IFRS 9 and IAS 39
Introduction
Laws and Regulations prevail in almost every field, and it is very important for the organizations to comply with these regulations and standards for their competitiveness and sustainability. Apart from the traditional regulations of managing and maintaining a company, there are certain regulations that specifically associated with the financial management. Entities are required to manage their financial transactions according to the prescribed methods and techniques covered and initiated by International Financial Reporting Standards (IFRS) (Iasplus.com, p.45). IFRS are designed specifically to serve as a common global language for all the business affairs. Generally, it is used to compare and understand the international boundaries across the organizations. Previously, IFRS known with the name of International Accounting Standards (IAS), however in some of the countries of European Union, it is still referring with the same name. Both IAS and IFRS are the babies of International Accounting Standard Boards (IASB). Every accounting standard is unique for the company, as every standard has a specific regulation associated with it. This assignment will look over the summarization of some of the major accounting standards, along with mentioning its pros and cons. It is also required to analyze the main reason behind the replacement of IAS 39 to IFRS-9.
Analysis and Findings
Summary International Accounting Standard (IAS) 39
IAS-39 known as Financial Instruments: Recognition and Measurement is basically an International Standard for the financial instruments released by the IASB. It was adopted by the European Union (EU) in the financial year 2004, however after a year; EU introduced a new concept of Fair Value in this particular standard to make it firm (Iasplus.com, p.55).
The standard is used for the measurement and recognition of financial assets, liabilities and some other contracts used specifically in the buying and selling of the non-financial items. Organizations basically surround with lots of operational assets and liabilities, which is very important to recognize on their actual value. There are two different types of recognition introduced in IAS-39 known as Fair Value and Historical Value. The concept of Historical Value measurement and recognition obsolete after the current economic crisis of 2008, and later on the concept of Fair Value of assets overcome on it completely. IAS-39 not only pointed out the operational assets, but it also pointed out some of the major financial instruments that include investment in stocks and debt securities. It means that the recognition and measurement of investment and stocks will also initiate and analyzed through this particular accounting standard (Iasplus.com, p.67).
After the hazards of current economic collapse, many reforms have been taken place in all over the world, and some of the major reforms envisaged specifically in the field of accounting standards as well. IAS-39 has been changed into IFRS-9, which will be applicable from the year 2018, and every company is obliged to comply with these standards.
International Financial Reporting Standard (IFRS) – 9: Overview
International Financial Reporting Standards (IFRS)-9 is basically an accounting standard propagated by the IASB. It used to address the accounting for the financial instruments particularly. There are three main topics classified in it known as classification measurement, impairment of financial assets and hedge accounting. It replaced the IAS-39, but it will be applicable on the financial reports of the companies after four years. The version of the IFRS that issued in the year 2014 had superseded all the previous versions. IFRS-9 does not replace the core requirement for the portfolio in terms of fair value of hedge accounting to net off the interest rate risk.
IFRS-9 is all about recognition and measurement of the financial instruments, as likely IAS-39 but with some new features and characteristics. The level of valuation and measurement are totally changed in IFRS-9 as compared to IAS-39, and it is specifically made to counter the adverse effects of the economic hardship or economic collapse. IFRS-9 initiated that both Fair Value and Historical value has a direct linkage with the financial position and net income of the company. Though, lots of the board members disagreed on some of the major issues merely to develop the new financial instrument standards (Iasplus.com, p.45).
IFRS-9 is built specifically on the working of logical and single classification, and worked as a measurement approach for the financial based assets that used to approach the financial assets to manage their cash flow characteristics and features. The final version of the IFRS-9 brings the classification and measurement together along with bringing together impairment and hedge accounting. IFRS-9 came into being to manage the financial assets of the organizations. IFRS-9 has the tendency and ability to provide a remarkable business model through which entities can manage their financial assets that include securities and liabilities (Ifrs.org, p.45). A business model usually refers to how an organization manages its financial assets to generate positive cash flow for the company. Financial Assets and Amortization cost are some of the important features that should be included in a business model to recognize and measure the actual value of the assets to be included in the financial assets. The major focus of IFRS-9 is to educate different users of the company about the true financial position of the company. Transparency and clarification are some of the major aspects that specifically stride under the adaptation of IFRS-9 by the companies, because the level of confidence of most of the external shareholders lifted from the organizations after the current economic crisis. There are number of tax evasion faced by the European countries during the current economic hardship due to the implementation of IAS-39, in which most of the organizations don’t put the fair value of their financial assets that will decrease their net income that leads to decrease the amount of taxation as well. European Union has analyzed this issue along with the issue of Shareholder’s confidence, and initiated IFRS-9 to be replaced the already mentioned IAS-39. Hopefully, it will eradicate all the major issues and concerns found in the financial reporting of the companies, and will come up with effective features accordingly.
IFRS-9 Came to Replace IAS-39
Shareholders are very important for an organization, as they have a direct linkage with the financial position of the companies. Organizations always have a careful consideration towards their shareholders because they have the idea that satisfaction of the shareholders is extremely important for their operations. Shareholders mainly concerned with the profitability of the company and with the management of the financial assets as well (Ifrs.org, p.66).
One of the major concerns that initiated and came over the screen during the current global financial crisis was the irresponsiveness from the companies towards their shareholders. The confidence of the shareholders got blur with the passage of time during the economic hardship. One of the major reasons behind the shaking of confidence of the shareholders is the inappropriate valuation, recognition and management of the financial assets of the companies. Precisely, it can be said that the level of manipulation was extremely high in this particular time period due to which the level of dissatisfaction of the shareholders was on a higher node (Ifrs.org, p.70).
The financial reporting standards are very much in the favor of satisfying the needs of the shareholders, and that is why they replaced IAS-39 with IFRS-9 because they think that the changes will certainly bring positivity in this particular provision. The core working on the replacement of IFRS-9 was accelerated in the response to the financial crisis. Interested parties that also include the G-20 and Financial Advisory Group highlighted the timeliness of the measurement and recognition of the expected loss in credit. Apart from the recognition of credit, it is also highlighted the complexity in the multiple impairment models and own credit issues that needed to be considered. IASB and IFRS worked closed to each other to develop such a perfect impairment and valuation model from which they can satisfy the needs of their shareholders in a best possible manner. The development as well as the replacement of IFRS-9 was not a piece of cake. Throughout the life cycle of this project, IASB has consulted with the shareholders and constituents over their stance of implementing the new standards (Ifrs.org, p.45). Lots of shareholders had furnished their concerns over the old IAS-39, because it has lots of flaws in it. Shareholders are concerned with the measurement and recognition of the actual value of the financial assets and included in the financial reports. Shareholders showed their concerns over the stance of the preparation of financial statements along with fluctuation in some of the major financial ratios. Shareholders also furnished that without proper valuation and implementation of fair value of accounting, it is not possible for the shareholders to park their money in the stocks of the company. Shareholders don’t have any idea regarding the total amount of equity of the company along with Return on Equity (ROE).
IFRS-9 came into being for the replacement of IFRS-39 to overcome on the problems and issues highlighted by the shareholders. Obviously, without shareholders no organization can sustain for long in an industry, and they required extensive analysis to overcome on the challenges accordingly. This new reform and replacement will certainly makes the things in the favor of the shareholders as well as for the companies from which they can report their assets and liabilities with transparency.
IFRS and its Phases
As mentioned earlier IASB and IFRS has been working since 2008 to made and present such a perfect reporting standard from which they can bring transparency in the financial reporting, and finally they completed it in the year 2014 which will be implementing practically by 2018. During its reform and replacement of IAS-39, IFRS-9 faced numerous phases like classification, investment in equity/debt securities and their recognition. It is required to address all of these three phases in this particular part of the assignment
Classification is a part of the measurement of financial assets of the organizations. Classification determines how financial assets and financial liabilities are included in a financial statement, and they can be measured and recognized in an ongoing basis (Ifrs.org, p.45). Organizations are termed as a Going Concern in the accounting standards, thus all of their financial assets and liabilities should also be recognize in the same manner. IFRS-9 introduced a perfect and logical approach used for the classification of the financial assets driven specifically through the characteristics of cash flow in which an asset is held. The idea of Fair Value that highlighted in the IAS-39 has been revised completely in IFRS-9 by incorporating an option known as FVOCI. It has a direct linkage with the net income and financial position of the companies.
Investment in Equity/Debt Securities
Investment worth a lot for an organization, as it will have a direct linkage with the financial position of an organization. The replacement of IAS-39 with IFRS-9 has a critical point of observation as well in which the reforms will be taking the place during the investment in equities and debt securities. IFRS-9 showed that proper valuation and measurement should have been taken place in a company while investing in equity and debt securities (Ltd, p.12). The investment in the equity and security will change the entire financial structure of the company, by changing the equity and liability section accordingly. This particular provision not only influences over the financial position of the company, but it is also influence over the shareholder’s equity and performance as well. This particular phase of IFRS will certainly make a difference in the effectiveness of the company.
Recognition and Measurement
The last thing that has a direct linkage with the financial position of the companies is the recognition and measurement of the true value of the financial assets and liabilities (Ltd, p.12). IFRS-9 brings extensive changes in the recognition and measurement of cost of the financial assets and liabilities with having fair value development. Fair Value development and implementation empowers the company to bring transparency in their asset reporting. This will also mitigate the problems and issues of accounting manipulation from the companies that will be economically perfect for the organizations in all over the world. It was not implemented and included in IAS-39.
Pros and Cons of IFRS-9
The association of pros and cons with every field is common, and it is equally applied over the implementation of Reporting Standards as well. IFRS-9 that aimed to bring positivity and transparency in the financial reporting have number of pros and cons associated with it, which are required to include in this particular section of the report.
Pros
Transparent functions
Transparency and clarification are extremely essential for an organization, and the companies which are transparent in their functions are more productive than that of ill-transparent companies. IFRS-9 provides immense transparency in their financial functions, which is one of the most important characteristics of the entities.
Directing the Cash Flows
Positive cash flow is an important thing for an organization, and it usually initiated when the level of operational cash flow is higher than that of the cash flow generated through the financial and investment activities. IFRS-9 with its fair value implementation has the ability to direct the level of cash flow in the right direction for the company.
Supporting hand for Shareholders
Managing the shareholders is an important aspect for an organization, and IFRS-9 has the same dream in their mind. The replacement of IAS-39 with IFRS-9 will certainly enhance the economic functions of the entities by managing the needs of the shareholders of the company.
Cons
Incremental Risk for Treasury Management and Software Provider Companies
The new divergence of IFRS-9 and amendments in the hedge accounting will bring inefficiency and riskiness for the Software-as-a-service (SaaS) and Treasury Risk management services because they usually work on the obsolete functions
Still Room for Changing
The amendments in the fair value of accounting did not focus much over the financial position of the companies, as there are further rooms available for the development and enhancement which the companies have to adopt during their international expansion.
Conclusion
The productivity of an organization lies in the fact that how well it operates and manages their operations. Proper compliance with the rules and regulations is necessary, and it is equally applicable over the financial and strategic position of the companies. One of the major compliance associated with an organization known as Financial Regulations and Compliance. Financial Reporting is a major part of financial compliance through which entities present their financial reports to their different users. It cannot be said that all the regulations and laws perverted in the financial reporting standards are actually made to prevent the organizations from any sort of mishaps, as some of the financial reporting standards specifically attached to the prevention of the shareholders of the company. One of the major types of such standard is IAS-39, in which the recognition and measurement of the financial assets & liabilities performed. IAS-9 replaced over IAS-39 because the reporting law had number of flaws in it. These assignments analyze each and everything in detail to make the right thing.
Work Cited
Iasplus.com,. 'IAS 39 — Financial Instruments: Recognition And Measurement'. N.p., 2014. Web. 30 Dec. 2014.
Iasplus.com,. 'IFRS 9 — Financial Instruments'. N.p., 2014. Web. 30 Dec. 2014.
Ifrs.org,. 'IFRS - IFRS 9 Financial Instruments (Replacement Of IAS 39)'. N.p., 2014. Web. 30 Dec. 2014.
Ltd, BDO. 'New Rules Make Hedge Accounting Easier - BDO Australia'. Bdo.com.au. N.p., 2014. Web. 30 Dec. 2014.
