IFRS 9: What is it exactly?
Sometimes you come across terms that make you wonder what they are. Then you can ask family and friends about it, to find out what it is. But it is much smarter to dive behind your laptop and search the internet for what it is. So too with IFRS 9. Because chances are your family and friends don’t know what it is and will look at you with open mouth when you ask them what it is. So it’s a good thing you started looking on the internet, because in this article you’ll find out what it is and which website you need to visit for an explanation of more of these terms.
This is IFRS 9
The IASB introduced IFRS 9 to replace IAS 39. This was a difficult financial instrument to interpret, so it could be better. IFRS 9 consists of three different parts:
- Classification and measurement
- Impairment
- Hedge Accounting
With IFRS 9, there is now a distinction between financial instruments, such as debt instruments, equity instruments and derivatives. Let’s start with the first. The debt instrument consists of the contracts of the issuing party that the lender must repay within a certain period of time with certain conditions. Think of a bond, for example. Then there are derivatives. These are the financial contracts that have value because of underlying assets. An example is an option. Equity instruments are again contracts that are legally recognised proof that someone has property rights in a company. Such as shares.
Within the IFRS there are three accounting principles for financial instruments. These determine the value of the instruments on the balance sheet. There are: fair value through equity, amortised cost and fair value through profit and loss.
There is an IFRS 9 framework, because the classification of financial instruments affects the valuation of financial instruments for reporting purposes. It makes everything clearer than when everything is written down on paper. What you also see in IFRS 9 is the SPPI test. This is a test that makes a complex framework which determines whether the cash flows obtained are only caused by the payments of the principal and interest. For this purpose, a definition has been included in the IFRS 9, to include the principal as interest and to set a clear guideline to use the SPPI test on all kinds of cases.
The framework of IFRS 9 is more complex than that of IAS 39. But there are more differences. For example, the IAS 39 test was only a trading book test, versus the Business Model test and the SPPI test.
More information about IFRS 9 and other terms
Want to know more about this? Then it is smart to take a look at annualreporting.info. This website is packed with explanations of these terms. You can view the terms in alphabetical order and click on them if you want to read more about them. This makes it a very conveniently arranged site full of useful information. It helps you a step further with your questions. Click on the link and discover everything about IFRS reporting.
