Brief of IFRS 9

IFRS 9 is an internationally recognized financial reporting standard that provides comprehensive guidelines for the classification, measurement, and recognition of financial assets and liabilities. The International Accounting Standards Board (IASB) issued this standard as a replacement for the previous standard, IAS 39.

Key aspects of IFRS 9 include:

1.  The International Financial Reporting Standards (IFRS) 9 introduces a revised framework for the classification and measurement of financial instruments, emphasizing a principles-based approach. The classification of financial assets is divided into three categories: those measured at amortized cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.

2.  Impairment: IFRS 9 introduces an expected credit loss (ECL) model for recognizing impairments on financial assets. This model requires entities to recognize expected credit losses earlier than under the previous standard, IAS 39, which was more focused on incurred losses.

3.  Hedge Accounting: The standard provides improvements to hedge accounting, aiming to better align the accounting treatment with risk management activities. It introduces the concept of hedge effectiveness and allows for more flexibility in applying hedge accounting.

IFRS 9 improves the transparency and relevance of financial reporting by adopting a more forward-looking approach to accounting for financial instruments. This initiative is a crucial component of a larger endeavor aimed at enhancing financial reporting and resolving concerns that were identified in the aftermath of the financial crisis.

IFRS 9 introduced an expected credit loss (ECL) model for estimating credit losses on financial instruments. The ECL model requires entities to recognize and provide for expected credit losses on financial assets, considering both the possibility of default within a specified time horizon and the potential severity of the loss if a default occurs.

The three stages of the ECL model are:

Stage 1 - Initial Recognition: Entities initially recognize a 12-month expected credit loss (ECL). This refers to the estimated credit losses that are anticipated to occur within the next 12 months for financial instruments that have not undergone a substantial increase in credit risk since they were initially recognized.

Stage 2 - Significant Increase in Credit Risk:Entities recognize a lifetime expected credit loss (ECL) if there is a significant increase in credit risk since the initial recognition of a financial instrument, even if the instrument is not yet considered credit-impaired. This represents the anticipated credit losses throughout the entire remaining lifespan of the instrument.

Stage 3 - Credit Impairment: When a financial instrument is credit-impaired, entities are required to recognize a lifetime expected credit loss (ECL) for the entire remaining life of the instrument. This applies regardless of whether there has been a significant increase in credit risk.

The process of calculating expected credit losses involves making estimates for three key factors: the probability of default, the exposure at default, and the loss given default. Entities utilize a combination of historical data, current market conditions, forward-looking information, and other pertinent factors to evaluate credit risk and make estimations regarding anticipated credit losses.

The goal of the ECL model is to provide a more forward-looking approach to recognizing credit losses, ensuring that entities recognize losses on financial instruments based on reasonable and supportable information that is available without undue cost or effort. It promotes the timely recognition of credit losses and enhances the overall transparency of financial reporting.