Understanding Financial Instruments Under IFRS 9

For accounting and financial services, revenue is not the only IFRS to think about - there are also financial instruments under IFRS 9 to think about. Contrary to popular belief, IFRST 9 affects various accounting services in Dubai and the UAE.

A company in UAE could face a lot of changes in its financial reporting because of this standard. This is especially true for UAE companies with investments, long-term loans, or non-vanilla financial assets. Well, it may depend as it may be the case for companies with short-term receivables as well.

Possible effects of Financial Instruments Under IFRS 9

The possible impacts of IFRS 9 include:

1. Increased volatility in the income statement

There is a risk that more assets will need to be measured at fair value and that changes in fair value will need to be recognized in the income statement.

2. Earlier recognition of impairment losses on loans and receivables, including trade receivables

In future reporting periods, entities must provide for potential future credit losses even if there is a high probability that the asset will be fully recovered.

3. A number of new disclosure requirements have been introduced

Those most affected may need new systems and processes to gather the necessary information.

4. New classification techniques

Under IFRS 9, there are new parameters for classifying and measuring financial assets based on the characteristics of contractual cash flows and asset management that meet the Dubai entity's business objectives.

Read also: How IFRS 9 Impairment Rules Will Affect Companies In UAE

Financial instruments

The following assets are identified as financial assets:

• Cash equivalents.

• Investments in equity securities.

• Trade receivables.

• Accounts receivable.

• Bonds

• Assets from contracts in accordance with IFRS 15.

• Trade payables.

• Loans.

• Financial obligations, such as bonds, are issued to obtain leverage.

• Equity instruments are represented by ordinary shares issued.

Organization And Measurement Of Financial Assets

There are three ways in which accounting services in UAE can categorize financial assets, such as below:

#1: Amortized Cost

An asset may be measured at amortized cost if it has a business model whose objective is to preserve the financial assets in order to meet the contractual cash flows and if, because of the contractual terms, the financial asset gives rise to cash flows that require repayment of interest and principal only on a specified date, for example, when due.

Subsequently, these assets are measured at amortized cost using the effective interest method, reduced by impairment losses. Foreign currency translation gains and losses, interest income and impairment losses are reported in income. Gains or losses on derecognition are reported in income.

#2: Fair Value With Adjustment In Other Equity

An entity's management is required to measure a financial asset at fair value with adjustment in other comprehensive income if it intends to hold the financial asset to hedge contractual cash flows and/or trade it. Under the contractual terms, the financial asset provides cash flows that are subject only to the payment of principal and interest on the unsettled amount due at a specified date. Changes in fair value are recognized in other income streams.

#3: Fair Value Through Profit And Loss

If the conditions specified in the previous categories are not met (measurement at amortized cost or fair value through other comprehensive income), an asset must be measured at fair value through profit and loss. Net gains and losses and interest and dividend income are recognized as income.

#4: Principal Is The Fair Value At Initial Recognition.

Interest includes the time value of money, the credit risk associated with the principal outstanding in a particular period, the cost of borrowing, profit margin and other fundamental risks.

Classification of Financial Liabilities

Financial liabilities are categorized as measured at amortized cost or at fair value through profit or loss if it is a derivative that is held for trading or is designated as such upon initial recognition. Financial liabilities are measured at net gains, net losses, and fair value, including interest expense, are recognized in income.

Classification Of Financial Assets

Financial assets should not be reclassified after initial recognition unless the entity adapts its business model to manage financial assets. In this scenario, financial assets are reclassified on initial recognition in the first reporting period after the change in the business model. Note that financial liabilities cannot be reclassified after initial recognition.

Why IFRS 9?

There are principles under IFRS 9 for reporting financial assets and liabilities:

Note:

• IFRS 9 does not define, in any way, financial instruments. For definitions of financial instruments, see IAS 32 Presentation of Financial Instruments.

• IFRS 9 is not related to issued equity instruments such as your own issued warrants, shares, and written options on equity.

• IFRS 9 is associated with equity instruments of other entities because they are financial assets from the entity's perspective.

• IFRS 9 does not deal with investments in subsidiaries, joint ventures, and associates.

Financial instruments are definitely instrumental in various aspects of accounting.  If you would like to know more about financial instruments or are looking for reliable accounting and financial services in UAE. Contact Audit Firms in Dubai, a team of registered chartered accountants delivering top-notch accounting services in Dubai and UAE to help Dubai companies scale higher.

Read also: Auditing Firms In Dubai Overview Of IFRS 9