Classification and measurement

Definition

Classification and measurement refer to the processes of categorizing financial assets and liabilities based on their characteristics and determining how to value them in financial statements. These processes are crucial for ensuring consistency and comparability in financial reporting, particularly when transitioning from older standards to newer frameworks like IFRS 9.

5 Must Know Facts For Your Next Test

1. The transition from IAS 39 to IFRS 9 brought significant changes in how financial assets are classified and measured, moving from a rules-based approach to a more principle-based framework.
2. IFRS 9 introduced a three-category classification system: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL).
3. The standard emphasizes the business model for managing financial assets as a key factor in their classification, focusing on whether the asset is held to collect contractual cash flows or for sale.
4. Impairment requirements under IFRS 9 shifted to an expected credit loss model, which requires entities to recognize losses earlier than the incurred loss model used in IAS 39.
5. A major objective of these changes is to provide users of financial statements with more relevant information regarding the risks associated with financial assets.

Review Questions

• How does the classification and measurement of financial assets change under IFRS 9 compared to IAS 39?
  • Under IFRS 9, the classification and measurement of financial assets have shifted from a more complex rules-based system in IAS 39 to a simpler, principle-based approach. IFRS 9 introduces three key categories—amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL)—based primarily on the entity's business model for managing those assets. This change allows for clearer reporting and aligns the recognition of income with the underlying economic reality of how assets are used.
• Discuss the implications of the expected credit loss model introduced by IFRS 9 for impairment recognition compared to IAS 39.
  • The introduction of the expected credit loss model under IFRS 9 represents a significant shift in impairment recognition compared to the incurred loss model of IAS 39. This new model requires entities to estimate potential losses over the life of a financial asset at all times, rather than waiting for a triggering event before recognizing impairment. This proactive approach aims to enhance transparency regarding credit risk exposure and ensures that users of financial statements receive timely information about potential losses.
• Evaluate how the changes in classification and measurement under IFRS 9 affect the overall reliability and relevance of financial reporting.
  • The changes brought by IFRS 9 in classification and measurement significantly enhance both the reliability and relevance of financial reporting. By simplifying asset categorization and aligning it with an entity's management strategy, users receive clearer insights into how financial instruments are held and managed. Additionally, the expected credit loss model improves the recognition of potential risks, thereby providing stakeholders with more timely and useful information. Overall, these improvements facilitate better decision-making by investors and regulators alike.

Related terms

Fair Value: The estimated price at which an asset or liability could be bought or sold in a current transaction between willing parties.

Amortized Cost: A method of valuing financial assets and liabilities that reflects the initial cost minus any repayments, plus or minus any accumulated amortization and impairment losses.

Financial Instruments: Contracts that create a financial asset for one entity and a financial liability or equity instrument for another, including stocks, bonds, loans, and derivatives.