History of IFRS 9

“A financial instrument is any contract that gives rise to financial asset of one entity and a financial liability or
an equity instrument of another entity.” Financial instrument was first governed by IAS 39 Financial
Instruments: Recognition and Measurement in year 2005. But users of financial statements had complaints
that IAS 39 is too complicated and confusing. IASB, in 2008, decided to change and improve the project
which resulted to IFRS 9 Financial Instruments. IFRS 9 had three phases: (1) Classification and measurement
(2) Impairment methodology (3) Hedge accounting. On the 24 th of July 2014, IFRS 9 Financial Instruments
was then completed and issued by IASB. The new standard was effective starting January 01, 2018 and IAS
39 is now superseded.

Recognition of financial instruments

Financial asset or financial liability is recognized in the statement of financial position. Financial instrument is
recognized when the entity is engaged in a contractual provision and focuses on the contract, not on the
future benefits. The financial asset is derecognize when the contractual rights to the cash flow from the
financial asset expire or when the entity transfer the asset or all the risk and rewards of ownership to
another party. The financial liability is derecognize when it is extinguished and it is when the obligation
specified in the contract is discharged (entity delivers cash out of financial asset), cancelled (when the entity
is legally release from its primary obligation to pay the creditor), or expired (due to passage of time).

Classification of financial instruments

The entity must classify its financial asset and/or financial liability. Classifying financial asset depends on the
business model test and contractual cash flow test. If the financial asset pass both the test, it must be
measured at amortized cost. If it fails in one of the test, it must be measured at fair value through other
comprehensive income. If it fails both the test, it is measured at fair value through profit and loss. There are
two classification for financial liability; (1) Measured at fair value through profit and loss (FVTPL), when the
financial liabilities are held for trading (2) Measured at fair value through other comprehensive income
(FVOCI), other than financial liabilities that are held for trading.

Impairment

When there is an impairment of financial asset, the entity recognized a loss allowance for expected credit
losses on financial assets at amortized cost and financial assets at FVOCI. There are two approaches in
recognizing and measuring the loss allowance namely; (1) General approach, and (2) Simplified approach.
The general approach is a three-stage model. The stage 1 asset, its loss allowance is measured at 12 months
expected credit loss. The stage 2 and 3 asset is measured at life-time expected credit loss. The simplified
approach, its loss allowance is measured only at life-time expected credit loss.

Hedge accounting

Hedge accounting is designating one or more hedging instruments so that their change in fair value is an
offset to the change in fair value or cash flows of a hedged item. Designating the hedging instrument to its
hedged item will result to recognizing its gain or loss in the same accounting period.