Summarising the IASB’s proposed changes to IFRS 9

The IASB is proposing modifications to classification and measurement requirements in IFRS 9. It’s also seeking information on load loss accounting reform.

The International Accounting Standards Board (IASB) has proposed modifications to the classification and measurement requirements in its financial instruments standard, IFRS 9, and is seeking further information on impairment as part of its post-implementation review of its financial crisis-era reform to load loss accounting.

Background on IFRS 

IFRS 9 Financial Instruments was developed in response to the global financial crisis, following calls from the G20 and other bodies for more timely recognition of loan losses and a forward-looking impairment model.  

It became effective in January 2018 and introduced a new ‘expected credit loss’ model that replaced the previous ‘incurred credit loss’ model, which failed to consider the effects of possible future credit losses even when they were expected. 

What’s happening? 

The IASB’s review of IFRS 9 is being conducted in three parts. The first part, which covered the classification and measurement requirements, concluded in December 2022. The current review is the second part and covers the impairment requirements. The final part, which will cover hedge accounting, will be held at a later stage. 

In response to the feedback the IASB received in December, it issued an exposure draft in March proposing clarifications to the classification of financial assets with environmental, social and corporate governance (ESG) features.  

The IASB said the changes will resolve whether loans with ESG-linked features that could affect whether they are measured or amortised cost or fair value have cash flows that are solely payments of principal and interest.  

Proposals 

To resolve any potential diversity in practice, the proposed amendments clarify how the contractual cash flows on those loans be assessed. They also look to ensure that investors are provided with useful information about the timing, amount and uncertainty of future cash flows. 

The potential outcomes of applying the derecognition requirements in IFRS 9 to the settlement of a financial asset or a financial liability via electronic cash transfers can produce challenges. The amendments also address them. 

The exposure draft proposes clarifications to how this should be accounted for. The IASB will also develop an accounting policy option to allow a company to derecognise a financial liability before it delivers cash on the settlement date when specified criteria are met. 

The IASB also proposes adding qualitative and quantitative disclosures to IFRS 7 Financial Instruments: disclosures for contingent events that could change the amount or timing in respect of contractual cash flows for financial assets and financial liabilities.

• Derecognition of a financial liability settled through electronic transfer —to clarify that an entity is required to apply settlement date accounting when derecognising a financial asset or a financial liability; and to permit an entity to deem a financial liability that is settled using an electronic payment system to be discharged before the settlement date if specified criteria are met.  
• Classification of financial assets—to clarify the application guidance for assessing the contractual cash flow characteristics of financial assets, including:
  • financial assets with contractual terms that could change the timing or amount of contractual cash flows, for example, those with ESG-linked features;  
  • financial assets with non-recourse features; and  
  • financial assets that are contractually linked instruments.

Classification of financial assets 

Contractual terms that are consistent with a basic lending arrangement: The IASB proposes additional examples of financial assets that have, or do not have, contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. It proposes providing examples of the factors that an entity may need to consider when assessing the contractual cash flow characteristics of financial assets with non-recourse features. 

Financial assets with non-recourse features: The IASB intends to enhance the description of the term ‘non-recourse’ and provide examples of the factors that an entity may need to consider when assessing the contractual cash flow characteristics of financial assets with non-recourse features. 

Contractually linked instruments: The IASB proposes to clarify the description of transactions containing multiple contractually linked instruments. In addition, the proposed amendments clarify that the reference to instruments in the underlying pool can include financial instruments that are not within the scope of the classification requirements of IFRS 9. 

Disclosures 

Investments in equity instruments designated at fair value through other comprehensive income: The IASB proposes amendments to IFRS 7 to require disclosure of an aggregate fair value of equity instruments rather than the fair value of each instrument at the end of the reporting period; and to require an entity to disclose the changes in fair value presented in other comprehensive income during the period. 

Contractual terms that could change the timing or amount of contractual cash flows: The IASB proposes disclosure requirements for contractual terms that could change the timing or amount of contractual cash flows on the occurrence (or non-occurrence) of a contingent event. The proposed requirements would apply to each class of financial asset measured at amortised cost or fair value through other comprehensive income and each class of financial liability measured at amortised cost. 

Some input required 

Separately, the IASB launched a call for feedback on 30 May for general information on the effect the application of the impairment requirements in IFRS 9, alongside other requirements in IFRS 9 or in other IFRS accounting standards. 

The IASB is seeking further information on the following by 27 September 2023. 

The general approach to recognition of expected credit losses: The IASB is seeking explanations on whether requiring entities to recognise at least 12-month expected credit losses provides useful information about changes in credit risk and resulting economic losses. 

Significant increases in credit risk: The IASB is interested in the use of judgement in determining significant increases in credit risk. Stakeholders have told the IASB that they observe a lack of consistency in what entities deem to be a significant increase in credit risk; the use of collective versus individual assessment for changes in credit risk; and how entities define ‘default’. 

Measuring expected credit losses: The IASB wants to understand whether adopting a principle-based, instead of prescriptive, approach to measuring expected credit losses helps reduce complexity and mitigate operational challenges for stakeholders by allowing an entity to use techniques that work best in its specific circumstances. 

The simplified approach for trade receivables, contract assets and lease receivables: The IASB asks whether applying the simplified approach reduces the costs and complexities of applying IFRS 9 impairment requirements to trade receivables, contract assets and lease receivables. 

Credit risk disclosures: The IASB wants stakeholders to explain whether the combination of disclosure objectives and minimum disclosure requirements for credit risk achieves an appropriate balance between users of financial statements receiving:

• comparable information—that is, the same requirements apply to all entities so that users receive comparable information about the risks to which entities are exposed; 
• relevant information—that is, the disclosures provided depend on the extent of an entity’s use of financial instruments and the extent to which it assumes associated risks. 

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.