IFRS 9

IFRS 9 began as a joint project between IASB and the Financial Accounting Standards Board (FASB), which promulgates accounting standards in the United States. The boards published a joint discussion paper in March 2008 proposing an eventual goal of reporting all financial instruments at fair value, with all changes in fair value reported in net income (FASB) or profit and loss (IASB). Due to the 2008 financial crisis, the boards revised their accounting standards for financial instruments to address perceived deficiencies which were believed to have contributed to the magnitude of the crisis. The boards disagreed on several important issues, and also took different approaches to developing the new financial instruments standard. In contrast, the IASB attempted to develop the new standard in phases, releasing each component of the new standard separately. In 2009, IASB issued the first portion of IFRS, covering classification and measurement of financial assets. This was intended to replace the asset classification and measurement sections of IAS 39, but not supersede other sections of IAS 39. Certain elements of IFRS 9 as issued were criticized by some key IASB constituents. The model for classifying debt instrument assets permitted only two approaches, fair value with all changes in fair value reported in profit and loss (FVPL), or amortized cost. Meanwhile, IASB and FASB worked together to develop a model for impairment of financial assets. IASB issued an exposure draft proposing an impairment model in 2013. FASB decided to propose an alternative impairment model. The final IFRS 9 standard, including hedge accounting, impairment, and the amended classification and measurement guidance, was issued on 24 July 2014. Early evidence on the market reaction to the IFRS 9 in Europe suggests overall a positive response to the IFRS 9, although heterogeneities across countries exist. ==Classification and measurement==

As amended, IFRS 9 had four possible classification categories for financial assets, including a FVOCI classification for debt instruments. The classification is dependent on two tests, a contractual cash flow test (named SPPI as Solely Payments of Principal and Interest) and a business model assessment. Unless the asset meets the requirements of both tests, it is measured at fair value with all changes in fair value reporting in profit and loss (FVPL). In order to meet the contractual cash flow test, the cash flows from the instrument must consist of only principal and interest. Among the amendments to classification and measurement made in the 2014 update, de minimis and "non-genuine" features can be disregarded from the test, meaning that a de minimis feature would not preclude an instrument from being reported at amortized cost or FVOCI. However, equity instruments, derivatives and instruments that contain other than de minimis embedded derivatives would have to be reported at FVPL. If the asset passes the contractual cash flows test, the business model assessment determines how the instrument is classified. If the instrument is being held to collect contractual cash flows, i.e., it is not expected to be sold, it is classified as amortized cost. If the business model for the instrument is to both collect contractual cash flows and potentially sell the asset, it is reported at FVOCI. For a FVOCI asset, the amortized cost basis is used to determine profit and loss, but the asset is reported at fair value on the balance sheet, with the difference between amortized cost and fair value reported in other comprehensive income. For any other business model, such as holding the asset for trading, the asset is reported at FVPL. IFRS 9 retained most of the measurement guidance for liabilities from IAS 39, meaning most financial liabilities are held at amortized cost, the only change relating to liabilities that utilize the fair value option. For those liabilities, the change in fair value related to the entity's own credit standing is reported in other comprehensive income rather than profit and loss. IFRS 9 retained the concept of fair value option from IAS 39, but revised the criteria for financial assets. Under a fair value option, an asset or liability that would otherwise be reported at amortized cost or FVOCI can use FVPL instead. IFRS 9 also incorporated a FVOCI option for certain equity instruments that are not held for trading. Under this option, the instrument is reported at FVOCI similar to FVOCI for debt. However, this version of FVOCI does not permit "recycling." Whereas when debt instruments using FVOCI are sold, the gain or loss on sale is "recycled" from other comprehensive income to profit and loss, for FVOCI equities the gain or loss is never reported in profit and loss, but rather remains in other comprehensive income. ==Impairment==

IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FVOCI. An exception to the general impairment model applies to financial assets that are credit impaired when they were originally acquired. Under both IFRS 9 and the FASB model there will be a loss, to the extent of the allowance, when most assets covered by this guidance are acquired. This loss will be smaller under the IFRS 9 model, due to the 12 month limit. ==Hedge accounting==

IFRS 9 updated the guidance for hedge accounting. The intent was to "[align] the accounting treatment with risk management activities, enabling entities to reflect better these activities in their financial statements." The changes permit more use of hedge accounting for components of instruments and groups of contracts, and ease the hedge effectiveness test; see Hedge relationship (finance). They also enhance the disclosures related to hedges and risk management with a requirement to refer to a formal risk management strategy or describe it clearly in the hedge documentation. == See also ==