The International Accounting Standards Board (IASB) issued a new standard on the classification and measurement of financial assets. Publication of the standard represents completion of the first part of a three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement, with a new standard, IFRS 9, Financial Instruments.


IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the various rules in IAS 39. The approach in IFRS 9 is based on the reporting entity’s business model and the contractual cash flow characteristics of the financial assets. The new standard also requires companies to use a single impairment method rather than allowing the many methods in IAS 39. As a result, the IASB says IFRS 9 will improve comparability and make financial statements easier to understand for investors and other users.


Citing numerous outreach activities to stakeholders, the IASB says it has received broad support for its approach. At the same time, the standard setter points out that a number of changes were made to the exposure draft issued in July to accommodate stakeholder concerns. For example, the IASB changed the accounting that was proposed for structured credit-linked investments and for purchases of distressed debt. The IASB also addressed concerns expressed about the problems created by the mismatch in timings between the mandatory effective date of IFRS 9 and the likely effective date of a new standard on insurance contracts.


Furthermore, in response to suggestions made by some respondents, the IASB decided not to finalize requirements for financial liabilities in IFRS 9. The IASB has begun to consider further the classification and measurement of financial liabilities. It expects to issue final requirements during 2010.


The effective date for mandatory adoption of IFRS 9 is Jan. 1, 2013. Consistent with requests by the G-20 leaders and others, early adoption is permitted for 2009 year-end financial statements.


IFRS 9 is available (subscription required) at


The remaining parts of the project deal, respectively, with the impairment methodology for financial assets and hedge accounting. The IASB published an exposure draft on the impairment methodology for financial assets on Nov. 5 (see below). The IASB says proposals on hedge accounting are being developed.


  The IASB published proposals that, if implemented, would fundamentally shift the way banks and other financial institutions report the value of loans (or portfolios of loans) and other financial instruments carried at amortized cost.


Both IFRS and U.S. GAAP currently use an incurred loss model for the impairment of financial assets. An incurred loss model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.


The global financial crisis has led to criticism of the incurred loss model for presenting an initial, overly optimistic assessment of credit losses, only to be followed by a large adjustment once a trigger event occurs.


Under the new IASB proposals, expected losses would be recognized throughout the life of the loan (or other financial asset measured at amortized cost), and not just after a loss event has been identified. This would avoid the front-loading of interest revenue that occurs today before a loss event is identified and would better reflect the lending decision. A provision against credit losses would be built up over the life of the financial asset. Extensive disclosure requirements would provide investors with an understanding of the loss estimates that an entity judges necessary.


Comments on the exposure draft (available at are due June 30. After considering comments received on the ED, the IASB says it plans to issue a standard in 2010 that would become mandatory about three years later with early application permitted.



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