IAS 39 Financial Instruments, comprising of recognition and Measurement is an accounting standard used internationally for financial instruments. It was released by International Accounting Standards Board (IASB). Its main purpose is to outline requirements that were needed for the recognition and measuring of financial; assets, liabilities and contracts that are used in the buying or selling of items that are non-financial. The instruments become recognized when the entity becomes a party. IAS 39 came into use on December 2003 and applied to the annual periods that begun on and after 1st January 2005.
It would be swapped and interchanged by the IFRS 9 Financial Instruments for the annual periods that begin either before or after 1st January 2018. Loan commitments are not within the scope of the IAS 39 if they could not in any way be settled net in any financial instruments. The issuer of a commitment is always required to issue a commitment before they issue a loan at a below-market interest rate. It was necessary to recognize the commitment at a fair value.IFRS 9 What is it about and what does it do?
IFRS 9 is a financial instrument that was issued on 24th July 2014 by IASB as a replacement of IAS 39 and its financial instruments. The IFRS 9 standard includes all the requirements that were needed for recognition and measurement, derecognition, impairment and general hedge accounting. The new version, IFRS 9, was issued on 2014 and replaces all the previous versions. It was mandatory to be used that begin or are after 1st January 2018. Early adoption has however been allowed before the stipulated time that it is supposed to be adopted. The IFRS 9 has been built into a single, logical measurement and classification approach done on financial assets, which reflect the business model which they are managed through their cash flow characteristics (Bellandi, 110-115).
The IFRS addresses the ‘own credit' issue. That allowed banks and other book gains via loss or profit, which is as a result of the value of their debt falling. That happening can be attributed to a decrease in the worthiness in credit when they had elected to measure that debt at fair value. It also includes an improved hedge model in accounting that provides a better link between the risks in management and its accounting treatment. That marked it better than the previous IAS 39 that was used to fulfill the same purposes. It led to the financial crisis and, therefore, the model was created so that it could solve the issues that could not be settled with the other model.
It is seen to be more efficient, especially in the EU, to replace the IAS 39. The method has more Added fields that have been tested and proven that they can be effective. That was determined after series of development stages. The stages were systematically undertaken by The International Accounting Standards Board (IASB). It was completed on July 2014, and it can apply before the year 2018. It will, however, be mandatory to apply after 1st January 2018 which is the year that it comes to full effect. All steps have been completed in the model with all phases accomplished and approved. It was expected to be better and with fewer liabilities like it had been seen in the previous models (Mehta, Yass, Alkafaji, Ghosh, and Nandakumar, 121-126).
The IFRS 9 has been built on a "forward-looking" model that will allow the recognition of losses on loans. It will also be applicable to all the financial instruments available and subject impairment. That had been lacking from the previous models that have been significantly adopted in the recent past. The model is meant to be more comprehensive and cover all these loopholes especially in the issuing of loans. The previous model lacked the required credibility needed in counting the losses.
Consequently, IFRS 9 has been made to be more superior and can contain all of these which are very essential. It was also formed to allow the handling of the issue of own credit. Banks and other book, gains either through profit or loss which results from the value that they have. The element of fair value is always including ensuring that all the people benefit from the loans issued.
The model also addresses risk management. Risk management has been an issue that needs to be addressed. Risk management can ensure that the issuer and debt receiver can view all the risks that are available and that can affect them. Risks could be imperative factor that determines if the parties made the financial deals that lie before them. Once the risks have been adequately assessed, they can be able to assist in determining if certain arrangements can be done, financially. The deals can then be finalized by examining the transactions that are to be made. This model is better than the IAS 39 which did not offer these services. That had made it to be a better model that needs to be used so that the financial crises that were experienced can be deflected at all costs (Gupta, 93-97).How IFRS 9 came to replace and simplify IAS 39
IAS 39 was very complicated and had too many exceptions, derogations, and inconsistencies. Many companies struggled a lot and paid consultants a lot of money so that they could be able to apply the method correctly. That showed the need for a new model that was going to be easier and could be implemented quickly to a lot of struggles. The IASB, therefore, rewrote and sought a method to use above IAS 39. It was not easy to replace the method though, and it took a substantially long time to rewrite the complicated way. Through the rewriting of the plan, it took a lot of time to identify the complications that were being faced in the IAS 39. Consultations and other necessary steps were taken with the aim of ensuring that the next model was going to be more efficient (Bellandi, 113-117).
IFRS 9 has been set to replace IAS 39 entirely in the year 2018 on 1st January. Companies have been given the chance to try the method before its due date to ensure that it is what they have been keenly looking. It was set to abridge the complications that were evident in the IAS 39. One of the targeted areas that are set to be simplified is that of loans. There have been a lot of complications that have been surrounding this area for the past but IFRS 9 will clarify this area through the settings that are available. The issuer would profit whether there has been a loss or profit on the issued loans (Gupta, 85-89). They are simpler to understand so that the companies will be able to give loans b first estimating the benefits that they are set to gain from them. Risk management is better in this model making it much easier to determine what is expected from the loans that are given out. How IFRS 9 started in 2009 and the 3 phases 1. Classification. 2. Investment in equity and debt securities. 3. How to recognize and measure them
IFRS 9 started in the year 2009 after there were some complications that led to the financial crisis in the same year. That was due to the use of IAS 39 which was complicated, and many companies did not understand. They had to hire consultants so that they could direct them to getting the interpretation needed for the model. The crisis was the primary reason that the board sort to adopt a new model that will be user-friendly. It was hypothetical to address the problems that were in the IAS 39 and therefore prompted for the rewriting of the new model. There were some notable changes that were made so that the model will be better than just rewriting it. It was later announced and released in the year 2014 on July. It was developed through phases that addressed different problems that had to be solved. These were the highly ranked reasons that led to the need for a new model (Gupta, 87-92).
For Phase one, IASB released the first portion of IFRS in the year 2009. It covered the classification and the measuring of financial assets. This move was intended to take the place of the asset classification and measurement section that is in the IAS 39. In the second, another portion was released in the year 2010 regarding the same model. It covered the issue of classification and the measuring of financial liabilities. It also addressed the aspects that were needed for the applying of the "fair value option". Investment in equity and debt security was another aspect that was highly considered in the second face (Mehta, et all, 118-121).There were more precise rules that were set and more risks managed on the issuing of loans.
An illustration is that the issuer benefits from the loan that they give whether it is a loss or profit. There is a se guarantee that they receive to show that they can be able to earn from the same loan. They can both be recognized and measured by the net worth of the issuer and the receiver. They are first assessed, and their capabilities proven before they can be able to go ahead with their transactions. That made it easier to evaluate and give out loans in a manner that is more natural and beneficial. The debt can always be assessed, and the liabilities checked to ensure that the issuer and the receiver both benefit positively from this. That was not available in the other model.Pros and cons of IFRS 9
The main advantage of the IFRS model is that banks will be able to provision for debts that have gone bad earlier than they had been stipulated. That would see an increase of the loan provisions of bank balance sheets by 5%. This will enable banks to set aside more money so that they can finance for future losses. That was not available in all the other models, but it was a great advantage to all loan issuers. They can assess loans that have gone bad way before the stipulated time and hence be able to avoid the loss (Mehta, et all, 118-121).
Circumventing such losses will let the banks prepare for any future losses that they might have incurred. Banks will, therefore, have fewer risks of losing their money to losses without having a way in which they can recover the lost money. Banks used to lose a lot of money on loans that had gone bad, but they were not able to provision them. They suffered the loss and when it happened many times it proved to be costly. They could, however, avoid the losses that they incurred in the previous years and were able to earn more profits. In the other model, lack of ways that loans could go bad could be provisioned, lead to the financial crisis that prompted the formation of a new model (Bellandi, 109-116).
That was a significant improvement over the earlier ‘discredited model' IAS 39. The model could not give the banks the authority to provision for loans that would have gone bad. It would prompt the banks to wait and count their losses unlike in the new model. It was a major disadvantage, and a new method is suitable for banks to attract investors. They will be more confident in investing due to the knowledge that their money was guaranteed. That was not the same as in the previous model. It scared away investors and left the banks dealing with hefty losses that had been caused due to the weaknesses in the model. When banks lacked the investors then, they were not able to run their operations smoothly as required.
They were not able to give loans to their customers as they also lost a lot of money on the loans. Lack of investors and having an enormous loss made it very difficult for banks to run their operations in the IAS 39 model. The new model has addressed this and shows a lot of promise in the same sectors (Mehta, et all, 120-126).
Among the most noted disadvantages of the model is that there is a lot of manipulation. The model allows companies to utilize the methods that that they feel as appropriate. That could be a loophole that can lead to the profit or revenue manipulation by the companies. Businesses can hide the financial problems that they have in their enterprises in order to attract investors. An example is when the method inventory valuation is changed hence bringing more income into the immediate' year profit and loss statement.
Deprived of the knowledge of the loss and profits that the companies gain, it will be almost entirely hard to find a solution to improving markets. Companies will have hid and manipulated the necessary information that could have been exploited to help in finding these solutions (Bellandi, 109-114). That affected all the businesses altogether.
The other disadvantage is that small businesses do not have resources that are disposable in the implementation, changing and training staff. It will result in the small companies hiring consultants so that they can help in making the necessary modifications that the system requires. They will have to bear more financial burdens than the larger companies do. The large firms might have all the needed resources for training their staff or hiring consultants.
That was the power that small enterprises do not possess. Small businesses are equally important as the large ones as they help in bringing in the required profits that help the country in achieving its goals. Some small businesses might also lead to closure because of their inability to carry an enormous financial burden (Mehta, et all, 114-117). The changeover alone is very expensive, and the long run might also cost a significant amount of money from the small companies.Conclusion
IAS 39 is an accounting standard used internationally for financial instruments. It was released by International Accounting Standards Board (IASB). IFRS 9, on the other hand, is a financial instrument that was issued on 24th July 2014 by IASB as a replacement of IAS 39 Financial Instruments: Recognition and Measurement. It was seen as a more efficient model than IAS 39 in adopting how business needs to be run. The scheme offers advantages over areas that have for a long time been a big barrier to the development of individual entities like loan issuers and small companies. The model was set to start to be used in the year 2018 being mandatory. It can however be adopted earlier than that.
IFRS 9 was begun in 2009 after there were some complications that led to the financial crisis. That was due to the use of IAS 39 which was complicated, and many companies did not understand. They had to hire consultants so that they could direct them to getting the interpretation needed for the model. The crisis was the primary reason that the board sort to adopt a new model that will be user-friendly. It was thought to address the problems that were in the IAS 39 and therefore prompted for the rewriting of the new model. There were some changes that were made so that the model will be better than just rewriting it. It was later announced and released in the year 2014 on July.
Bellandi, Francesco. The Handbook to Ifrs Transition and to Ifrs U.s. Gaap Dual Reporting: Interpretation, Implementation and Application to Grey Areas. Chichester, West Sussex: John Wiley, 2012. Print.
Gupta, Pooja. Financial Instruments Standards: A Guide on Ias 32, Ias 39 and Ifrs 7. New Delhi: Tata McGraw-Hill, 2008. Print.
Mehta, Kalpesh J, Yass A. Alkafaji, T P. Ghosh, and Nandakumar Ankarath. Understanding Ifrs Fundamentals: International Financial Reporting Standards. Hoboken, N.J: Wiley, 2013. Internet resources.