1.1 IAS 32

The original version of IAS 32 – Financial Instruments: Disclosure and Presentation – was published in March 1995. The presentation requirements of the standard were subject to significant review during 2002 and 2003 and a revised standard was published in December 2003. IFRS 7, which was published in August 2005, superseded the disclosure requirements in IAS 32 and the title of the latter standard was changed to reflect this. In February 2008, the IASB amended IAS 32 to change the classification of certain puttable financial instruments and instruments of limited life entities from liabilities to equity. Further amendments to IAS 32, designed to clarify its requirements for offsetting (or netting) of financial instruments, were issued in December 2011 and numerous other amendments have been made throughout the life of the standard.

The IASB recognises that the classification of financial instruments as liabilities or equity in accordance with IAS 32 presents many challenges. Consequently, it is working on a research project exploring what improvements could be made to the presentation and disclosure requirements for financial instruments with characteristics of equity. In June 2018 the IASB published Financial Instruments with Characteristics of Equity, a discussion paper setting out its preliminary views on the subject and, at the time of writing, the Board is expecting to decide the direction of this project by the end of 2019.

1.2 IAS 39

IAS 39 was originally published in March 1999. Its origins could be found in US GAAP and at a high level there were only limited differences between the two systems. In particular, both adopted a similar ‘mixed attribute’ model whereby some financial instruments were measured by reference to their historical cost and some by reference to their fair value.

By dealing with most aspects of virtually all financial instruments, it was the longest, and by far the most complex, standard issued by the IASC which also established a process to develop and publish guidance in the form of Questions and Answers (Q&As). IAS 39, like IAS 32, was subject to significant review during 2002 and 2003 and a revised standard, incorporating most of the Q&As as implementation guidance, was published in December 2003.

Many other changes have been made to IAS 39 since its original publication, including amendments in March 2004 allowing the use of hedge accounting for certain portfolio (or macro) fair value hedges of interest rate risk. However, subject to limited exceptions, most of the requirements of IAS 39 are now superseded by or carried forward into IFRS 9. Those exceptions are:

• any entity may continue applying the hedge accounting requirements of IAS 39 instead of those in IFRS 9 even after applying the rest of IFRS 9;
• any entity may apply the macro fair value hedge accounting requirements of IAS 39 for hedges of interest rate risk in addition to the hedge accounting requirements of IFRS 9; and
• certain insurers may delay their application of IFRS 9 (see 1.4 below).

This publication reflects the reduced applicability of IAS 39 by covering its requirements only at a high level, although there are explanations in Chapter 53 at 13 of the more important differences between hedge accounting under IAS 39 and IFRS 9.

1.3 IFRS 7

A project principally focused on revising the then IAS 30 – Disclosures in the Financial Statements of Banks and Similar Financial Institutions – evolved into a comprehensive review of all disclosure requirements related to financial instruments. This resulted in the publication of IFRS 7 in August 2005, superseding IAS 30 and the disclosure requirements in IAS 32.

IFRS 7 has been subject to a number of amendments since publication. The requirements relating to liquidity risk were improved in the light of experience gained in the financial crisis; disclosures about transfers of financial assets were enhanced following an aborted attempt to revise the requirements addressing derecognition of financial assets; and more information about offsetting and netting agreements is now required. IFRS 9 also makes a significant number of amendments and additions to IFRS 7.

1.4 IFRS 9

In April 2009, during the financial crisis, the IASB committed itself to a comprehensive review of IAS 39. The IASB's plan split this project into the following three phases, each of which would result in the publication of requirements replacing the corresponding parts of IAS 39:

• classification of financial assets and financial liabilities;
• impairment and the effective interest method; and
• hedge accounting.

Originally, the IASB had proposed a simplified accounting model under which all financial instruments would be measured either at amortised cost or at fair value through profit or loss. Subsequently, additional categories of financial asset were introduced allowing certain investments in debt and equity instruments to be measured at fair value with most changes in value recognised in other comprehensive income. For debt instruments, those gains and losses are subsequently recycled to profit or loss on derecognition. In addition, the accounting for financial liabilities was eventually left much the same as in IAS 39, although the IASB introduced a requirement to recognise in other comprehensive income (rather than profit or loss) gains or losses on most financial liabilities designated at fair value through profit or loss to the extent they represent changes in the instrument's credit risk. The requirements of these parts of IFRS 9 are primarily covered in Chapters 48, and 50.

During the financial crisis, a number of commentators criticised the requirements of IAS 39 for unnecessarily delaying the recognition of impairments. IAS 39 uses a so called ‘incurred loss’ approach whereby impairments are not recognised until there is objective evidence of the impairment having occurred. The requirements in IFRS 9 are better described as an ‘expected loss’ approach. In almost all circumstances, applying IFRS 9 will result in the recognition of an impairment expense sooner than would have been the case under IAS 39. Consequently, at any point in time, an entity will have accumulated a higher impairment provision (and report a lower amount of equity) than would have arisen from applying IAS 39. This part of IFRS 9 is covered in Chapter 51.

The hedge accounting phase of the project was designed to simplify hedge accounting, expand the relationships for which hedge accounting could be applied and align the accounting requirements more closely with entities' risk management practices. IFRS 9 does not itself address portfolio hedge accounting and, viewed in isolation, is less accommodating than IAS 39 in this respect. However, IFRS 9 does allow for the continued application of the portfolio fair value hedge accounting requirements of IAS 39 alongside its more general hedge accounting requirements. In addition, entities wishing to use the portfolio cash flow hedge accounting guidance in IAS 39 can continue applying the entirety of IAS 39's hedge accounting requirements, although none of the benefits of applying the hedge accounting requirements of IFRS 9 would then be available.

The IASB has a separate research project which aims to eliminate any need for this continued application of IAS 39 (and also the so-called EU ‘carve-out’ – see 2 below). A discussion paper, Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging, was published in April 2014, but the IASB subsequently concluded it was not in a position to develop its proposals into an exposure draft. At the time of writing the IASB has been developing a ‘core model’ addressing the most important issues and is planning to discuss its approach to gathering stakeholders' views on this model later in 2019. The hedge accounting requirements of IFRS 9 are covered in Chapter 53 which also highlights important differences between those requirements and those of IAS 39.

The first version of IFRS 9 was published in November 2009 with significant amendments following in October 2010 and November 2013 before it was substantially completed in July 2014. In October 2017, the IASB published limited amendments to the standard designed to address concerns about the classification of financial assets containing certain prepayment features.

Most entities were required to adopt IFRS 9 for periods commencing on or after 1 January 2018 and the October 2017 amendments were available to be adopted at the same time (although their mandatory effective date was one year later). However, a number of constituents identified adverse accounting consequences that might arise from insurers applying IFRS 9 before IFRS 17 – Insurance Contracts – adoption of which is not now expected to be mandatory for periods commencing before 1 January 2022. The IASB responded by amending IFRS 4 – Insurance Contracts – to allow certain insurers to adopt IFRS 9 at a later date as well as offering other reliefs to those insurers that adopt IFRS 9 in a period before they adopt IFRS 17. Further information about these changes is included in Chapter 55 at 10.

During the development of IFRS 9, the IASB worked closely with its counterparts at the FASB with the aim of aligning as far as possible the financial reporting requirements for financial instruments in accordance with IFRS and US GAAP. The measurement of fair values under the two bodies of GAAP is to a large extent the same and in June 2016 the FASB published a new standard requiring impairment of financial assets to be based on expected losses, although it is somewhat different to the approach in IFRS 9. The FASB has made various other amendments to US GAAP in recent years, but important differences remain in the areas of classifying and measuring financial instruments and hedge accounting and there are significant differences in other areas including the approach to offsetting financial assets and financial liabilities.

One of the recommendations following the financial crisis has been the reform of interbank offered rates (IBOR). These benchmarks index trillions of dollars in a wide variety of financial products but their long-term viability has been brought into question and in some jurisdictions there has been clear progress towards replacing them with alternative rates. The IASB has been monitoring these developments and in May 2019 published an exposure draft of proposed amendments to IAS 39 and IFRS 9. The proposals are intended to mitigate the effects of these reforms on financial reporting, particularly hedge accounting, in the period before financial instruments are issued or modified to reference these alternative rates, with the intention of them being finalised in time for the 2019 reporting season. As a second phase, in the autumn of 2019 the IASB will determine what further standard setting is considered necessary to mitigate or address the introduction of these rates on other areas of financial reporting.

1.5 Structure and objectives of the standards

The main text of the standards is supplemented by application guidance (which is an integral part of each standard).¹ IAS 32 and IFRS 9 are each supplemented by illustrative examples and IFRS 7 and IFRS 9 by implementation guidance. These examples and implementation guidance accompany, but are not part of, the standards.²

The objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. [IAS 32.2]. For IFRS 9 it is to establish principles for the financial reporting of financial assets and financial liabilities that present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity's future cash flows. [IFRS 9.1.1]. Finally, the objective of IFRS 7 is to require entities to provide disclosures in their financial statements that enable users to evaluate:

1. the significance of financial instruments for the entity's financial position and performance; and
2. the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. [IFRS 7.1].