractual cash flows and one which is held to be sold.
Reclassification between categories is only permitted when an entity changes its business model for managing financial assets. Reclassification is expected to occur only very rarely.
The recognition and measurement requirements for financial liabilities are largely unchanged from IAS 39 with most financial liabilities being measured at amortised cost. For those liabilities that are held for trading or where the option is taken to measure at fair value through profit or loss changes in the fair value attributable to changes in own credit risk will be recognised in other comprehensive income and not subsequently reclassified to profit or loss.
IFRS 9 replaces the incurred loss model used in IAS 39, where impairments were only recognised when they occurred, with an expected loss model where expected losses are provided for. To measure impairment IFRS 9 introduces a three stage approach to measuring impairments as follows:
The standard does introduce a simplified approach for trade receivables and contract assets that arise from transactions within the scope of IFRS 15 and for lease receivables. Under the simplified approach provision should be made for the estimated lifetime equivalent credit losses. In practice this will mean that provisions will be made earlier, probably based on historic experience, as opposed to waiting for evidence of impairment (such as a customer entering administration). As an example of the difference:
As with IAS 39 hedge accounting remains an accounting policy choice under IFRS 9 though the ability to voluntarily revoke a hedging designation, available under IAS 39, has been removed. In general the requirements for hedge accounting have been relaxed, principally by relaxing the requirements around hedge effectiveness (including the requirement for this to be within 80%–125%). Whilst IFRS 9 makes it easier to qualify to use hedge accounting the underlying accounting for hedged transactions is very similar.
IFRS 9 is effective for periods commencing on or after 1 January 2018 with earlier application permitted. The standard shall be applied retrospectively though there are transitional provisions for where retrospective application of the classification and measurement requirements of the standard may be impracticable.