IFRS 9, International Financial Reporting Standard 9, Financial Instuments

1. IFRS 9 – Day 1 Session 1
DAY 1 - PART 1

2. 2. Basics
Outline
3 & 4 Classification (H2M, A4S, Host, Derivative)
& Measurement – Initial & Subsequent
5. Recognition & Derecognition
1. Definitions, Objectives and Scope
6. Impairment
7 & 8. Hedging
Outline – 2 Days – 8 Sessions

3. Session 1 - Introduction
1.01 What is happening in Accounting
1.02 Defining an Asset
1.03 Defining a Financial Asset
1.04 Recognition
1.05 Contracts and Contractual Rights
1.06 Defining Characteristics of a Financial Instrument
1.07 IFRS 9 is not alone
1.08 Objectives (What are we trying to do here?)
1.10 Scope (What falls under IFRS 9?)
a) Scoped in (included)
b) Scoped out (excluded)
1.11 US GAAP vs IFRS 9 and why did they diverge?
1.01
3

4. 1. What is happening in Accounting?
4

5. First Sir David Tweedie
March 2015 Baruch College discussion with Robert Herz (Ex
FASB 2002-2011)
You can have International Standards without the US
but you cannot have Global Standards without the US
1.02
If you think you understand IAS 39
you haven’t read it properly
5

6. Current situation
Differences are
Growing in importance
US Companies cannot
ignore them
1.02
IFRS
Local
Local
Local
Local
Local
Local
Local
Local
Local
Local
Local
Local
Local
Local
US
GAAP
Differences
6

7. First I want you to indulge me
We need to:
1. Step up to the challenge – meet it head on
2. Don’t be afraid to try – and expect to make mistakes
NASA: mistakes are acceptable, failure is not!
The accountancy profession has to deal with Reality
This is not a theoretical exercise
Some people resist change – they should listen
Don’t pretend:
1. that things are not happening
2. that we can avoid them if we bury our head in the sand
(even if some want to)
1.02
7

8. Second I want you to think
about . . .
The recent depression taught us:
- We may have to think of new solutions
- We have to experiment
- We sometimes do not understand what is happening – but it
is happening
As civilization develops we discover new things
Why don’t old solutions work anymore?
Keynes? Friedman? Did they work in the recent depression?
We have a new environment – things are not the same today
as they were then
Because we have moved on – there are new factors in play
1.02
8

9. Second I want you to think
about . . .
As in medicine – sometimes they do not understand why
something works but it does – after we gain familiarity things
become clearer
In economics so much depends upon faith that our government
knows what it is doing – confidence is necessary – a run on the
bank can be caused by a lack of confidence
Governments fall because of a lack of confidence
So much depends upon faith and confidence in the USD
– I hope we never see a lack of confidence in the USD
The world would be in chaos!
1.02
9

10. Accounting Revolution (1)
We are living in interesting times
We have been thinking for quite a while – 6 yrs
IAS 39 = Largely Rules
IFRS 9 = Largely Principles
In the middle of a rethink of many concepts and ideas
Fundamental changes made possible by computers
We can deal with greater complexity and greater volume
Accounting theory is developing and evolving
1.02
10

11. Accounting Revolution (2)
Historical cost or Hysterical cost?
Cost is objective but wrong
- so lets be wrong because it is objective?
Fair Value is hard – Too hard? Or is it a challenge?
The road ahead is challenging – acknowledged
But should we opt for the easy way
– the latest recession seems to send a message
– deal with the challenge or the chaos
1.02
11

12. Accounting Revolution (3)
Rules seem to be a good idea – everyone knows where they
stand
BUT
– they do not evolve by themselves
- They have to be maintained
- Lawyers seem to make a sport of finding ways round the rules
-
Deterministic rules 
Provisioning rules 
Principles - calling
for judgment
1.02
12

13. Accounting Revolution (4)
Some challenges
More questions remain
BASEL II/III is closer with IFRS 9
Consistent application will be difficult
New thinking will have major impacts on banks
Convergence with the US has NOT been achieved
Implementation of IFRS 9 will be costly and require
thinking/judgment
1.02
13

14. Challenges
You cannot win in the long-term if you do not do it right
Difficult: Do it now
Impossible:
Maybe tomorrow
But keep it on your list
And work on it
John Kennedy was credited with some words of wisdom or was
it Robert Kennedy or was it George Bernard Shaw or was it . . . .
Some people see things that are and ask,
Why?
Some people dream of things that never were and ask,
Why not?
1.02
14

15. Challenges
As a profession we are facing challenges that
need answers.
Nothing should be too difficult
There should be Nothing we are not willing to
consider
When we think we have Nothing to learn that’s
when we are in danger
When we feel Nothing will change – it does
1.02
15

16. Thoughts on Debt - Why
At any significant rate of inflation you can:
1. Get rich
2. Get out of debt
Smoothing techniques are employed to postpone/delay the
impact of bad situations
– if you can keep going you can get through the current crisis
and inflation will rescue you
1.02
16

17. Why (2)
Cash flow is the game and we use creative accounting and
inflation to provide offsets to current results
So keep the cash flow coming and you can probably resolve
most situations
Futures, forward contracts can hedge risks but also can be
used to modify PoL, cash flow etc.
Terms are often more important than price. You set the price
letting me dictate the terms and I will win every time!
1.02
17

18. IFRS Framework –
‘Balance Sheet’ has been renamed
Consolidations are now based on Control not legal
Ownership
Statement of Financial Position
Accounting is experiencing the greatest change in 600
years.
I am going to talk about some of those changes – the
ones that are relevant to IFRS 9.
18

19. English language – a context?
Might - Maybe - evens - probably - Almost certain
Perhaps Not likely vs LikelyCould well be
Every person has their own opinion on the interpretation
When you cannot measure it then it is an opinion anyway
Probability = 10%, 25%, 40%, 50% 51%, 60%, 75%, 90% 100%
Statistics are manipulated – a given depending on who is
doing it.
Auditors pass an opinion – for years and decades = “In our
opinion”
1.02
19

20. Some IFRS 9 History
1. Norwalk agreement IASB & US FASB
2. Financial crisis 2007/8
3. IASB & FASB – Joint project (Unsuccessful)
4. FASB bailed
1.02
20

21. Development Timeline
21
2009:
Classification
and
Measurement
2011:
FV and
derecognition
2013:
Hedge
accounting
2014:
ECL and
Impairment
2009 2013 20142011
Please do not take this timeline too seriously
It merely serves to indicate that this has been a LONG & HARD road
Which is not yet finished
1.02

22. IFRS is not aloneIFRS 9 is not alone
IFRS 9 – Financial Instruments
• Objective is simplification; targeted changes proposed
• Easier to qualify for hedge accounting (reasonably effective)
• Less onerous hedge effectiveness assessment requirements
• Removal of shortcut and critical terms match methods
• Cannot elect to “stop” hedge accounting
22

23. IFRS is not alone
IFRS 7 – Disclosure
IFRS 9 is not alone
IAS 32 – Presentation
IAS 39 – Recognition & Measurement
IFRS 9 – Financial Instruments
IFRIC 9 – Reassessment of Embedded Derivatives
IFRIC 10 – Interim Financial Reporting and Impairment
IFRIC 16 – Hedges of Net Investment in Foreign Operations
IFRIC 19 – Distinguishing Financial Liabilities from Equity Instruments
23

24. 2. What is an Asset?
24

25. Group discussion – an ASSET
What is an Asset?
Accountancy has redefined an Asset!
An Asset can, but does not necessarily mean, you own it
Splitting an Asset
An Asset can:
- involve ownership or
- it can mean control or
- it can mean you own part of it all the time or
- all of it for a limited time
- it can mean you own part of it part of the time
25

26. IFRS Framework –
‘Asset’ has been redefined
The economic substance of the transaction takes
precedence over the legal aspects of a transaction
An asset is a resource controlled by the entity as a result
of past events and from which future economic
benefits are expected to flow to the entity
(Framework Par 49a).
So we could say that – for a leased car – the car is an
asset on our balance sheet (Statement of Financial
Position)
26

27. Physical & Intangible Assets
Control of such physical and intangible assets creates an
opportunity to generate an inflow of cash or another financial
asset, but it does not give rise to a present right to receive cash
or another financial asset.
Physical assets, such as:
inventories
property, plant and equipment
leased assets and
intangible assets (such as patents and trademarks)
are not financial assets.
27

28. Disclosure
The jury is still out on this one
We may see a gradual evolution of disclosure requirements in
the light of practical experience.
International GAAP 2015 EY (Wiley) Chap 52 Financial Instruments: Presentation
and Disclosure – p3940
Detail: Strike a balance between
- overburdening with excessive detail and
- obscuring important information in aggregation
International GAAP 2015 by EY (Wiley) Chap 52 Financial Instruments: Presentation
and Disclosure – p3822 [IFRS 7.B3]
28

29. Other assets and liabilities
Assets (such as prepaid expenses) for which the future economic
benefit is the receipt of goods or services,
rather than the right to receive cash or another financial asset, are
not financial assets.
Liabilities such as deferred revenue and most warranty
obligations
are not financial liabilities because the outflow of economic
benefits associated with them is the delivery of goods and
services
rather than a contractual obligation to pay cash or another
financial asset.
29

30. Other assets
Assets (such as prepaid expenses) for which the future economic
benefit is the receipt of goods or services, rather than the right to
receive cash or another financial asset, are not financial assets.
Liabilities such as deferred revenue and most warranty
obligations are not financial liabilities because the outflow of
economic benefits associated with them is the delivery of
goods and services rather than a contractual obligation to pay
cash or another financial asset.
30

31. 3. What is a Financial Asset?
31

32. Basic Scenario
Instrument
Created
ISSUER
INVESTOR 1
SELL
INVESTOR 2
Accounting – Recognised as:
Liability
or
Equity
Accounting - Recognised as:
Asset
32

33. IAS 32 – Financial Instrument
A financial instrument is any contract that
gives rise to:
a financial asset of one entity
and
a financial liability or
equity instrument of another entity.
33

34. IAS 32 – Financial Asset
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favorable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity
instruments and is:
(i) a non-derivative for which the entity is or may be obliged to receive a
variable number of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of the
entity’s own equity instruments.
34

35. IAS 32 – Financial Asset (Summary)
A financial asset is composed of:
(a) cash
(b) equity
(c) a contractual right
35

36. Which of the following are Financial Assets:
Examples:
(a) trade accounts receivable and payable
(b) notes receivable and payable
(c) loans receivable and payable
(d) bonds receivable and payable
(e) a note payable in government bonds
36

37. IAS 32 – Financial Liability
A financial liability is any liability that is:
(a) a contractual obligation
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments
and is:
(i) a non-derivative for which the entity is or may be obliged to deliver a
variable number of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of the
entity’s own equity instruments
(See Puttable exceptions)
37

38. IAS 32 – Equity
An equity instrument is
any contract that evidences a residual interest
in the assets of an entity after deducting all of its liabilities.
38

39. IAS 32 – Entity
In this Standard, ‘entity’ includes:
• individuals
• partnerships
• incorporated bodies
• trusts and
• government agencies
39

40. Portfolio
Not defined
but the context in which the term is used suggests
it is group of assets held and managed
according to a common policy.
The term FUND can be used the same way.
40

41. Trading
The term Trading means:
Active and frequent buying and selling.
Normally this means that the objective is to make a profit on
trading in the short-term.
41

42. IAS 32 – Fair Value
Fair value is the amount for which
an asset could be exchanged,
or a liability settled,
between knowledgeable, willing parties
in an arm’s length transaction
You could say this is the Price instead of the Value
We assume that a Fair Price is = Fair Value at the time of a sale
42

43. Financial Asset – Debt Instrument
Fair value with changes in fair value recognized in net
income (FV_PoL) is the residual category
43
Debt investments (loans and debt securities) would be
evaluated
using a cash flow characteristics test and
consideration of the business model
in which the instrument is managed.
Instruments that pass the cash flow characteristics test
are classified and measured at:
1. amortized cost or
2. Fair value with changes in fair value recognized in
(FV_OCI) based on the business model assessment

44. Debt Instrument
- Common Sense Approach
The old H2M model = Amortised Cost
FV SPPI model - Unrealized changes >> OCI
Realized changes >> PoL
Non SPPI model - All changes >> PoL
This is a ‘rule-of-thumb’ method for SME’s and
companies that do not want to go into the detail of IFRS 9
We will be discussing this in greater detail later
44

45. PwC
Debt investments
FASB and IASB proposals
Amortized cost Fair value through
OCI
Fair value through
PoL
Classification is done at initial recognition and not revisited
(business model change may trigger
subsequent reclassification,
but very infrequently)
Classify based on:
45
Business modelBusiness model
Business modelCash flow characteristics

46. PwC
Cash flow characteristics test - preview
Interest
Compensation for time
value of money and
credit risk associated
with principal amount
outstanding
Principal
Amount
transferred
by holder
upon initial
recognition
Solely
Payment
of Principal
and
Interest
(SPPI)
46
Debt investments
• No Bifurcation of hybrid financial instruments
• Assess only at inception
We will return to this later

47. PwC 47
Business Models
Amortise Cost:
Hold asset for cash flow
FV_OCI:
Hold assets to collect contractual cash flows,
unrealized changes to OCI and
realized changes in FV through sale (PoL)
FV_PoL:
All other debt investments
Notes:
Assess at inception (but change could trigger reclass
Based on how group is managed
>1 model can apply (within portfolio)

48. PwC 48
Debt investments
• Cash flow characteristics test
Leverage increases variability of cash flows and does not
have characteristics of interest
Contingent events that could impact cash flows such that
they no longer represent SPPI causes instrument to be FV-
PoL (probability not considered)
Non-genuine contractual cash flow characteristic does not
affect the financial asset's classification (IASB )
Terms that modify relationship between principal and
interest (EG: interest rate reset - but frequency of reset does
not match tenor of interest rate) but only reflect changes in
time value of money and credit risk need to be assessed
- See next slide

49. PwC 49
Debt investments
• Cash flow characteristics test
1. Compare to a benchmark instrument (instrument with
same credit quality and terms except for term under
evaluation) for all reasonably possible scenarios
2. If effect is “more than insignificant,”
then must be at FV-PoL
Terms that modify relationship between principal and
interest (EG: interest rate reset - but frequency of reset
does not match tenor of interest rate) but only reflect
changes in time value of money and credit risk need to
be assessed:

50. PwC
2. Extension Options (both)
Terms that allow holder or issuer to extend the term are SPPI if:
1. Result in contractual CF during the extension period that are SPPI
2. Extension option is not contingent on future events, other than to
protect holder against issuer's credit deterioration, a change of
control of issuer, or changes in tax or law 50
Debt investments
• Cash flow characteristics test
1. Prepayment Terms (both):
Terms that permit or require issuer to pre-pay (or holder to put
instrument to issuer) before maturity are SPPI if:
• Prepayment amount substantially represents unpaid amounts of
principal and interest (including reasonable additional compensation),
• Term is not contingent on future events (other than to protect holder
against issuer's credit deterioration, a change of control of issuer, or
changes in tax or law)

51. 4. Recognition
At the introductory stage it is appropriate to say that:
An asset does not have to be owned
It can be an right (as an asset)
coupled with an obligation (without being a liability)
To be recognised merely means included on the
Balance Sheet (Statement of Financial Position)
51

52. Initial Recognition
Cost has long been the valuation criterion – in the context of a
free market and between knowledgeable and willing buyers
and sellers
B4.1.10
The quoted price in an active market is taken as the best
context for price to equal value
Since it is possible to make a Profit or a Loss on Day 1 we must
think about where to show this
Accounted for only if :
1. objectively measured using an active market (Level 1) or
2. based on a valuation technique which uses only observable
markers
52

53. Example 1
ABC Co is going through a rough time during the depression.
It borrows money at 5% paid monthly
B4.1.10
ABC wants to have a better cash flow so it swaps the loan for
another that costs 8% payable on maturity
53

54. 5. Contracts and Contractual Rights
What is happening in Accounting?
54

55. IAS 32 – Contract & Contractual
In this Standard, ‘contract’ and ‘contractual’
refer to an agreement between two or more parties
that has clear economic consequences
that the parties have little, if any, discretion to avoid,
usually because the agreement is enforceable by law.
Contracts, and thus financial instruments, may take a variety of
forms (EG: need not be in writing)
55

56. A contractual right
A contingent right and obligation meet the definition of a
financial asset and a financial liability, even though such
assets and liabilities are not always recognised in the
financial statements 56
z
A chain of contractual rights or contractual obligations meets the
definition of a financial instrument
- if it will ultimately lead to the receipt or payment of cash or
- to the acquisition or issue of an equity instrument
Example: a financial guarantee is:
- a contractual right to receive cash from the guarantor, and
- a corresponding contractual obligation (of the guarantor)
to pay the lender, if the borrower defaults.

57. Classification
Example Designation of a group of assets
B4.1.33-36
IAS 32 states that:
an issuer of Financial Instruments should classify
• the financial instrument
• or its component parts
on initial recognition as
a financial liability or equity instrument
in accordance with the contractual arrangement’s
substance and definitions of:
• financial asset,
• financial liability or
• equity instrument
57

58. Classification
Example Designation of a group of assets
IFRIC 2 para 5
Substance means
1. The contractual terms
2. Relevant laws and regulations
3. The entity’s governing charter
58

59. A contractual right - Lease
Accordingly, a finance lease is regarded as a financial instrument
and
an operating lease is not regarded as a financial instrument
(except as regards individual payments currently due and
payable). 59
Under IAS 17 Leases a finance lease is regarded as primarily an
entitlement of the lessor to receive, and an obligation of the lessee
to pay, a stream of payments that are substantially the same as
blended payments of principal and interest under a loan agreement.
The lessor accounts for its investment in the amount
receivable under the lease contract rather than the leased
asset itself.

60. Example:
Contractual obligation
IFRIC 2 para 5
This instrument contains no contractual obligation to
pay the dividend (it can be deferred) or to call the
option.
Therefore, although there might be an economic
reason for the call, there is no obligation to do so.
It is an equity instrument
An entity issues a non-redeemable callable bond where
the fixed dividend of 5% can be deferred at the issuer’s
option.
A clause increases the dividend to 25% if the bond is
not called previously.
60

61. IAS 32 – Puttable instrument
A puttable instrument is a financial instrument that
gives the holder the right
to put the instrument back to the issuer for
cash or
another financial asset or
is automatically put back to the issuer
on the occurrence of an uncertain future event or
the death or retirement of the instrument holder
A puttable financial instrument includes a contractual obligation
for the issuer to repurchase or redeem that instrument for cash
or another financial asset on exercise of the put
61

62. 6. Characteristics of
a Financial Instrument
A Financial Instrument is:
any contract that gives rise to
- a financial asset in one company
- a financial liability or Equity
in another entity
62

63. IAS 32 – Financial Asset
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favorable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity
instruments and is:
(i) a non-derivative for which the entity is or may be obliged to receive a
variable number of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of the
entity’s own equity instruments.
Remember
63

64. IFRS 7 - Disclosure
7. IFRS 9 is not alone
IAS 32 - Presentation
IAS 39 – Recognition & Measurement
IFRS 9 – Recognition & Measurement
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 16 Hedges of Net Investment in Foreign Operations
IFRIC 19 Distinguishing Financial Liabilities from Equity Instruments
1.10
64

65. 8. Objectives of IFRS 9
To establish principles for the financial reporting of
Financial Assets and
Financial Liabilities
that will present relevant and useful information
to users of Financial Statements
for their assessment of the
amounts,
timing and
uncertainty
of an entity’s future cash flows
65

66. Deloittes comment on IFRS 9
Many preparers of financial statements, their
auditors and users of financial statements find
the requirements for reporting financial instruments complex.
66

67. A Single and
Integrated Standard (Not)
1.10x
The final version of IFRS 9 brings together
 the classification and measurement,
 impairment and
 hedge accounting
phases of the IASB’s project to
replace IAS 39 Financial Instruments: Recognition and
Measurement
However, there are still references to IAS39 so
IFRS 9 does NOT stand alone as a single and
integrated standard

68. KPMG: 2014 July
Simple test for existence
Example:
IF(ISERROR(VLOOKUP(I10,Rge_01,1,FALSE)),"Missing","OK"))
This technique can be used to locate missing items from a list
The new standard is going to have a massive
impact on the way banks account for credit
losses on their loan portfolios. Provisions for
bad debts will be bigger and are likely to be
more volatile.
– Chris Spall,
KPMG’s global IFRS financial instruments leader
68

69. IFRS 9 – 3 main topics
Classification and measurement of financial
instruments
Hedge accounting
Accounting for Impairment
IFRS 9 effective 2018
69

70. Deloittes - IFRS 9 Classification
IAS 39 contained many different classification categories and
associated impairment models.
Many of the application issues that arose with IAS 39 were
related to the classification and measurement of financial
assets.
Based on feedback received, the IASB decided that the most
effective way to address such issues and improve the ability of
users of financial statements to better understand the
information about the amounts, timing and uncertainty of
future cash flows is to replace the existing classification and
measurement categories for financial assets.
70

71. Classification and Measurement
In particular, similarly to what happens today, financial assets
will either be measured at amortised cost, FV_OCI or FV_PoL.
In contrast to the fundamental change in the accounting for
impairment, at first glance the new classification and
measurement requirements may not seem very different to
what we have today.
However, the new requirements will in fact result in
differences that matter for those reading the financial
statements.
71

72. Classification and Measurement
This provides more structure to the classification of these types
of assets, which results in better information in Fin Stats
because it directly reflects both the:
That is different to the available-for-sale category today,
which is generally an unrestricted option
EG. New requirement debt instruments can only be measured at
FV_OCI if they are held in a particular business model
IFRS 9: in order to be classified at FV_OCI,
a debt instrument needs to have both:
• simple principal and interest cash flows and
• be held in a business model in which both holding and selling
financial assets are integral to meeting management’s objectives
• nature of the instrument’s contractual cash flows and
• business model in which that instrument is held 72

73. IASB – Sue Lloyd
The extensive changes that are introduced by the new forward-
looking expected credit loss (ECL) model mean that entities will need
to begin implementation promptly
Many entities also recognise the extent of the changes for investors
and analysts and are either required by regulation, or have indicated
their intention, to provide information in advance of 2018 about the
anticipated effects of those changes
73

74. Impairment
Credit quality
74

75. Impairment Disclosures – Sue Lloyd
Expected credit losses (ECL) reflect management’s expectations of
shortfalls in the collection of contractual cash flows
Clearly that gives rise to significant judgments, including in the
choice both of the information used to:
• measure ECL and the
• assess how credit risk has changed over the life of a financial
instrument.
Accordingly, we have introduced disclosures to assist investors
and analysts to understand the:
• amount of ECLs
• basis for their measurement
• reasons for changes in ECLs over time.
75

76. Hedge accounting
These new requirements were not a result of the financial crisis.
Information is also required to be provided about the effect of hedge
accounting on the financial statements, which will assist in shedding
light on a notoriously complex area of accounting.
76
The final version of IFRS 9 includes the new hedge accounting
requirements that were first published in November 2013
However, these improvements to hedge accounting address concerns
and criticisms about shortcomings in the prior model and the
information provided about risk management.
As a result, the new hedge accounting model more closely aligns risk
management and accounting.

77. Transistion
Entities can choose to apply it earlier, although the reality for
many, particularly financial institutions, is that
a significant amount of time will be needed to prepare for IFRS 9,
not least because of the improvements to accounting for
impairment, which is based on expected credit losses.
77
Even though IFRS 9 is mandatory from 1 January 2018, the
effects could be apparent earlier than that.

78. 10. Scope
78

79. Importance of being financially bilingual
The remaining major capital markets without an IFRS mandate
are:
• USA: no current plans to change but has the same issues
• Japan: voluntary adoption is allowed, but no mandatory
transition date has been established
• India: regulatory authorities have made public statements
about the intention to adopt from 2016-2017
• China: intends to fully converge at some undefined future date
Many of the world’s capital markets now require IFRS, or some form
thereof, for financial statements of public-interest entities
1.11 79

80. 10a. Scoped In
80

81. Scoped in
(Not Changed (IFRS 9 refers to IAS 39)
1. All financial instruments except those scoped out
2. Derivatives linked to interests in
subsidiaries, associates or joint ventures
3. Derecognition and measurement of lease receivables
4. Derecognition of lease payables
5. Derivatives embedded in lease agreements
6. Insurance contracts that are financial instruments
7. Financial guarantee contracts
(unless previously asserted that they were insurance policies)
8. Certain loan commitments
9. Certain contracts to buy non-financial items
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82. 10b. Scoped Out
82

83. Scoped out
(Not Changed (IFRS 9 refers to IAS 39)
1. Subsidiaries, associates and joint ventures (unless incl in IAS 39)
2. Rights and obligations under leases
(except derecognition, impairment and embedded derivatives)
3. Employer’s rights and obligations under employee benefit plans
4. The entity’s own equity
5. Rights and obligations under insurance contracts
(other than certain financial guarantee contracts)
6. A contract to acquire a business in the future
7. Loan commitments unless designated at FV through PoL,
& those that can be settled net
or commitments at below market interest rates
8. Share based payment transactions (IFRS 2)
9. Rights to be reimbursed for expenditure to be incurred provided for by IAS 37
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84. Phasing of IFRS 9
The phased completion of IFRS 9:
Phase 1
On 12 November 2009, the IASB issued IFRS 9 Financial
Instruments as the first step in its project to replace IAS 39
Financial Instruments: Recognition and Measurement
IFRS 9 introduced new requirements for classifying and
measuring financial assets that had to be applied starting 1
January 2013, with early adoption permitted
Cont
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84

85. Phasing of IFRS 9
Phase 2
On 28 October 2010, the IASB reissued IFRS 9, incorporating
new requirements on accounting for financial liabilities, and
carrying over from IAS 39 the requirements for derecognition
of financial assets and financial liabilities
On 16 December 2011, the IASB issued Mandatory Effective
Date and Transition Disclosures (Amendments to IFRS 9 and
IFRS 7), which amended the effective date of IFRS 9 to annual
periods beginning on or after 1 January 2015, and modified
the relief from restating comparative periods and the
associated disclosures in IFRS 7
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85

86. Phasing of IFRS 9
Phase 3
On 19 November 2013, the IASB issued IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS 9,
IFRS 7 and IAS 39) amending IFRS 9 to include the new general
hedge accounting model, allow early adoption of the
treatment of fair value changes due to own credit on liabilities
designated at fair value through profit or loss and remove the
1 January 2015 effective date.
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86

87. Phasing of IFRS 9
Phase 4
On 24 July 2014, the IASB issued the final version of IFRS 9
incorporating a new expected loss impairment model and
introducing limited amendments to the classification and
measurement requirements for financial assets.
This version supersedes all previous versions and is mandatorily
effective for periods beginning on or after 1 January 2018 with
early adoption permitted (subject to local endorsement
requirements).
For a limited period, previous versions of IFRS 9 may be adopted
early if not already done so provided the relevant date of initial
application is before 1 February 2015.
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87

88. 11. US GAAP vs IFRS 9
88

89. FASB (US GAAP) vs IASB (IFRS)
IFRS 9 began as a joint project with the US FASB
1.16
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).
As a result of the financial crisis of 2008, the boards decided
to revise their accounting standards for financial instruments
to address perceived deficiencies which were believed to have
contributed to the magnitude of the crisis.
89

90. US GAAP and IFRS 9
The US has scoped itself out
– in 2012 it withdrew from the IFRS project
And in 2014 it withdrew from the IASB/FASB
joint Financial Instruments project
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91. Where is the US going?
US GAAP reporting and IFRS
The last remaining joint convergence project is leasing.
Once this project is finalized, the formal bilateral relationship
between the Boards will come to a close.
The future of further convergence remains uncertain as the
Boards shift attention to their individual agendas.
1.16
At present, the US seems happy to tolerate and deal with 2
sets of standards
91

92. Investor perspective: the need to
understand IFRS is arguably even greater
From an investor perspective, the need to understand IFRS is
arguably even greater.
US investors keep looking overseas for investment opportunities.
Recent estimates suggest that over $7 trillion of US capital is
invested in foreign securities.
The US markets also remain open to non-US companies that
prepare their financial statements using IFRS.
There are currently over 450 non-US filers with market
capitalization in the multiple of trillions of US dollars who use
IFRS without reconciliation to US GAAP.
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93. IFRS and the SEC
– little hope of a mandatory change to iFRS
July 2012: the Staff of the SEC’s Office of the Chief Accountant
issued its final report on its IFRS work plan that was intended to aid
the SEC in evaluating the implications of incorporating IFRS into the
US reporting system.
No recommendation from the staff on whether, when, or how IFRS
might be incorporated into the US financial reporting system.
No next steps toward a SEC decision on IFRS.
Little support for adopting IFRS as authoritative guidance in the US,
and outright adoption would not be consistent with the method of
incorporation followed by other major capital markets.
However - substantial support for exploring other methods of
incorporating IFRS that demonstrate a US commitment to the
objective of a single set of high-quality, global accounting standards.
1.16 93

94. IFRS and the SEC
– little to IFRS
US reporting
Although the era of convergence is coming to a close, the
impacts of the accounting changes resulting from the Boards’
joint efforts continue to have significant and broad-based
implications.
The Boards’ recently issued joint standard on revenue (May
2014) is a prime example, and will impact nearly every
company in the world
Both Standard-setters have delayed implementation
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95. IFRS and the SEC
– Leasing
US reporting
The last remaining joint convergence project is leasing.
Once this project is finalized, the formal bilateral relationship
between the Boards will come to a close.
The future of further convergence remains uncertain as the
Boards shift attention to their individual agendas.
1.16 95

96. IFRS and the US GAAP
The way ahead
Progress will be market driven
1.16
The way forward will be reactive not proactive.
Problem:
There will be a shortage of people who know both US GAAP
and IFRS
US is 25% of world GDP – it used to be 50%
The US will find itself in a minority and with smaller influence
internationally
There are no new issues only new people
96

97. IS YOUR LIFE
NOW CHANGED?
The End

98. Questions?

99. 99
CliffB