January 2018 as a target date…
Early July 2014, the IASB – the European accounting standards setter – has published a final version of the IFRS 9 norm. The announced ambition is to reform the IAS 39 norm that is actually ruling the financial instruments accounting and assessment.
In fact, IAS 39 is openly questioned since the 2008 crisis: an amplifying effect of the fair value application, a pro-cyclicality of the impairment model in proven risk and the banking prudential policy, a complex operational setting – the limits of this norm was therefore reached.
In the same way than Basel III in the banking sector, IFRS 9 is part of the normative changes that arose after the financial crisis. This norm is a response from an accounting point of view to, on the one side, simplify the classification and valuation of the financial instruments and, on the other side, have a better representation of their financial states in accordance with the economic reality. Either it is financial institutions or firms, entities using an IFRS accounting register will have to adopt this norm for the 2018 exercise. This deadline set by the IASB is, however, subject to the EU approval.
Let us note that the IASB divided this norm into 3 phases, reflecting its construction steps since 2009 rather than 3 distinct and independent subjects:
- Phase 1 – Classification and assessment
- Phase 2 – Depreciation
- Phase 3 – Hedge accounting (micro-hedge)
IFRS 9 can be applied in advance in its entirety starting from February 2015 depending on the final version availability. However, two prelim applications are also possible: the assessment of credit risk specific to the entity and all the norm except phase 3.
…. A deadline close enough to switch to project mode
Before the European Union approval, preparatory works can already be anticipated. Phase 1 implementation requires to do the inventory of the detained financial instruments with their characteristics and to define the detention / management objectives of each portfolio. Phase 2 requires the construction of a data history in order to assess the depreciation on an “expected loss” model, in accordance with the Basel regulation. Phase 3 softens the methods of the hedging relationship documentation and offers the possibility to elaborate new hedging strategies by extending the qualified elements area.
More broadly, comply with IFRS 9 will obviously require an in-depth diagnosis of the financial instruments portfolio and an analysis of the impacts on the organisation, the process and the IT. Many evolutions within the institutions will follow – significant or not depending on the portfolio size. Moreover, the transversal characteristic of this norm will demand the involvement of many departments in addition to accounting. In parallel, management opportunities are also possible thanks to phase 3 and its new hedging accounting methods. The IFRS 9 transition can also be the chance to simplify some accounting process and reportings.