New accounting standard to simplify reporting on instruments

A NEW accounting standard released recently by the International Accounting Standards Board is intended to simplify the reporting of financial instruments.

“The … financial crisis, compounded by excessive political interference, has resulted in the (board) agreeing to an urgent and complete revision to the standards on financial instruments accounting,” Sue Ludolph, project director of accounting at the South African Institute of Chartered Accountants, said yesterday.

The aim of the board is to replace the IAS 39 (AC133) — with a new standard (IFRS 9), which deals only with financial assets.

The international accounting board will do this in three phases . “As the ( board) completes each phase, and its separate project on the derecognition of financial instruments, it will delete the relevant portions of IAS 39 and create chapters in IFRS 9 that replace the requirements of IAS 39.”

Chapters four and five of the new standard specify how an entity should classify and measure financial assets — based on the entity’s business model for managing the assets and their contractual characteristics .

Further, they should be measured at amortised cost or fair value. “These requirements simplify the approach for classification and measurement of financial assets compared with the requirements of IAS 39,” Ludolph said.

Also to be replaced is the current incurred loss model, which assumes all loans will be repaid until the contrary is proven.

“This model has drawn much criticism , since it presented an unjustifiably optimistic picture of loans and financial assets.”