Getting ready for IFRS 9
With less than 5 months to go before IFRS 9 becomes effective, many companies have not yet kicked off an IFRS 9 implementation project. Although the biggest impact would be on banks and insurers, most of us incorrectly think that IFRS 9 would only impact these companies or companies in the financial services industry. Let us take a closer look at the potential impact for all corporate companies and the actions that should be considered.
If you have any investments on your Statement of Financial Position, this is the first line item that will be impacted.
- IFRS 9 introduces significant changes in the classification of investments. Whether you classify investments as financial assets measured at amortised cost, fair value through profit or loss (‘FVTPL’) or fair value through other comprehensive income (‘FVOCI’) will depend on each investment’s contractual cash flows and how the entity manages groups of investments.
- All investments in equity instruments including unquoted shares will be classified as FVTPL subject to an option to present at FVOCI if the investment is not held for trading. This means that investments in subsidiary companies need to be carried at fair value in the separate financial statements. The cost exemption in IAS39 for unlisted equity investments is no longer available.
- Impairment losses must be recognised for all investments in debt securities not classified as FVTPL. These are calculated using probability weighted estimates of expected credit losses (ECLs) based on historical experience and forward looking information. You may apply 12-month ECLs for assets that have not suffered a significant increase in credit risk, but should apply lifetime ECLs for those that have.
The second line item that will be impacted is Trade Receivables.
- The new classification model must be applied to all receivables. Trade receivables will generally meet the criteria to be held at amortised cost, but you should watch out for the impact of more complex contractual terms. Bad debt provisions are likely to increase, with large increases expected in the first year of application. You will also have to assess whether the credit advanced to the customer contains a significant financing component. Impairment of trade receivables and contract assets without a significant financing component will be based on lifetime ECLs. For trade receivables or contract assets with a significant financing component, and lease receivables, you may choose to either apply the general approach or recognise lifetime ECLs at all times.
If your company applies hedge accounting you will also be impacted.
- IFRS 9 allows you to switch to a new hedge accounting model that is aligned more closely with risk management. Under the new model, more risk management strategies are likely to qualify for hedge accounting. The new model is more principles-based: the bright-line effectiveness test under IAS 39 falls away and a more judgemental approach is required in the assessment of qualifying, rebalancing and discontinuing hedge accounting.
To kick start your IFRS 9 implementation, management will have to review all contract terms. Business models for managing investments should be assessed and documented. Credit risk management systems should be assessed to ensure that these can track changes in credit risk since initial recognition. Credit risk management processes and data availability should be reviewed. The impairment methodology will have to be redesigned to comply with IFRS 9. Significant judgments will be involved and should be documented. It is important to collect data now in order to document what would constitute a significant increase in credit risk. If not, IFRS 9 has a rebuttable presumption that an instrument that is 30 days past due has experienced a significant increase in credit risk.
There are also additional requirements especially in terms of disclosures which should not be underestimated. Time is running out and management need to ensure that implementation projects are designed and on schedule. Where applicable, audit committees need to be actively involved in monitoring progress.
Disclaimer: The content of this article is subject to the disclaimer which can be found at http://www.kpmg.com/na. For more information on IFRS 9, please contact Janita Breedt (email@example.com) at KPMG Namibia in Windhoek.