March 17, 2022 17:06 
Opinion article by Corina Dimitriu, Audit & Assurance Partner, Deloitte Romania, and Krzysztof Supera, CE IFRS Technical Desk Senior Manager, Audit & Assurance, Deloitte Poland
Four years have passed since the initial application date of the International Financial Reporting Standards (IFRS) 9 Financial Instruments and for a year now, the International Accounting Standards Board (IASB) has been carrying out work related to the post-implementation review of this standard. It is an opportunity to reflect on whether IFRS 9 has met the expectations of market participants. On the other hand, the 2021 reporting is a good time for IFRS preparers to review their accounting policies and disclosures in their financial statements related to financial instruments. The purpose of such a review should be identification of possible remaining elements of the outdated International Accounting Standards (IAS) 39 and to plan appropriate corrections if necessary. Somehow unexpectedly, one can still find traces of the predecessor of IFRS 9 in the published financial statements.
Categories of financial instruments
Accounting policies sometimes include outdated categories of financial instruments, such as loans and receivables, available-for-sale assets or held-to-maturity assets. It also happens that the categories on the face of statement of financial position are in line with IFRS 9, while other parts of the financial statements still refer to the categories of IAS 39, e.g., in the note on fair value or in the notes to individual items of the statement of comprehensive income. It is worth noting that the term “loans and receivables” can still be observed. It is explained by some entities that it is not a category of IAS 39, but a class of financial instruments that entities are allowed to define themselves. Such an approach may be justified in some cases, but it is hard to defend when the entity does not originate any loans – it is simply a remaining IAS 39 policy, which requires amendment.
Equity investments
IFRS 9 introduced the requirement of measuring equity investments at fair value. In the past, as per IAS 39, it was allowed to measure these investments at cost. There is no such an exemption for unquoted equities in IFRS 9 anymore. Contrary to the requirement of IFRS 9, many entities still do not measure their equity instruments at fair value. In some cases, the entities assume that the cost of acquisition is an adequate estimate of fair value. Such a possibility is allowed by IFRS 9, but to a limited extent and should be considered as an exception, not as an adopted approach to valuation of equity investments. Attention should be paid to unquoted equity instruments that were acquired long time ago. Right after their purchase, it could be assumed that the transaction price is an approximation of the fair value. However, in the subsequent years, this value ceases to be representative because financial results and market circumstances change (e.g., due to COVID-19 pandemic, changes in energy prices or business expansion of the issuer). Therefore, there is a risk that the presented carrying amounts are outdated and that the financial results do not reflect changes in the fair value of unquoted equity instruments.
Expected credit losses
In accordance with IFRS 9, impairment of financial assets (and other credit exposures in the scope of IFRS 9) is recognized based on the expected loss model. This means that financial assets measured at amortized cost, debt assets measured at fair value through other comprehensive income, as well as originated financial guarantee contracts, loan commitments, contractual assets and lease receivables shall be subject to recognition of respective loss allowance or provision. Consequently, the above-mentioned exposures are not subject to impairment tests that would determine whether the impairment incurred or not. It should be therefore ensured that the disclosures do not refer to the concept of impairment testing, because expected credit losses are recognized over the entire life of a given credit exposure, and not only after the occurrence of a loss event. Moreover, accounting policies sometimes address reversals of impairment losses in line with outdated IAS 39 instead of referring to expected credit loss model and to migrations between stages.
In the case of corporate entities, expected credit losses for trade receivables are often calculated with use of the provision matrix, which is based on historical data on the repayments and overdue status. Disclosed loss rates per past due period sometimes indicate that the expected loss model was not fully implemented. For example, if the loss rate for less than 90 days past due is 1%, for 90-180 days it is exactly 50%, and for over 180 days it is exactly 100%, one can have the impression that this approach is not anyhow different from a conservative or prudent model that was applied over the years under IAS 39 requirements. This impression can be often confirmed by the financial statements published by the entity before 2018 with the same approach to impairment of trade receivables.
Additionally, it is worth paying attention to the changes that were introduced to IFRS 7 Financial instruments: disclosures. Despite adding new requirements, the IASB removed the disclosure requirement for financial assets that are past due but not impaired. This change is a direct result of a fundamental change regarding recognition of credit losses. The disclosures corresponding to the deleted paragraph of IFRS 7 should be removed from the notes to the financial statements as they are outdated.
If the remaining traces of IAS 39 relate to the narrative layer only, the required improvement comes down to careful reading of the entire financial statement and updating it accordingly. A much bigger challenge is faced by entities where outdated disclosures result from certain incompliances with IFRS 9. These deficiencies may result, among others, from the simplifications, which were needed because of late implementation of IFRS 9. It should be underlined that the simplifications applied upon the first-time application of IFRS 9 may have lost their justification over the years.
IFRS 9 still described as a “new standard”
Some financial statements are still referring to IFRS 9 as to a new standard. This may result from the descriptions prepared in the first year of application of this standard. Also, the descriptions of the “new” impairment model can be found. Sometimes the disclosures refer to IFRS 9, while in other areas there are no similar references (e.g., to IAS 2 or IAS 19). It is most often a rollforward of the information disclosed in financial statements for 2018, which were prepared in accordance with IFRS 9 but with comparatives based on IAS 39, in accordance with the allowed possibility of not restating the comparatives.
IFRS 9 application – a process, not a one-time effort
In the case of some financial statements, it seems that the application of IFRS 9 was a one-time effort only. It was carried out by the entity either on its own or with the support of external entities, but it did not translate into a change in the approach to financial instruments. For the purpose of transition from incurred loss model to expected credit loss model, historical data were analysed, the loss rates were determined, and since then the obtained results have not been updated. Meanwhile, the credit risk for trade receivables may have changed significantly, not only due to pandemic, but also due to changes in the structure of counterparties resulting from entering new markets (or, on the contrary - withdrawal from certain geographic areas). While maintaining constant loss rates over a one or two-year horizon may be appropriate, quantitative data calculated on the basis of performance for an observation period ending four years ago (e.g. 2015-2017) should be reviewed and updated.
Conclusion
There are various reasons why IAS 39 can be still observed in the financial statements. It may result from missed update of descriptions in the notes to the financial instruments, while the reported financial data are compliant with the requirements of IFRS 9. More problematic is however the incompliance with certain requirements of IFRS 9. If there are any areas in which IFRS 9 has not been fully applied, the respective changes should be planned immediately. In case of material misstatements, it may be necessary to correct opening balance. It is worth resolving any open issues before publishing the annual report for the financial year 2021. If the traces of IAS 39 relate to narratives only, it is advised to update the template for the financial statements as soon as possible.
