IFRS 9 – Expert support in accounting for financial institutions

IFRS 9, the accounting standard for financial institutions, has been mandatory since 1 January 2018. Although companies in the financial sector have now successfully mastered the challenges of implementation and transition, questions continue to arise in day-to-day practice, as well as the need to adapt to new initiatives, such as the recent supplementary standard on the classification of financial instruments dated 30 May 2024.

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IFRS 9 overview

IFRS 9 consists of the following three main areas:

Classification and measurement of financial instruments

Financial instruments are classified based on the company's business model and the contractual cash flows.
They are classified in one of the categories “at amortized cost (AC)”, “at fair value through other comprehensive income (FVOCI)” and “at fair value through profit or loss (FVTPL)”.
A financial instrument can only be measured at AC or FVOCI if the contractual cash flows consist solely of payments of principal and interest on the outstanding principal amount (SPPI criterion). For FVOCI measurement, however, this principle does not apply to equity instruments and in the context of hedge accounting.

Impairments

Impairments are recognized on the basis of expected credit loss (ECL). The ECL model generally uses three stages to assess credit risks and calculate impairments:

Stage 1: Financial instruments for which the credit risk has not increased significantly since initial recognition.
Stage 2: Financial instruments for which the credit risk has increased significantly since initial recognition but for which there is no objective evidence of impairment.
Stage 3: Financial instruments for which there is objective evidence of impairment (e.g. payment defaults).

Hedge Accounting

In hedge accounting, IFRS 9 aims to better align hedge accounting with a company's risk management and more accurately reflect the economic reality of hedging activities. For this purpose, the standard regulates the following issues:

Eligibility of underlying transactions (e.g. even aggregated positions) and hedging instruments (usually derivatives)
Application of hedge accounting models (fair value, cash flow, net investment)
How to carry out the evaluation of effectiveness
Documentation requirements
Revaluation and recalibration of hedging relationships
Disclosure requirements (qualitative, quantitative, specific)

Significant changes to IFRS 9

The amendments to the Supplementary Standard dated 30 May 2024 aim to clarify the accounting treatment of ESG characteristics in financial instruments and the derecognition of financial liabilities through electronic payment systems. The amendments shall be applied retrospectively for annual periods beginning on or after 1 January 2026.

Classification of ESG instruments

An important addition concerns the assessment of whether the contractual cash flows meet the SPPI criterion. Different components of the interest rate must be considered separately. For example, the amendment specifies that ESG instruments meet the SPPI criterion if interest rate changes adequately reflect credit risk. To clarify this, the supplementary standard provides several examples of financial assets whose contractual cash flows (do not) meet the SPPI criterion.

Other clarifications relate to the classification of non-recourse financial assets and contractually linked instruments

Electronic payment systems

The amendment allows financial liabilities settled through electronic payment systems to be derecognised before the settlement date under certain circumstances. This is possible if the payment order can no longer be cancelled, the company has no practical ability to access the payment funds and there is only an insignificant settlement risk.

WTS Advisory supports you in all aspects of IFRS 9

WTS Advisory supports you both in the implementation of current IFRS 9 adjustments and in the 'run‘, e.g. in the preparation of financial reports and disclosures in accordance with IFRS 9. In the area of impairment, we can provide you with our expertise in collecting, managing and analysing the data required to calculate expected credit losses. In the area of hedge accounting, we can advise you on documentation and accounting issues, as well as issues relating to the measurement of effectiveness. We can also help you prepare for external audits or provide specific answers to audit questions.

Get in touch with us: We are here to discuss your questions and the current challenges you are dealing with!

Further topics that might interest you

IFRS 18 in the financial sector

Hedge Accounting

Disclosure Report Requirement for Credit Institutions

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