Understanding IFRS 9

IFRS 9 is an International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) that provides guidance on accounting for financial instruments. It replaced the earlier IAS 39 standard.

IFRS 9 is applicable to all entities that prepare financial statements under IFRS. It covers the recognition, measurement, derecognition, and disclosure of financial assets, financial liabilities, and some other contracts that are within the scope of the standard.

The key application of IFRS 9 is in accounting for financial instruments. Financial instruments include financial assets, such as cash, accounts receivable, and investments in debt and equity securities, as well as financial liabilities, such as accounts payable and debt obligations. IFRS 9 provides guidance on how these financial instruments should be measured and accounted for in an entity’s financial statements.

The standard requires entities to classify financial assets based on their characteristics and the entity’s business model for managing them. Financial assets are classified as measured at amortized cost, fair value through other comprehensive income (OCI), or fair value through profit or loss (FVTPL). The classification of financial assets determines the subsequent measurement and recognition of gains and losses.

IFRS 9 also requires entities to recognize expected credit losses (ECLs) for financial assets measured at amortized cost or FVTPL. ECLs are the expected losses that result from default events within a certain time horizon. The standard provides guidance on how to calculate ECLs and requires entities to update their ECL estimates based on changes in credit risk.

In addition to financial instruments, IFRS 9 also provides guidance on the derecognition of financial assets and liabilities, as well as disclosures related to financial instruments.

Overall, the application of IFRS 9 provides guidance on how to account for financial instruments in a more transparent and consistent way, improving the usefulness of financial statements for investors and other users.