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With IFRS 9, these classi!cations have following the change. The entity cannot IFRS 9 gone. After initial recognition, an entity restate any previously recognised gains, The nancial reporting wasn’t the only recent shake-up must now measure !nancial at losses, or . that rocked the world. There amortised cost, through other 4. Impairment methodology is also the implementation of IFRS 9 comprehensive income (FVTOCI) or fair IFRS 9 introduces an ‘expected loss’ Financial Instruments to contemplate. value through pro!t or loss (FVTPL). screws are tightening: approach to account for credit losses. There’s a common belief that IFRS The classi!cation of !nancial assets will This requires entities to use forward- 9 is applicable only to large !nancial depend on the entity’s for looking information for earlier recognition institutions. But that’s not true. Not only managing these, and on the contractual of credit losses. does IFRS 9 also affect non-!nancial "ow characteristics of the !nancial IFRS9 & IFRS15 We can blame the !nancial crisis for this entities, it can have a signi!cant impact . change, as it was thought the IAS 39 on !nancial reporting. IFRS 9, the standard which applies to periods beginning on or after 1 January 2018, affects not 2. Embedded derivatives impairment approach contributed to the IFRS 9 replaces IAS 39 Financial Where a hybrid instrument contains a delay in credit losses recognition. only large nancial institutions but non-nancial entities too. IFRS 15, which deals with how to Instruments – Recognition and host contract which is an asset within the Expected credit losses are recognised in report on revenue arising from customer contracts, focuses on timing and how to cope with Measurement for periods beginning on or scope of IFRS 9, the embedded three stages: variables. Nicholas Joel from our Business Services division helps you to navigate the rules. after 1 January 2018. The implementation will not be separated from the host of the new standard was intended to contract. This means the classi!cation 1. Performing – a loss allowance equal eradicate the inconsistencies of IAS 39 rules in IFRS 9 will apply to the hybrid to 12 months’ expected credit losses relating to how entities manage risk and instrument as a whole. is recognised with interest income the timing of recognition of the credit calculated on the gross carrying Under IAS 39 the embedded derivative losses on receivables. amount of the asset; and the host contract were separated if IFRS 9 addresses accounting for !nancial they were not ‘closely related’. 2. Underperforming – a loss allowance instruments and deals with three main equal to the entire expected credit The entity also had an option to classify elements: classi!cation and measurement losses, with interest income still the hybrid instrument at FVTPL in its of !nancial instruments; impairment of calculated on the gross carrying entirety, subject to certain conditions. !nancial assets; and . amount; This option is still available under IFRS Where an entity holds investments 9, where the host asset is not within the 3. Non-performing - a loss allowance or !nancial assets at amortised cost, scope of IFRS 9. equal to the entire expected credit there are likely to be consequences from losses, with interest income calculated 3. Reclassication of nancial assets the adoption of IFRS9. These might on the net carrying amount (i.e. after and liabilities include: loss allowance). IFRS 9 allows an entity to reclassify its 1. Immediate recognition of credit losses. !nancial assets if it changes its business Under IAS 39, any loss allowance was Entities must recognise a 12-month model for managing those assets. recognised at the non-performing stage. expected credit loss on acquisition of a But, for this to apply, these changes How will the changes affect you? !nancial asset. must be signi!cant to the entity’s As I said at the start, the impact of IFRS 2. Movement in fair value of investments. operations, as well as 9 on !nancial reporting is signi!cant. This It’s no longer possible to carry equity demonstrable to external applies particularly to the expected loss investments at cost. Instead they must parties. As a result, changes in model. Management must continuously be measured at fair value, with any gain the classi!cation of !nancial monitor the effect of both historical or loss recorded in pro!t or loss as they assets will be unusual. performance and potential future arise. If an entity does reclassify its economic factors. What are they key changes? !nancial assets following a change in the business Overall, the changes with IFRS 9 relate to: model, it must apply 1. Classication and measurement of the reclassi!cation nancial assets and liabilities prospectively from the To measure a !nancial asset after initial !rst day of the !rst recognition, IAS 39 classi!ed !nancial reporting period assets under four categories: !nancial assets at fair value through pro!t or loss; held-to-maturity investments; loans and receivables; and available-for-sale !nancial assets.

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IFRS 15 also identi!es conditions under Entities should apply the chosen method IFRS 15 which a contract modi!cation must be consistently throughout the life of each Like IFRS 9, this standard is also effective accounted for as a separate contract. contract. for reporting periods beginning on or after Where these conditions do not apply, So how could, for example, a mining 1 January 2018. So here are some timely the accounting method depends on the company deal with the ‘high probability tips on the more confusing elements. nature of the modi!cation. of no signi!cant reversals’ rule, given IFRS 15 (Revenue from Contracts with Other implications commodity price swings? IFRS 15 then Customers) sets out the principles for requires an estimate of how much of the So there may be signi!cant changes to reporting the nature, amount, timing and consideration would likely be immune an entity’s criteria. uncertainty of revenue and cash "ows from such a reversal. This tricky area is But along with !nancial reporting arising from contracts with customers and seen as a subjective estimate, so involves requirements, entities must also consider replaces IAS 18 Revenue. careful consideration by management. wider implications, such as: Crucially, the IFRS 15 standard does not How we can help • Breaches of loan covenants change the total amount of revenue an PKF Littlejohn has an experienced team entity must recognise, but just the timing • Availability of reserves for dividend with an in-depth knowledge of IFRS 15 of recognition. distribution who can offer advice. It’s true that the new standard has the • Changes to key performance biggest impact on entities in industries indicators. with long-term contracts. But it will also Variable consideration signi!cantly affect those where bundled contracts are common. So it is vital that One common conundrum is how to all entities carefully analyse these changes recognise revenue when there is a and make sure they are appropriately variable consideration element. re"ected in their !nancial reporting. For example, revenue contracts in the Revenue recognition model mining sector can include signi!cant variables that are only !nalised several IFRS 15 replaced the broad principles of months after shipment to the customer. revenue recognition under IAS 18 with a New speci!c requirements for such cases new core principle where an entity must mean that amounts are only included recognise revenue at the time it transfers in the transaction price if it is ‘highly goods or services to a customer, based probable’ that the amount would not be on the amount it expects to receive from subject to signi!cant future reversals. that customer. The goods or services are deemed to be transferred when the For variable considerations, then, the customer has control of them. entity must estimate the sum to which it will be entitled under the contract for the The new standard sets out a ‘!ve-step’ transfer of promised goods or services. approach that entities must follow when IFRS 15 allows one of the following two determining how, and when, to recognise methods to calculate the estimate: revenue. 1. Expected value – the sum of the Unlike IAS 18, IFRS 15 requires entities probability-weighted amounts to account for two or more contracts entered into at or near the same time with 2. Most likely amount – the single amount Nicholas Joel the same customer as a single contract - management believe they will receive subject to certain criteria. Manager – Business Services t: +44 (0)20 7516 2372 e: [email protected]

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