IFRS 9 Financial instruments for Banks (2024)

FAQs

Is IFRS 9 applicable to banks? ›

– IFRS 9 allows a bank to switch to a new hedge accounting model that is aligned more closely with risk management. The new model may allow additional hedging strategies; however, some current hedging strategies may be restricted.

IFRS 9 Financial Instruments is one of the most challenging standards because it's sooo complex and sometimes complicated. It belongs to the “Big 3” – the three difficult standards that were significantly amended or newly issued in the past years: IFRS 9 Financial Instruments: adoption date = 1 January 2018.

IFRS 9 – Aligns the measurement of financial assets with the bank's business model, contractual cash flow characteristics of instruments, and future economic scenarios. Banks may have to take a “forward-looking provision” for the portion of the loan that is likely to default, as soon as it is originated.

IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS 39 Financial Instruments: Recognition and Measurement. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting.

International Financial Reporting Standards (IFRS) were created to bring consistency and integrity to accounting standards and practices, regardless of the company or the country.

Positive impact in the long-term, in particular at the onset of crisis. At the same time, our results indicate that, in the long-term, the advantages of a timelier recognition of loan losses under IFRS 9, increases bank resilience.

More income statement volatility.

IFRS 9 raises the risk that more assets will have to be measured at fair value with changes in fair value recognized in profit and loss as they arise. Earlier recognition of impairment losses on receivables and loans, including trade receivables.

Conversely, a contract to buy or sell nonfinancial items is exempt from derivative accounting (i.e. is not in the scope of IFRS 9) when it cannot be settled net in cash or by exchanging financial instruments – e.g. because none of the criteria for net settlement is met.

IFRS 9 permits an entity to choose as its accounting policy either to apply the hedge accounting requirements of IFRS 9 or to continue to apply the hedge accounting requirements in IAS 39.

IFRS 9 describes requirements for subsequent measurement and accounting treatment for each category of financial instruments. It presents the rules for derecognition of financial instruments, with focus on financial assets.

What is IFRS 9 impairment of financial instruments? ›

IFRS 9 mandates recognition of impairment losses on a forward-looking basis, thereby recognising impairment loss prior to any credit event occurring. These losses are known as expected credit losses (ECL).

IFRS 9 allows the use of practical expedients when measuring ECLs under the simplified approach – e.g. using a provision matrix. A company that applies a provision matrix may be applying segmentation to capture the significantly different historical credit loss experience for different customer segments.

Contrary to widespread belief, IFRS 9 affects more than just financial institutions. Any entity could have significant changes to its financial reporting as the result of this standard. That is certain to be the case for those with long-term loans, equity investments, or any non- vanilla financial assets.

The International Financial Reporting Standards (IFRS) regulations apply to the banking industry and set the accounting and reporting standards for financial institutions.

Basel focuses on regulatory capital adequacy, allowing flexibility in the use of internal models. In contrast, IFRS 9 adopts a forward-looking approach, emphasizing timely recognition of credit losses in financial statements.