IFRS 9 Financial Instruments (AASB 9) was issued to replace IAS 39 (AASB 139) Discuss critically the shortcomings and criticisms of IAS 39 (AASB 139) which have given rise to IFRS 9 (AASB 9). How will the application of IFRS 9 (AASB 9) impact on the accounting for financial instruments in financial reports? Your discussion should be illustrated and informed by reference to two listed companies (ASX or other sources for the most recent years), that are either using IAS 39 (AASB 139) or that have decided to early adopt IFRS 9 (AASB 9).
The IASB currently is revising its accounting requirements for financial instruments. The objectives of the project include improving the decision-usefulness of financial statements for users by simplifying the classification and measurement requirements for financial instruments (NF6).
awareness of the shortcomings and criticisms of IAS 39 (AASB 139), IASB has issued a new financial instruments standard referred to as IFRS 9 Financial Instruments. This paper will, with scholarly thorough research, discuss about the matter of the IFRS 9 application and its impact on the accounting for financial instruments in financial reports. Two chosen companies will be exemplified to portrait a better picture regarding the impact of the replacement.
IAS 39 (AASB 139)
AASB 139 requires:
• financial assets and liabilities to be recognised in the balance sheet; • financial assets to be classified into one of four categories; financial Assets at Fair Value through Profit and Loss;
loans and Receivables; and
available-for-Sale Financial Assets.
• financial liabilities to be classified into one of two categories; financial Liabilities at Fair Value through Profit and Loss; and Other Financial Liabilities.
• Initial measurement of financial assets and liabilities at fair value;
• Financial assets and liabilities to be measured, subsequent to initial measurement, at either fair value or amortised cost depending on which class they are recognised in; • Increases or decreases in the value of financial assets and liabilities to be taken to the profit and loss or to equity depending on which class they are recognised in; and • Financial assets to undergo impairment testing where there is ‘objective evidence’ that the asset is impaired. (NF 2)
IFRS 9 (AASB 9)
IFRS 9 was first published in November 2009 in reaction to the financial crisis, but addressed only the classification and measurement of financial assets. The latest changes are in line with the IASB's phased approach to the completion of IFRS 9, under which chapters will be added to the existing Standard as and when other phases of the overall project are completed (work is currently being undertaken on impairment methodology and hedge accounting). When complete, IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. (5) Executive summary (6, first impression)
Shortcomings and criticisms of AASB 139
Complicated to comply
The introduction of AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) provides audit committees with an ideal opportunity to add transparency and integrity to the area of accounting for derivatives. However, failure to get this complicated area right will mean further risk in financial reporting. Experience in the US has found that four years after FAS 133, a similar standard to AASB 139, was introduced in the US, that companies are still suffering retrospective restatements of their numbers due to non-compliant hedge documentation. This can be both embarrassing and career limiting. The CFO and CEO of Fannie Mae (of the largest mortgage serving companies in the US) currently face legal prosecution over incorrect hedge documentation. (1) If ASIC follows the US lead it will inevitably inspect companies’ compliance with AASB 139. This may lead to newspaper headlines or worst, prosecution....
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