Why is IAS tough

IAS 39 or IFRS 9: No more confusion!

People are creative and inventive. So it's no wonder that they have also devised and created a large number of financial instruments. Admit it - do you really know your way around all the derivatives, a wide variety of stock options, subscription rights, certificates, convertible bonds and the like?

The whole area is really complicated and difficult to understand, also from the perspective of applying IFRS. What makes things even more difficult are the two different standards on financial instruments: IAS 39 and IFRS 9.

For this we have to explain something:

  • There are currently two IFRS standards that deal with financial instruments, namely IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 9, Financial Instruments. 39 and 9 - that sounds very similar too!
  • And what is the status quo?
  • Should we now apply IAS 39 or IFRS 9?

Standard IAS 39 in its current form has been in force since 2005. Its purpose was to prescribe uniform rules for the accounting of financial instruments so that these can be presented by companies in a transparent and consistent manner.

In fact, the opposite happened. IAS 39 proved extremely complicated and contained numerous exceptions, inconsistencies and deviations. Companies struggled hard and invested a lot of money just to properly apply IAS 39.

The International Accounting Standards Board (IASB) therefore decided to revise and replace the old standard. The new standard was named IFRS 9 - Financial Instruments.

However, it is not child's play to replace such a complicated standard. The associated process therefore takes place in three phases:

  • Classification and evaluation
  • Determination of impairment (impairment test)
  • Accounting for hedging relationships

IFRS 9 is therefore not yet completely available, but work is still being carried out on it.

Phase 1, which deals with the classification and valuation of financial instruments, has already been completed. The regulations for the classification and measurement of financial assets have already been rewritten and issued in November 2009 as the new IFRS 9 standard. In October 2010 the financial liabilities followed.

In addition, the old IAS 39 standard is still being applied, while the IASB is working hard on the revision of the missing parts of IFRS 9. For example, the impairment approach and accounting for hedging relationships are currently under discussion.

But be careful! The application of the new standard IFRS 9 will be mandatory from January 1, 2018. This is mandatory (subject to EU endorsement). However, if a company wishes to apply IFRS 9 before 2018, this is possible and permissible, but must be clearly stated in the financial statements.

As mentioned earlier, until 2018 you have a choice. Since IFRS 9 will not be mandatory until 2018, you can until then:

  • either apply only IAS 39 or
  • Apply IFRS 9 for the classification and measurement of financial assets and liabilities and IAS 39 in all other matters such as accounting for hedging relationships and impairments.

Above all, remember that IFRS 9 will be mandatory from 2018 at the latest. From then on you can forget about IAS 39. So you only have the option during this transition period.

If you only have a few financial instruments to report, you are unlikely to feel the effects of switching from IAS 39 to IFRS 9.

But if you work for a financial institution, such as a bank or an investment company, we definitely recommend that you carefully analyze the various effects of the two standards. We will write something about IAS 39 and IFRS 9 in other articles, but let's briefly outline the idea.

Think about the types of financial assets you have on your books.

Simply put, IFRS 9 introduces the ability to measure equity instruments (e.g. shares in other companies) at fair value in other comprehensive income. It is therefore no longer necessary to show all revaluation gains and losses in the income statement. This can mean significantly lower earnings volatility for you. So if you prefer a more stable representation of income for your shareholders, you might like IFRS 9.

However, some institutions prefer the old standard IAS 39. For example, IFRS 9 provides for stricter rules for the reclassification of financial assets or abolishes the accounting separation of embedded derivatives - a regulation that, depending on the situation, may not be very attractive for some organizations.

That was it again in all necessary brevity. We will write even more about IAS 39 and IFRS 9 in the future because we are fully aware of the difficulties and complexity compared to other standards. Please send your comments or email with any further questions so that we can write about them in future articles and hopefully be of help to you.