IFRS 9

What it means

IFRS 9 is the IFRS standard on financial instruments, covering classification, measurement, hedge accounting and impairment based on expected credit losses. It applies to receivables, loans, bonds, shares and derivatives.

Financial assets are classified according to the company's business model and the characteristics of their cash flows. They are measured at amortised cost using the effective interest method, at fair value through other comprehensive income, or at fair value through profit or loss.

The biggest change from earlier rules is the expected loss model. Impairment allowances are recorded as soon as a receivable arises, based on expected future losses, not only once it is clear the debtor is not paying.

How it works in practice

For trade receivables, most companies use the simplified approach with a provision matrix. Receivables are grouped by days past due, and each group is assigned a loss rate based on historical experience adjusted for forward-looking information.

Banks and financial institutions use a three-stage model: for performing loans an allowance covers 12-month expected losses, after a significant deterioration it covers lifetime losses, and for defaulted loans the actual loss is recognised.

Hedge accounting under IFRS 9 is more flexible than before and better reflects risk management. It allows the gain or loss on a hedging derivative to be recognised in the same period as the hedged item, reducing volatility in results.

What to watch out for

Slovak accounting procedures do not use the expected loss model, and tax-deductible allowances are governed by the Income Tax Act. IFRS reporting therefore produces differences that must be reconciled and do not reduce tax.

Expected loss estimates depend on assumptions about the future, such as economic conditions. In a crisis the assumptions must be revisited, or allowances will be understated and the auditor may require an adjustment.