IASB Completes Important Steps in Reform of Financial Instruments Accounting

The International Accounting Standards Board (IASB) has announced the completion of a package of amendments to the accounting requirements for financial instruments.


The changes bring into effect a substantial overhaul of hedge accounting that will allow entities to better reflect  their risk management activities in the financial statements.


The amendments also allow the changes to address the so-called ‘own credit’ issue that were already included in IFRS 9 Financial Instruments to be applied in isolation without the need to change any other accounting for financial instruments; and remove the 1 January 2015 mandatory effective date of IFRS 9, to provide sufficient time for preparers of financial statements to make the transition to the new requirements.


Hedge accounting
The changes to hedge accounting and the associated disclosures were developed in response to concerns raised by preparers of financial statements about the difficulty of appropriately reflecting their risk management activities in the financial statements. The changes also address concerns raised by users of the financial statements about the difficulty of understanding hedge accounting.


The new model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk management activities in their financial statements. The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of particular interest to non-financial institutions. As a result of these changes, users of the financial statements will be provided with better information about risk management and about the effect of hedge accounting on the financial statements.


Own credit
As part of the amendments, the changes introduced also enable entities to change the accounting for liabilities that they have elected to measure at fair value, before applying any of the other requirements in IFRS 9. This change in accounting would mean that gains caused by a worsening in an entity’s own credit risk on such liabilities are no longer recognised in profit or loss. Today’s amendments will facilitate earlier application of this long-awaited improvement to financial reporting.


IFRS 9 effective date
Because the impairment phase of the IFRS 9 project has not yet been completed, the IASB decided that a mandatory date of 1 January 2015 would not allow sufficient time for entities to prepare to apply the new standard.


Accordingly, the IASB decided that a new date should be decided upon when the entire IFRS 9 project is closer to completion. The amendments made to IFRS 9 in November 2013 remove the mandatory effective date from IFRS 9. However, entities may still choose to apply IFRS 9 immediately.


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