IAS 39 vs IFRS 9
People are very creative and inventive. So they created and invented numerous kinds of financial instruments. Just admit it—are you really versed well in derivatives, various share options, warrants, certificates, convertible bonds and many others?
This area happens to be so complicated and difficult to understand, also from IFRS accounting and reporting point of view. Adding to the complications—there are two different standards about financial instruments: IAS 39 and IFRS 9.
To clarify this matter a bit here I’d like to explain:
- Why do we currently have 2 IFRS standards dealing with financial instruments? (IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments—oh gosh, they have even almost identical name!)
- What is the current status?
- Should we apply IAS 39 or IFRS 9?
The reason for IAS 39 and IFRS 9
Standard IAS 39 in its current form came to effect in 2005. Its aim was to prescribe unified rules for reporting of the financial instruments so that companies presented them in a transparent and a consistent way.
But the opposite happened. IAS 39 was extremely complicated and contained too many exceptions, inconsistencies and derogations. Companies really struggled and paid high fees for consultants just to apply IAS 39 correctly.
Therefore, International Accounting Standards Board (IASB) decided to rewrite and replace IAS 39. The new standard got the name IFRS 9 Financial Instruments.
However, it is not very easy to replace such a complicated standard. Therefore, replacement process evolves 3 main phases:
- Classification and measurement
- Impairment methodology
- Hedge Accounting
Currently, IFRS 9 has been fully completed.
The current status of IAS 39 vs. IFRS 9
In fact, Phase 1 on Classification and measurement has been completed. Requirements for classification and measurement of financial assets were rewritten and issued in new IFRS 9 in November 2009. Financial liabilities followed in October 2010 and hedge accounting in November 2013.
In July 2014, IASB issued final requirements related to impairment of financial assets, own credit and amendments to hedge accounting. This means IFRS 9 is fully completed.
What should we apply—IAS 39 or IFRS 9?
Mandatory effective date of IFRS 9 is 1 January 2018, so you have a choice until then. You can either:
- apply IAS 39, or
- apply IFRS 9.
However, this choice is available only until 1 January 2018 and you’ll have to apply IFRS 9 after that. Be a bit careful here, because you need to present comparative information, too – so in fact, you’d need to restate your financial instruments in line with IFRS 9 for the comparative period starting 1 January 2017, too.
Which choice is better for me?
If you have only small amounts of financial instruments, the impact of switch from IAS 39 to IFRS 9 would be probably minimal.
But if you work for some financial institution like bank or investment house, then I would definitely recommend performing thorough analysis of the different impacts that IAS 39 and IFRS 9 can have. I will write about IAS 39 and IFRS 9 in other articles, but let me quickly draft the idea.
You should assess the types of financial assets that you have in your books.
Simply speaking, IFRS 9 introduces an option to value equity investments (for example, shares in other companies) and certain debt instruments at fair value through other comprehensive income. Thus, there is no necessity to put all your revaluation gains and losses to profit or loss and it can mean significantly lower volatility in your profits. If you like more stable presentation of income to your shareholders, IFRS 9 would be goodie for you.
But some institutions will prefer old IAS 39. For example, IFRS 9 puts tougher guidelines on asset reclassifications, or removes separate accounting for embedded derivatives—and based on specific situation, that might be unappealing for some institutions, indeed.
That was it in short. I will write about IAS 39 and IFRS 9 more in the future because I know very well about its difficulty and complexity compared to other standards. Please, leave comments or e-mail me with additional questions so that I can cover that in my articles and give you some assistance.
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How is Impairment on investments previously classified as ‘Available for Sale’ due to prolonged decline in the fair value of the equity instruments is treated after the application of IFRS 9?
Any guidance over this?
What is the main difference between the Old GAAP and IFRS?
and also can I have financial statement formats for both standards
Hi Asmera, hmmmmm… the big question is – what is the Old GAAP?
Thank you so much. you indeed are doing a great job. Be forever blessed.
Just 2 question that what are the key areas that makes IAS 39 and IFRS 9 to differ. Morever what brought about IFRS 15 to replace IAS 18 and IAS 11?
Very helpful as a start to my studying of the new standard – glad i came here somehow
Thank you for the good work Sylvia. Very insightful.
Great Article, It helps me to understand more and able to help me in my final assignment.
Let us say there is a contract awarded in a foreign currency so that the amount is equal to a subcontract amount. The receivable in will be paid out on the exact same date as the payable out (in the same amount). Because sales and cost of sales valuations are impacted, are two hedges required even though there is a natural hedge and a zero amount impact on a set date?? There is no cash impact but the sales valuation and cost of sales valuation could be impacted.
I hope you are having a great day 🙂
I have a question that i cant find answer for literally anywhere and yes Im desperate.
Does IFRS 9 consider futures as forward contracts? Im asking since IFRS 9 allows to seperate forward points for effectiveness testing. Is it possible to do the same with futures?
Also I have a question: on the picture above, which guy is considered IAS 39 and which one IFRS 9 ? :))
Thank you so much if you find time to answer me, my diploma thesis kind of stands and fails on whether I can separate time value of futures as well or not! 🙁
hmmm, interesting question and logically – why coudn’t you consider future as forward contracts? Futures do have almost the same characteristics as forwards, the only difference is that futures are standardized contracts regularly traded on the stock exchange and forwards are more general terms (including OTC – “over the counter”). So as soon as you can deal with futures for the purposes of IAS 39/IFRS 9 testing, go ahead 🙂 IFRS 9 does not specifically mention futures anyway 🙂
The second question – it should be clear, isnt’t it? 🙂
Hezky den! S.
Thank you very very much !!!!
Hezký den i Vám :))
I am currently in my final year of my undergraduate business management (accounting) degree. Part of my final year requires me to do a 8000 word final year project worth 40%. I am thinking to do this on the “How effective is the IFRS 9 in comparison to the IAS 39?” Here I am thinking to discuss the major changes and their effectiveness in the following areas:
1) Classification & Measurement
2) Impairment model
3) Hedge Accounting
I will need to conduct primary research on professional accountants and their views on the effectiveness on each of these areas.
Please could you advice is this project is doable to too complex for a final year project. I am aiming to get a first class classification and this module accounts for majority of the points.
I would be grateful for a response.
Thanks Silvia for your response!
All in all , i want an approach that can help me in every situation. We all know that net assets as per audited FS are never same as F.V. Because there are different measurement criteria for different type of assets and liabilities in their respective standards.
So just for a question , what would you do in such situation, if you have an equity instrument(shares) of an unlisted entity and you have got audited financial statement of that entity and you also know very well , that the net assets as per audited accounts are not same as F.v of those net assets.
How would you treat the above?
My question is that if I have and unquoted equity investment designated as AFS, and I have audited financial statements of that investee. Do I need to revalue that equity instrument on net assets value as per the audited financial statements. or I need to carry it cost?
Equity carrying value; $100
Net assets value as per audited financial statement per share: $90.
At which amount I need to carry out my investments?
Hi Masroor, IAS 39 states that you should measure equity instruments with no reliable fair value measurement at cost. You need to be consistent period by period. It’s the question whether the net assets of the investee (based on audited financial statements) reflect the fair value of that investee – this does not necessarily need to be the case. You should also investigate whether there’s some impairment. S.
So you meant to say audited accounts are not reliable ‘fair value measurement’ and I should carry my investment at cost i-e $100 accordingly further I should only test for impairment of that investments!
Sorry i could not get back earlier , as i thought that i will receive response by email and never visited the site after post, just visited.
I am not saying that. I just say that the fair value of a company depends on more factors than audited financial statements, because that’s just the internal indicator of the company’s fair value. What about the external factors, like market situation? I think you should study IFRS 13 Fair Value Measurement to see how the fair value should be established and you’ll find out that also fair value hierarchy asks you to put “level 1 inputs” on top (these are observable market inputs basically).
All I wanted to say is that the fair value and net assets from audited financial statements are not always the same. S.
I am associate member of ICMA Pakistan and found your videos very useful and we much appreciate your efforts.
Certainly good work!
Can you please issue article where it fully compares IAS-39 & IFRS-9 particularly ‘IMPAIRMENT’ area.
Thanks and Regards
yes, sure, that’s on my future plan 🙂 S.
Great work…you presented the idea clearly…although these standards are quite confusing…Can you please provide the overall justifications and controversies of IFRSs….??
thankssss alot. it help me alot. can you help me what are the standards that replaces IFRS or IFRS replaces that….???? plzzzzzz
Hmhm, I’m not sure I understand your question 🙂
Great JOB..appreciate if you can make available some comprehensive Q&As on IFRS’s
silvia dear your article is very very useful,simply loved it please can u send me links of your other articles about IAS 9 and IFRS 39
I thank you 🙂
Thank you very much.
Lets say agreed forward contract with the bank
Year end, 1USD= .69Euros
Settlement date 1 USD= .71Euros.
Or you can make up some for convenient.
Would appreciate for your kind help. I really need to know
thank you very mucg
Could you please show me accounting treatment. for the belowS:
Supplier in US. Sold a product to Europe customer for 20,000 EUROs. Payable in nine months time. Assume at the time of sell 1USD=.70 EUROs.
If I do the hedge with a bank.
how i will record this tansaction.
Would apprecaite if could help me
to answer your question, there’s not much information. What is agreed forward rate with the bank? What are the spot rates at the year-end and at the settlement date? All matters 🙂
Thanks for the professional presentation. is it possible to show an example for further illustration of the accounting treatmet of IAS 39 Vs. IFRS 9.
Hi Ahmed, yes, I can cover it, but what specifically? There’s so many issues related to financial instruments 🙂
I am a ACCA Member. I really found easy the way you do explain. really fantastic.
I need a help regarding hedge accounting.
Cash flow hegge= Explanation with accounting treatment.
ie. how i will record in p/l and balancsheet.
Same as fair value hege.
i was watching your video.
like a US supplier sells a product 20K Euros.
receiable in 9 monts.
you have done the hedge with a Bank.
in effect the result is 0.
could you please expalin that beat as well.
how it will be recorded.
would really apprecaite for you kind support.
Md. Shamim Hasnain
Hi Shamim, a hedge accounting is quite a topic 🙂 But I’ll try to make up a numerical example with accounting treatment in one of my future articles / videos. Thank you for your comment!
hello; can you tell me why ias 39 is better then IFRS 9?
Hello, Stephen! I don’t think IAS 39 is better than IFRS 9, because there is too much confusion, derogations and strict rules in it. IFRS 9 should be an improvement – that’s why it exists. Have a nice day! S.
Thank you for your some of the videos for various IASs.. Pleat let me know that do you have videos of IFRS9, 10, 11, 12…. and IAS 19.?? from where i can find these standards videos.?
I think you can find some of these videos on my YouTube channel http:/www.youtube.com/ifrsbox – just visit the channel and try to search 🙂 All the best!
First of all a big thanks for your effort to put the basics of both the standards.
Like everyone, i am also confused between the two standards- more so since i have a current running project that wants me to change the Hedge accounting module of my product from IAS into IFRS!
Now could you please help me from where i can the details i should look for? I am looking for details like what all features i would have to change from the existing one into the new standards etc.
Actually, did IASB finish the hedge accounting project? Or is it still in its final stages?
Please advice when you are free.
Thanks in advance
thank you for your question. Nope, IASB has not finished the hedge accounting project yet, but it is in its final stage. Finalized requirements are expected to be issued in the 3rd quarter of 2013 – literally these days. However, there will be some transitional period in order t give users enough time for making appropriate changes.
I’ll come back to this issue once it is ready.
Have a nice day! S.
HEY, thanks for this site, it is a big help for me,. i’m actually studying the basics of IAS 39 and IFRS 9 and it so happened that I really am confused between the two,..this would bring some light ,.. keep moving you’ll be a great help, we need seniors like you to guide us.
I am an ACCA student, currently going to appear in P2-Corporate Reporting and the only standards that I cannot understand enough to apply is IAS 37/39 and IFRS 7/9. I came across this blog and found it quite helpful. Just wanted to say keep up the good work. We certainly need our seniors help. 🙂
I’m glad you find it useful and come back anytime 🙂
Am reviewing the accounting entries for bonds valuations from inception, valuation adjustments and derecognition. I noted that the revaluation gans/losses entries done in the balance sheet for available for sale assets are never transferred to the profit & loss when selling off the securities off our books. How should the entries be done?. In my understanding the revaluation gains/losses as entered in the revaluation reserve (70%) & deferred tax asset (30%) should be transferred to the profit/loss to aid in correct/actual gain/loss on sale of a financial instrument. Whats your view? please advice.
basically you are correct. All revaluation gains / losses are recognized to equity. At sale, cumulative gains or loss from equity is all put to profit or loss – this is called “recycling”. It is the treatment as per IAS 39 to be more precise.
Accounting entries – let me make up some numbers:
Cost of AFS = 200
Revaluation loss = 15
Carrying amount of AFS = 200-15 = 185
Proceeds from sale of AFS = 150
Accounting entry at revaluation date: Debit Equity – revaluation loss / Credit AFS asset (some provision account): 15
Accounting entries at sale of AFS:
Debit Cash: 150
Debit Loss from sale of AFS asset: 50 (which is cost of AFS less proceeds 200 – 150; or put it another way: carrying amount of AFS 185 less proceeds 150 plus recycled cumulative revaluation loss from equity 15) Credit AFS asset: 185
Credit Equity – revaluation loss 15
Hope it helps
where can i found the different chapters of ifrs 9..?
Hi, Santu Ca,
you can look to ifrs.org, you can find full texts of IFRSs there.
I would like to know much more about IFRS 9, thaks for your help. You are so pretty!!!
there is some article and video on IFRS 9 in this webpage, so please check this out.
And do not make the old lady embarrassed! 🙂 🙂 🙂
One of the Best article I have read 🙂 do you have any recommendation on which journal article I should look up to get info about the transition
Can you specify what transition you mean?
Very clearly written, I hope you present more insight into the new standard, I am studying it right now and would like more analysis.
Great work! I am studying for my CPA Australia qualification and I found your youtube videos and blog introduction very easy to follow and well presented. Thank you for sharing your valuable knowledge and work.
thanks for the comment – these things keep me moving on! Good luck with your studies 🙂