Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

A BRIEF SUMMARY

IFRS 9: Financial Instruments

Scope

IFRS 9 applies to ALL financial instruments, with the exception of financial instruments which are
dealt with in their own standards.
Popular opinion has held that the current IAS 39 dealing with financial instruments is too complex
for most companies to apply. A refreshed standard was required that would align more closely with
the models adopted by businesses in their day-to-day operations.
IFRS 9 has been developed with a view to:
1. Simplifying the classification and measurement of financial instruments;
2. Updating the treatment of impairment of financial instruments, by adopting a forwardlooking approach;
3. Substantially overhauling hedge accounting (this is viewed as a specialist area, and as such
will not be dealt with as part of this brief summary)

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

Page 1

Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Classification of Financial Assets

Default classification

FAIR VALUE
THROUGH PROFIT
AND LOSS

FAIR VALUE
THROUGH OTHER
COMPREHENSIVE
INCOME

AMORTISED COST

(the only exceptions are investments

in equity instruments that are
irrevocably elected at inception to be
at Fair Value Through Other
Comprehensive Income the
gains/losses from these instruments
will NOT be recycled from Other
Comprehensive Income to Profit &
Loss upon disposal)

Classification into one of

these categories is companyspecific, based on the:
1) Business model of the
company; and
2) Cashflow characteristics
of the instrument
(however, you may still irrevocably
designate a financial asset as being
carried at Fair Value Through Profit or
Loss in certain circumstances)

IRREVOCABLE = there can be no prospect of changing the classification at

a later date (ie your decision is final)

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

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Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

When considering the classification of financial assets into either the Fair Value Through Other
Comprehensive Income or Amortised Cost categories, one needs to take into cognisance the
business model of the company.

BUSINESS MODEL

how a business normally operates and

how it manages its financial assets in
general (ie the day-to-day business
approach)
Based on what the business is currently
actually doing, and NOT based on the
future intentions regarding a specific
financial asset
this is not something that is easily or
regularly changed, and would only be
amended through majority decision at
the highest level of the corporate
governance structure

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

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Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Classification of Financial Liabilities

Default classification
Exceptions:

AMORTISED COST

1) When Fair Value Through Profit &

Loss is required, including
derivatives
2) Financial liabilities that arise when
a financial asset doesnt qualify for
derecognition
3) Commitments to provide a loan at
below market-related interest rates
4) Financial guarantee contracts
5) Contingent consideration in terms
of IFRS 3: Business Combinations

You may irrevocably designate a

financial liability to this category if:

FAIR VALUE
THROUGH PROFIT
AND LOSS

1) It eliminates or reduces accounting

mismatches
2) The management and performance
measurement of a group of
financial liabilities is on a fair value
basis

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

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Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Measurement of financial instruments

INITIAL MEASUREMENT
(ALL FINANCIAL
INSTRUMENTS)

At fair value

SUBSEQUENT
MEASUREMENT
(IF CARRIED AT
AMORTISED COST)

SUBSEQUENT
MEASUREMENT
(IF CARRIED AT FAIR
VALUE)

Using the effective interest-rate method (ie

at amortised cost) less impairments

At fair value, with NO exception for

unlisted equity instruments

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

Page 5

Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Reclassification

An entity may only reclassify financial assets when its business model has changed. This would
indicate a fundamental change in the management and direction of the business, which would
trigger the potential need to reclassify instruments under its control.
All reclassifications are done prospectively from the beginning of the following accounting period
after the change in business model. No reclassifications can be effected during the period.

Impairment

In impairment is, at its core, the derecognition of that portion of an asset that no longer meets
the asset definition, due to the fact that the expectation of future economic benefits has
changed.

A more conservative approach has been adopted in IFRS 9 in the assessment of impairment of
financial instruments.
The implementation of a new Expected Loss Model results in the use of historic, current and
forecast information to determine loss allowances.

Instead of looking at historic performance to assess what has been lost

during the past year, the focus now rests on what losses are expected to
occur going FORWARD.

Impairments are to be recognised on Day 1, taking into account the expectation of future economic
losses.

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

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Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Can move between stages, depending on the change in credit quality

The Impairment Model is as follows:

Instrument is
performing, and
not impaired on
initial
recognition

Determine an
expected loss
over the next 12
months and
raise a provision
for impairment

Interest revenue
is recognised on
the gross
carrying amount

Stage 2:
Financial Asset
is underperforming

Credit quality
has significantly
deteriorated,
but instrument
is not impaired

Determine an
expected loss
over the lifetime
of the
instrument and
raise a provision
for impairment

Interest revenue
is recognised on
the gross
carrying amount

Stage 3:
Financial Asset
is nonperforming

The instrument
has been
specifically
identified as
being impaired

Determine an
expected loss
over the lifetime
of the
instrument and
impair the asset
directly

Interest revenue
is recognised on
the net
(amortised)
carrying amount

Stage 1:
Financial Asset
is performing
(return is in line
with risk)

It is anticipated that the implementation of the above model will be onerous for entities operating in
the financial services sector, where numerous financial assets which are exposed to fluctuations are
under administration.
The majority of entities within other sectors will primarily be concerned with the determination of
expected loss allowances on trade receivables. To facilitate this, a simplified model is applicable to
the determination of credit allowances on trade receivables.

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

Page 7

Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Determining credit losses on trade receivables:

The simplified model may only be applied to trade receivables, ie receivables which arise from
revenue transactions and do not have a significant financing element.

Terms of repayment must be under 12 months to qualify for this

impairment model!
An entity may develop a provision matrix which is applied to its age analysis. Under this model, it is
assumed that all trade receivables are in Stage 2, thus an estimate of expected lifetime losses is
required.
Should individual receivables bear evidence of being impaired, they may be extracted and treated as
Stage 3 financial instruments.

An example of such a provision matrix at reporting date is as follows:

Expected loss
rate

Current

1 30 days
past due

31 60 days
past due

61 90 days
past due

90+ days past

due

0.2%

2.5%

7.5%

9.5%

12%

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

Page 8

Address:

Phoenix Accounting Solutions

Chartered Accountants (SA)

Contact No.

Practice Number 30680497

4 Edmund Road
Constantia Kloof
Florida
1709
079 878 5903
072 477 2945

www.phoenixaccounting.co.za

Disclosures

Extensive impairment disclosures are required.

Quantitative disclosures:

Reconciliation of opening loss allowance to closing loss allowance, showing key drivers of
change
Reconciliation of opening gross carrying amounts to closing gross carrying amounts, showing
key drivers of changes
Gross carrying amounts by credit risk grade
Write offs, recoveries and modifications

Qualitative disclosures:

Inputs, assumptions and estimation techniques for estimating expected credit losses
Inputs, assumptions and estimation techniques to determine significant increases in credit
risk and default
Inputs, assumptions and techniques to determine credit-impaired assets
Write-off policies, modification policies and collateral

Transition

This standard is applicable for years beginning on or after 1 January 2018.

Entities are allowed to early adopt the IFRS 9 standard.
This standard is to be applied retrospectively. Restatement of comparatives is not required, but
entities are permitted to restate comparatives if they can do so without the use of hindsight.
If an entity does not restate comparatives, it should adjust the opening balance of its retained
earnings for the effect of applying the standard in the year of initial application.
Certain operational simplifications upon transition are allowed.
On the date of initial application, a reconciliation is required of the ending impairment allowances in
accordance with IAS 39 (or provisions in terms of IAS 37) to the opening loss allowances determined
in accordance with IFRS 9.

Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA

Page 9