The Philippine Financial Reporting Standard 9 (Financial Instruments) is the local adoption of International Financial Reporting Standard 9 issued by the International Accounting Standards Board on July 24, 2014. PFRS 9 replaces International Accounting Standards 39—Financial Instruments: Recognition and Measurement, in three phases. IFRS 9 is primarily concerned with the accounting of financial instruments (debt, derivatives and equity) and seeks to establish a new financial instruments standard. This change was triggered by the financial crisis of 2008 and seeks to address perceived deficiencies in IAS 39.
Together with IFRS 9, there are two other standards that are seen as challenging. These are: IFRS 15, Revenues from Contracts with Customers; and IFRS 16, Leases.
IFRS 9 includes three main components: a) requirements for recognition, classification and measurement of financial instruments; b) impairment of financial assets; and c) hedge accounting. As for the classification of financial assets, IFRS 9 sets out three major classifications: amortized cost; fair value through profit or loss; and fair value through other comprehensive income. Debt instruments are classified and measured either at amortized cost or at fair value depending on (a) the contractual cash flow characteristics of the financial asset and (b) the entity’s business model for managing financial assets. On the other hand, equity securities will be classified at either FVTPL or irrevocably designated at initial recognition at FVOCI. As such, all equity securities shall be measured at fair value. Derivatives will be classified and measured at fair value through profit or loss with fair value changes recognized in profit or loss.
IFRS 9 introduces a new impairment methodology, as opposed to the incurred loss model under IAS 39. The new impairment methodology addresses the delayed recognition of credit losses. IAS 39 or the incurred loss model was believed to have contributed to the 2008 financial crises. The present system introduced a forward-looking expected credit loss model. The underlying principle of the ECL model is to reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. It is a principles-based accounting standard geared toward the earlier recognition of impairment losses.
The application of hedge accounting requirements under PFRS 9 is optional.
PFRS 9 was mandatorily effective for periods beginning on or after January 1, 2018. PFRS 9 does not cover and, therefore, does not replace the requirements for fair value hedge accounting for interest rate risk.
The Insurance Commission issued Circular Letter 2014-41, dated September 25, 2014, requiring MBAs to adopt a Standard Chart of Accounts that is aligned with PFRS 9 consistent with Section 189 of the Insurance Code. However, the IASB issued a directive in 2015 to give companies whose business model is predominantly to issue insurance contracts the option to defer the effective date of IFRS 9 until 2021 or until the effective date of the new insurance contracts standard. Both IFRS 9 and IFRS 17 can then be applied at the same time.
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Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.
