IFRS 9 Financial Instruments vs IAS 139 Financial Instruments

This report discusses the differences between IFRS 9 and IAS 139 for financial instruments, including changes in reporting standards and evaluation of impacts on financial institutions. The report highlights the new guidelines that improve transparency and disclosure in reporting financial information, and the forward-looking impairment model of IFRS 9 that augments the efficiency of the banking system. The report concludes that IFRS 9 provides a wider approach for managerial discretion as compared to IAS 139.

Running head: ACCOUNTING AND FINANCE
Accounting and finance
Name of the Student:
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Table of Contents
Introduction:....................................................................................................................................2
Discussion:.......................................................................................................................................2
Differences between the IFRS 9 Financial instruments and IAS 139 financial instruments:.........2
Evaluation of changes in the standard for reporting of financial instruments:................................2
Conclusion:......................................................................................................................................2
References list:.................................................................................................................................2

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Introduction:
The report elucidates research on accounting standard IFRS 9 Financial instruments that
was issued on 24th July, 2014 which is mandatorily effective for period beginning on or after 1st
January, 2018. This particular standard is applicable to impairment, recognition and
measurement, general hedge accounting and derecognition. As per this standard, reporting entity
is required to perform the recognition of financial liabilities and assets in the statement of
financial position, when it is involved in contractual provisions (Ramirez 2015). Measurement of
financial assets and financial liabilities is done at its fair value minus and plus when it is
recognized initially. However, when such financial assets and financial liabilities are not
recognized at fair value by way of loss and profit, issuing of such assets and liabilities
incorporates the transaction cost. Implementation of such standard is meant to respond to several
critics faced by IAS 139. Applicability of IAS 139 was not consistent with the way business
manages risks and business and it was way too complex which made IASB to reconsider IAS
139 (Chawla et al. 2016).
Discussion:
Differences between the IFRS 9 Financial instruments and IAS 139 financial instruments:
Introduction of IFRS 139 incorporates revised guidance on measurement and
categorization of financial assets and the project of introduction of this standard were divided in
to three phases. These phases include measurement and classification of financial assets and
liabilities, accounting hedge and impairment. The accounting for financial assets has simplified

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and improved with the introduction of IFRS 9 as there is no retention of factor of available for
sale transactions (Bernhardt et al. 2014). It has the consequence of eliminating the requirement to
recycle losses and gains upon derecognition of financial assets and thereby reducing the financial
reporting complications. Fair value reporting and accounting is considered as relevant and
providing reliable information to the interested parties and the new standard gives an increased
emphasis on the same (Ifrs.org 2018). The accounting treatment and discretion degree for
classifying assets has been reduced. Such reduction in classification should support enhanced
comparability and understanding of the information and reporting financial information
regarding financial assets in a consistent manner. Application of accounting policies under IAS
139 generally intends to make distinction between homogeneous of loans and loans that are
individually significant (Iasplus.com 2018). However, under IFRS 9, the distinction between
collective and individual assessment is less relevant.
All the financial assets that are currently in the IAS 139 scope are classified into two
forms under IFRS 9 under which assets are required to measure at fair value and amortized cost.
The scope of IAS 139 is carried forward by IFRS 9 and it further add the option of including
certain contracts that is otherwise subjected to “own use exemption” and in respect to
impairment requirement, there would be certain contract assets and loan commitments. The new
standard comes with minor amendments that carries forward from recognition and derecognition
requirements of IAS 139 (Novotny 2016). In addition to this, the existing requirement for
derivates in IAS 139 is retained by IFRS 9 where the host is not considered as financial assets.
Application of fair value option for financial assets under IAS 139 can be done in event
of assets forming part of group of liabilities or assets that has an embedded derivative or is
managed on fair value basis. Management of assets on fair value basis under IFRS is accounted

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for at fair value through loss or profit by default. The cost exemption in IAS 139 is removed by
the part of IFRS 9 that deals with the financial assets for relative derivative assets and
instruments. Therefore, under the IFRS 9, measurement of unquoted equity instruments is done
at fair value.
The incurred loss model under IAS 139 is replaced by model of “expected credit loss”
under IFRS 9. Financial assets evaluation that are not done at fair value through profit and loss
including trade and lease receivables, loan, contract assets and debt securities are areas where the
new model is applicable. Requirement of general hedge accounting is carried forward by IFRS 9
and regarding impairment of financial assets, impairment review has been effectively
incorporated for financial assets for which the measurement are done at fair value. Fair value of
assets and its related comprehensive income is determined by the classification of financial
assets (Mügge and Stellinga 2015). Therefore, the overall impact of IFRS 9 would be to provide
an emphasis of fair value relating to fair value accounting instead of using other form of
measurement such as historical cost or amortized cost. Furthermore, there would be reduced
complexities in accounting for financial assets impairment. For financial liabilities accounting,
there have been no considerable changes.
Evaluation of changes in the standard for reporting of financial instruments:
Implementation of IFRS 9 comes with incorporation of new guidelines that helps in
improving transparency as it emphasize on legal matter over economic substance. Assessment if
the effect of IFRS 9 is done on the circumstances and facts which is considered relevant by
entity. The complexity and types of financial liabilities and assets will determine the impacts of
implementation of new standard. There will be significant impact on the impairment model

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complexities by the types of loans purchased and originated and extent of credit provision
(Pavlović 2015). Companies under IFRS concerning the application of forward looking approach
using new expected credit loss model would be required to consider probability weighted and
multiple scenarios along with macro economic factors. The increased disclosure and judgment
would provide chief financial officer of entities with an opportunity to expound on their strategy
and reasoning because of creating need for explanation of assumptions and discernment
(accaglobal.com 2018). This would facilitate opening of dialogue about the risk management of
company with investors. Organization would be permitted with new strategies and less volatility
in income statement resulting from increased qualification of hedge accounting application.
There would be reduction in volatility of hedge accounting along with impact on key
performance indicators such as debt equity ratio, return on capital employed, leverage ratio, net
interest margin, loan deposit ratio and asset quality ratio. The financial statements of financial
institutions such as bank would be significantly impacted by replacement of IAS 139 by IFRS 9
with major impact on impairment calculations. On contrary to this, significant challenge is
presented to finance and risk functions across the banks by the implementation of IFRS 9 (Blatt
et al. 2018).
Conclusion:
From the analysis of changes brought by the introduction of IFRS 9 is intended to bring
much needed transparency and disclosure in reporting of financial information. The efficiency of
banking system would be further augmented by the forward looking impairment model of IFRS
9. It is expected that the new accounting standard would play its part in bringing a sound banking
system by strengthening their credit risk management system. It has been found that the financial
stability of organizations would be enhanced by mitigation of amplifying impact of incurred loss

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approach. Nevertheless, there are some drawbacks associated with IFRS 9 in terms of lacking
conceptual justification and arbitrary expected credit losses. A reasonable compromise between
requirement of financial officer to bring financial stability and providing relevant information is
represented by such model. Therefore, under the IFRS 9, a considerable wider approach is
provided for managerial discretion as against ISA 139.

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References list:
Bernhardt, T., Erlinger, D. and Unterrainer, L., 2014. IFRS 9: The New Rules For Hedge
Accounting from the Risk Management’s Perspective. ACRN Journal of Finance and Risk
Perspectives, 3(3), pp.53-66.
Blatt, J., Gulbin, J. and Officer, C.F., 2018. Achieving IFRS Off-Balance-Sheet Treatment in
Trade Receivables Securitizations. The Journal of Structured Finance, 23(4), pp.30-35.
Chawla, G., Forest, L. and Aguais, S., 2016. Some options for evaluating significant
deterioration under IFRS 9. The Journal of Risk Model Validation, 10(3).
https://www.accaglobal.com, A. (2018). IFRS 9, Financial Instruments | P2 Corporate
Reporting | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available
at: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles/ifrs9-financialinstruments.html [Accessed 12 Aug. 2018].
Iasplus.com. (2018). IFRS 9 — Financial Instruments. [online] Available at:
https://www.iasplus.com/en/standards/ifrs/ifrs9 [Accessed 12 Aug. 2018].
Ifrs.org. (2018). IFRS . [online] Available at: https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-9-financial-instruments/ [Accessed 12 Aug. 2018].
Mügge, D. and Stellinga, B., 2015. The unstable core of global finance: Contingent valuation and
governance of international accounting standards. Regulation & Governance, 9(1), pp.47-62.

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Novotny-Farkas, Z., 2016. The interaction of the IFRS 9 expected loss approach with
supervisory rules and implications for financial stability. Accounting in Europe, 13(2), pp.197-
227.
Pavlović, V., 2015. IFRS 9 AND IMPLICATIONS OF “BUSINESS MODEL VS.
MANAGEMENT INTENT” CRITERIA ON THE QUALITY OF ACCOUNTING
INFORMATION. FINIZ 2015-Contemporary Financial Management, pp.22-26.
Ramirez, J., 2015. Accounting for derivatives: Advanced hedging under IFRS 9. John Wiley &
Sons.