An early adoption has further been permitted. In the year 2010, the IFRS 9 was improved through the inclusion of the requirement for classification as well as measurement of financial liabilities, impairment and the hedge accounting and de-recognition of the financial instruments. It is an important step for any entity to adopt the standard early. This is because such an entity would still apply the old IAS 39 for other accounting practices whose requirements have not been included in the new version. These include classification and measurement of liabilities, de-recognition, and recognition of financial assets and liabilities hedge accounting and impairment of financial assets. IFRS 9 will retain a mixed-measurement model, where some assets are measured at amortized cost and others are at fair levels. The distinction between these two models lies on the differences between the business models in each entity as well as on the requirement to assess if the cash flows for the instruments are only interest and principal.
The model is the basis of the approach to the standard, and is primarily an attempt to align the system of accounting on the method that the business management uses its assets for the business while also considering the business characteristics. For example, the debt instrument is measured at the amortized level when both the business model test and the characteristics of the contractual cash flow tests are satisfied. This business model tests if the objectives of the business model will hold the assets to collect the contractual cash flows rather than having an objective of selling this instrument prior to its contractual maturity.
The contractual cash flow characteristic test involves determination of the ability of the contractual terms of the asset to give rise to cash flow that are primarily payments of the interest amount outstanding and the principal. Unlike the IAS 39, IFRS 9 contains only two categories of primary measurement for the financial assets. The IAS 39 had multiple measurement categories. This implies that the categories of the IAS 39 that relates to held maturity, loans receivable and those available for sale have been eliminated in the new standard. This is in addition to the already eliminated tainting provisions of the standards. A debt instrument such as the loan receivables must be measured at the amortized levels.
It is important to note that the expectations of the board as at 2009 have changed due to certain issues arising in the process of replacing the old model. While the new standard IFRS 9 was expected to completely replace the IAS 39 by 2013, the final stages are still in progress, and in most cases, the old model will be applicable in some areas for the next three to four years. By June 2011, the final stages are still at ‘Work in Progress’ stage, and is expected to remain at this stage up to perhaps 2015. It is for this reason that the boards changed the schedule so that the IFRS 9 will entirely replace the IAS 39 by 2015.
This model strongly focused on improving financial instruments by raising fair values. This standard increased the use of fair values in financial instruments accounting for all derivative assets and liabilities. Today, assets and liability derivatives are not recognized at fair value. These standards improve the challenges faced by the previous standards, International . These standards allowed investment on fair value, market and cost. It is believed that the International Accounting Standards 39 will bring consistency in recognition and measurement concerning the financial instrument. Unlike International Accounting Standards 25, International Accounting Standards 39 classified financial assets in a number of categories. They included ‘loans and receivable originated by enterprise’, ‘available for sale financial assets’, ‘held to maturity investments’ (Ather 1).
International Accounting standards 39, has been recommended by many due to its financial assets held for trading such as dept and equity securities. AIS 25 allowed the debt and equity securities and financial assets held for trading were reported at a cost, which is lower than the market. Today, such practices are mixed together. It is preferred for financial assets, debt securities and equity securities available for sale but not held for trading. Such entities are generalized and reported at cost as compared to AIS 25 where they were reported at a lower cost or fair value. The Standards have won credit over the previous standards in almost all derivative
Loans, receivables and fixed maturity investment are the three categories of financial assets that are important in the International Accounting standards 39. Such standards were not designated as held to maturity. AIS 25 allow them reported as cost, fair value or lower of cost and market. Today they are all generalized and reported at cost. These standards provide guidelines for estimation of fair value as part of the financial instrument. The Implementation of the standards only targets the State Bank of Pakistan and other Non-Banking Financial Institution. The deferral arouse as a result of conflicts between the crucial requirements of the IFRS focuses on investors and the financial information created satisfies customer needs.
According to IFRS 13, fair value helps in assessing company’s financial position and focus on company’s ability to generate cash equivalents. In IFRS, there is an importance application of fair value, which works as a reliable measure in cash generation as compared, in the historic cost. Today, most of the investor lay their concern on a company’s economic status. In the past, investors were more concerned on the company’s legality. IFRS lays its concern on the economic and transaction status and their provisions contain form concepts like financial liabilities and assets under the implementation of IAS 39 (Global reporting revolution 1).
Securities that were valued at historical cost may tend to retain or decrease in market value as compared to the historical cost. At a fair value, in a normal market, securities meet their evaluation and measurements as per their market prices. The price of the securities is affected by the volume supply and demand in the market and the fair value of these securities changes as the market does. This means that losses resulting from the decrease or increase of the market value of the financial assets are affected by fair value changes (Perry & Nolke 1).
IASB has its objectives on ensuring that the company’s financial statements provide the capital market customers with information, which is crucial in making their economic decisions. Under the AIS implementation, the forward-looking investor’s should therefore invest in such companies. This is in contrast with the tax authority’s objectives, which determines the correct tax amounts a company has to pay which depends on its past performances.
In countries where IFRS is embraced on dealing with fair value on its tax systems; fair value becomes a problem especially on setting of the tax rules. This has resulted to complexity in legislation creating a burden in compliance to such companies. Therefore, countries should consider on how to deal with fair value as its failure could lead to increased volatility on cash tax as well as mismatched taxes, which would mean a negative impact on the tax authorities, capital markets and the taxpayers(Global reporting revolution 1).
Under the implementation of IAS 39, derivatives are accounted at fair value while the assets liabilities are held amortized costs. Income on Fixed assets and liabilities is generally presumed t be very effective as Per the SFAS 133. This effectiveness is actualized by specification of the interest rate n risk hedge through the shot-cut method. This presumption is Under the implementation of the IAS 39, the shortcut method is precluded. The same problem has a negative impact on banks and its capital requirements. The best remedy for this problem lies on the IAS 39 F.5.5 guidance that have three remedial classifications; ad hoc, market based and implementation guided- based.
The implementation guided based remedy and the theoretical swap hedge effective method provides FAS 133 Shortcut method treatments on the IAS 39 analogous interest rate and risk hedges. It is therefore clear that interest rate risk hedges that qualify for short cut method under FAS-133 deemed to be 100 percent effective would fail upon being put under IAS 39 tests. This shows an inconsistent situation with IASB and FASB convergence goals (Bodurtha 1).
Copyright (c) 2012 Morgan D
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Morgan is a writer who works with Uk Best Writing service, He has experience of more than ten years in acdemic writing. He provides students with Uk research papers, ssays writing service UK and Uk essay service online.
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