Does your organisation prepare general purpose financial reports?

If so, your reports will need to be prepared in line with the new standard AASB 9: Financial Instruments for the first time.

This new standard provides guidance for the classification and measurement of financial assets, makes some minor amendments to the accounting for financial liabilities, prescribes new principles for measuring and recording impairment of financial assets and provides a new set rules for hedge accounting. This standard replaces AASB 139 Financial Instruments: Recognition and Measurement.

What is new with AASB 9?

AASB 9 applies to reporting periods beginning on or after 1 January 2018, and as such is applicable for years ending 31 December 2018 and 30 June 2019.

There are three main areas of change with AASB 9, which are:

1. Classification & measurement

Under the previous standard there were four classifications:

  1. Held to maturity
  2. Loans & receivables
  3. Available for sale
  4. Fair value through profit & loss

These have now been reduced to:

  1. Amortised cost
  2. Fair value (either through Other Comprehensive Income (OCI) or through P&L)

2. Impairment

The main change under the new standard is that now there must be immediate recognition of expected credit losses, including the use of forward-looking information. The new standard will therefore often result in the recognition of credit losses earlier than was the case under the previous standard.

3. Hedge accounting

There are three main changes to hedge accounting under AASB 9:

  1. Removal of the 80–125% hedge effectiveness rule
  2. Risk components of non-financial assets can be the hedged item
  3. More items now qualify for recognition as the hedged item, e.g. layers, grouped items, net positions.

What will be the impact?

For many non-complex organisations, the impact of AASB 9 will be minimal due to the types of financials instruments held (i.e. Cash, Trade Receivables). As a result, the extent of the impact will be generally be limited to updating disclosures in the financials and ensuring any doubtful debt provisions are recognised in line with the updated standard.

For organisations who hold more complex financial instruments (i.e. derivative products, hedges), the classification and measurement of these will need to be reassessed and disclosures updated to reflect the change to AASB 9.

On application of the standard, all entities will also need to decide how they will treat the impact in the financial statements either through restatement of comparatives or disclosing the impact in the notes to the financial report.

The challenges of implementing this standard for these instruments should not be underestimated.

What can be done to prepare?

Given AASB 9 impacts the current financial year end, now is the time for organisations to make a number of key decisions relating to how they will apply the new standard and to put those decisions into action.

Some key questions you should consider:

  • What types of financial instruments does your organisation hold and what categories do they fall under?
  • How will investments in equity instruments (i.e. Shares) be classified and gains/losses recognised?
  • What system changes and internal control changes will you require to meet the changes of AASB 9?
  • Do those charged with governance (such as boards and audit committees) and management understand which financial instruments this standard impact?

If you need assistance with the implementation of AASB 9: Financial Instruments, give us a call on 03 5221 6399 and speak with one of our Audit team who will be able to guide you in the right direction.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.