For companies with a 31 December year end the date of initial application for IFRS 9 will be 1 January 2018.
The date of initial application is a key date in the IFRS 9 transition process because it is the only date on which certain transition choices can be made and certain actions performed. In addition, it is the date from which some assessments made about an entity’s financial instruments must be applied and these may be more challenging if left until later.
IFRS 9 requires retrospective application (if this is possible without the use of hindsight). Irrespective of whether prior periods are restated, there are extensive disclosures required in the first period of application, and for some of these, information at the date of initial application will be required.
If you have any instruments to which any of the following transition assessments or actions apply you should also be considering the disclosure requirements of IFRS 7 and information that will be easier to obtain near the date of initial application rather than when the financial statements are being prepared.
Debt modifications that may require restatement
The carrying amount of an existing liability may need to be restated on transition to IFRS 9. This will be the case if:
- the terms of the liability were modified in a previous accounting period;
- the liability prior to the modification was not derecognised; and
- the difference arising on the modification was added to the carrying amount of the original liability and thus spread forward.
Under IFRS 9 such differences are recognised immediately in profit or loss and hence the comparatives or carrying value at initial application will need to be adjusted where the amount is material. To make this assessment information relating to all past renegotiations of existing debt will need to be collated.
If you have existing liabilities where the terms have been renegotiated in a prior period without treating the renegotiated debt as a new instrument then the carrying amount may need to be restated.
Classification and measurement of financial assets and liabilities – important transition choices and assessments
Measurement of financial assets and the business model assessment
Under IFRS 9, the measurement of financial assets depends on the entity’s business model for each class of asset. At the date of initial application an assessment (based on the facts and circumstances that exist on that date) must be made as to whether the business model is one where the objective is to hold financial assets in order to collect contractual cash flows, which are solely payments of principal and interest. An entity may have different business models for different classes of financial assets.
Time value of money modifications
When assessing whether cash flows are solely payments of principal and interest (SPPI), consideration should be given to whether the return is linked to credit risk and time value of money. When the time value of money element of payments is modified, an entity is required to consider whether it still meets the definition of SPPI.
If it is impracticable for an entity to assess a modified time value of money element on the basis of the facts and circumstances that existed at the initial recognition of the financial asset, it may assess the contractual cashflows that existed at the initial recognition excluding the impact of the modified time value of money.
Financial assets with prepayment features
Financial assets with prepayment features may be measured at amortised cost when certain conditions are met which are set out in IFRS 9 B4.1.12(c). One of the conditions is that the fair value of the prepayment feature is insignificant on initial recognition.
If, at the initial application date it is impracticable to determine whether the fair value of the prepayment features was insignificant on initial recognition, the assessment of whether the contractual cash flows meet the SPPI test can be done based on the facts and circumstances that existed at the initial recognition of the asset without taking into account the exception for prepayment features in para B4.1.12.
Designating and/or revoking financial instrument designations
At the date of initial application an entity:
- must revoke the previous designation of a financial asset or liability as fair value through profit or loss (FVTPL) under IAS 39 if it does not meet the conditions for such designation in IFRS 9 set out in paragraph 4.1.5;
- may revoke the previous designation of a financial asset or liability as FVTPL under IAS 39 if it qualifies to be measured at amortised cost under IFRS 9;
- may designate a financial asset or liability as FVTPL if the conditions in IFRS 9 are met ie doing so eliminates or significantly reduces a measurement or recognition inconsistency (referred to as “accounting mismatch”); and
- may designate an investment in an equity instrument as fair value through other comprehensive income (FVOCI) if the conditions in IFRS 9 are met ie the equity instrument is not held for trading and is not contingent consideration of an acquirer in a business combination to which IFRS 3 applies.
These decisions should all be made based on facts and circumstances that exist at the date of initial application.
As derivatives embedded in financial asset host contracts will no longer be accounted for separately it will be necessary to obtain fair values at the date of initial application of instruments that were previously split and accounted for as a host contract at amortised cost and a derivative at fair value.
- An entity may choose to continue to apply the hedge accounting requirements of IAS 39 instead of the hedge accounting requirements of IFRS 9.
- In order to apply hedge accounting from the date of initial application, the hedge accounting criteria (of the relevant standard) must be met at the date of initial application.
- In order to apply hedge accounting under IFRS 9, the required hedge accounting documentation must be in place, this will constitute:
- amended documentation for existing hedging relationships under IAS 39 which will continue to qualify for hedge accounting under IFRS 9; and
- new documentation for relationships which did not qualify or were not designated as hedging relationships under IAS 39 but will qualify for hedge accounting under IFRS 9.
- Hedge ineffectiveness as a result of currency basis spread must be recognised under IFRS 9 but may be taken to other comprehensive income and recycled to profit and loss if an election is made at the date of initial application.
- There is an accounting policy choice that exists for cash flow hedges under IAS 39 which does not exist under IFRS 9. Under IAS 39 you can choose whether or not to adjust the cost of a non-financial item with the fair value movements that have accumulated in the cash flow hedge reserve on cessation of hedge accounting. In IFRS 9 that adjustment (called a basis adjustment) is required. Where an adjustment was not performed under IAS 39, a basis adjustment may be required at the date of initial application to the carrying value of the non-financial item for hedges that terminated prior to the date of initial application.
For further information, please speak to you usual RSM contact.