Discuss about the Business Accounting for Business Draft and Proposal.
Examining the relevant exposure draft depicted in IASB website:
IASB mainly have discussion, exposure draft and proposal on certain topics, which in turn helps in supporting the ethical business practices. The relevant exposure draft published in 2015 December is been effectively reviewed in the assignment. ‘Applying IFRS 9 Financial instrument with IFRS 4 Insurance Contacts’ is the topic of the exposure draft (Ifrs.org 2016). In addition, the effective depiction of the overall issues portrayed in the exposure draft is evaluated.
Identifying and summarising the overall issued raised in the exposure draft:
The main concern depicted in the paper is regarding the impact of new insurance contract standards on IFRS 4 ‘Insurance Contracts’ (Ifrs.org 2016). The IFRS 4 is mainly designed to address the concerns of relative parties regarding the effective dates of IRFS 9. In addition, with the help of relative IFRS 9 companies and relatively individuals are able to recognise and measure the financial instruments. Furthermore, IAS 39 is been effectively replaced with the IFRS 9 for recognising and measuring the financial instruments (Ifrs.org 2016). Bischof and Daske (2016) stated that the use of effective regulation of IFRS does not allow companies to use any unethical measures to decrease their tax pay. On the other hand, Ramirez (2015) criticises that changing rules in IFRS mainly depicts a loopholes, which help companies to take advantage and reduce their tax pay.
In addition, the exposure draft also portrays the problems, which might be faced by insurers, while using the new IFRS 9 for recognising and measuring the financial instruments (Ifrs.org 2016). The insurers and relative party has mainly states that the two major accounting changes in such short notice could eventually change the cost. Moreover, this cost difference might affect the volatility of the profit and loss statement of the insurance companies. Furthermore, if the IFRS 9 is applied before new insurance contract standard then the companies might face problems in their overall financial statement. Onali and Ginesti (2014) mentioned that IFRS 9 is mainly helpful in valuing the financial instruments used by insurance companies, which could be adequately depicted in their financial statement. On the contrary, Novotny (2016) argued that due to the complexity of IFRS 4 and IAS 39, IFRS 9 could not be easily incorporated in the financial statement of the insurance companies.
In addition, the insurance companies have further identified that the implementation of IFRS 9 could mismatch their overall accounting system, which might depict wrong financial statement to its stakeholders. In addition, the use of IFRS 9 could eventually hamper their overall financial statement (Ifrs.org 2016). Thus, for addressing the conversion of the insurance companies the IFRS has mainly included the option of voluntarily discloser. However, the temporary issues taken by the IFRS does not accommodate the negative impact IFRS 9 could have on the new insurance contract standards. Nadia and Rosa (2014) cited that insurance companies have been effectively developing the financial instruments based on IFRS 4 guidelines. In this context, Chawla et al. (2016) further elaborated that changing the financial instrument from IFRS 4 to IFRS 9 could mainly have negative impact on the operations and valuation of the company’s assets.
However, IASB after hearing and understating the problems of the insurance companies have effectively depicted the measures, which could be used until the IFRS 9 is fully implemented from 1st Jan 2018. Furthermore, IASB after the effective evaluation have depicted the entities that an option to reclassify their financial instruments will be effectively provided (Ifrs.org 2016). These additional benefits of reclassification and providing an option could help in reducing the volatility of IFRS 9 on the profit and loss statement of the entities. Furthermore, the option creation could effectively help the IASB reduce the overlap approach, which arises from the implementation of IFRS 9. Huian (2013) stated that amendments and revisions are mainly helpful in reducing the negative impact of law in the operations of the company. Nevertheless, Celli (2013) criticises that delay in implementing ethical laws might not help in reducing the unethical measures conducted by companies in depicting the value of their intangible assets.
In addition, the IASB has also depicted the second measure, which might be implemented to reduce the negative impact of IFRS 9. Moreover, IASB also stated the entities, which deal in financial instrument could temporarily opt out from IFRS 9. In addition, the entities who mainly issue contracts based on IFRS 4 could also be exempted from the temporary implementation of IFRS 9 until the matter is been effective resolved (Ifrs.org 2016). This exemption is mainly conducted to prevent the companies from facing loses, which are wholly dependent on the IFRS 4 for designing the financial contracts. In addition, insurance and financial product selling companies are most affected from the overall change depicted in IFRS 9. Lüdenbach and Christian (2013) mentioned that IFRS 4 mainly provides the insurance companies relatively measures, which could be depicted in their financial statement. However, Bischof and Daske (2016) argued that due to the loopholes in IFRS 4 the IASB has mainly introduced IFRS 9, which might change the overall assumption of financial assets conducted by certain entities.
The overall exposure draft mainly depicts the questions, which needs to be answered within the 60 days from its release. This system is mainly maintained by IASB for effectively detecting the relative changes, which might be needed in the IFRS 4 and IFRS 9 (Ifrs.org 2016). Furthermore, IASB mainly stated that the overall issues depicted in the exposure draft mainly relate to some entities and the scope of the impact can be limited. Furthermore, the depicted amendments are a temporary faces, which is just a measure that could only be used before the implementation of the IFRS 9. In this context, Onali and Ginesti (2014) mentioned that IASB with the help of ‘due process handbook’ is able to collect relative comments from the entities ridging viability of the proposed law. However, Nadia and Rosa (2014) argued that IASB can be enforce the law if low impact is on the operations and financial statement of different entities.
Critically evaluating the overall issues discussed in the exposure draft:
The overall issues that is been depicted in the exposure draft mainly states the change in IFRS 4 regulations and insurance contract. Moreover, the main reason for drafting the IFRS 9 is to reduce the overall loopholes that are currently being present in IFRS 4 laws. IFRS 4 mainly allows the insurance and lending companies to depict the future predictions, which might be incurred from the current transactions (Huian 2013). This type of listing mainly reduces the overall viability of the financial statement. In addition, the IFRS system allows banks and financial institutions to depict the expected gains in their current profits and inflate their overall balance sheet. In addition, banks are able to effective use the CDS (Credit Default Swaps) to reduced the losses in their overall financial statement (Celli 2013). The financial crisis of 2008 was the major indication that the overall impact of IFRS is being reduced on the financial institutions.
In addition, IFRS to reduce the unethical measures used by financial institutions effectively depicts the IFRS 9, which limits the overall financial institutions from utilising the identified loopholes. Furthermore, the IFRS 9 changes the current valuation of assets and liabilities that are being accounted in the financial statements (Ifrs.org 2016). In addition, it introduces logical approach, which might be used by companies to depict its adequate and ethical financial statement (Chawla et al. 2016). In addition, IFRS mainly changes the overall principle based requirements, which was been use to measure the financial asset and liabilities of banking companies.
Bischof, J. and Daske, H., 2016. Interpreting the European Union’s IFRS endorsement criteria: The case of IFRS 9. Accounting in Europe, 13(2), pp.129-168.
Celli, M., 2013. The Faithful Representation of Electrical Energy Sale and Purchase Agreements Under International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). Journal of Modern Accounting and Auditing, 9(8), p.1032.
Chawla, G., Forest, J., Lawrence, R. and Aguais, S.D., 2016. Point-in-time loss-given default rates and exposures at default models for IFRS 9/CECL and stress testing. Journal of Risk Management in Financial Institutions,9(3), pp.249-263.
Huian, M., 2013. ANALYSIS OF THE CONSTITUENTS’PARTICIPATION IN THE DEVELOPMENT OF THE 1ST PHASE OF IFRS 9 FINANCIAL INSTRUMENTS. Annals-Economy Series, 1, pp.209-216.
Ifrs.org. (2016). IFRS - Home. [online] Available at: https://www.ifrs.org/Pages/default.aspx [Accessed 10 Oct. 2016].
Lüdenbach, N. and Christian, D., 2013. IFRS Essentials: Regeln, Fälle, Lösungen. Mehr als 50% Beispiele. Verständlicher Sprachstil. Praxisrelevante Bilanzierungsfragen. Inklusive IFRS 9-13, IAS 1 (2011) und IAS 19 (2011). NWB Verlag.
Nadia, C. and Rosa, V., 2014. The impact of IFRS 9 and IFRS 7 on liquidity in banks: Theoretical aspects. Procedia-Social and Behavioral Sciences,164, pp.91-97.
Novotny-Farkas, Z., 2016. The interaction of the IFRS 9 expected loss approach with supervisory rules and implications for financial stability.Accounting in Europe, 13(2), pp.197-227.
Onali, E. and Ginesti, G., 2014. Pre-adoption market reaction to IFRS 9: A cross-country event-study. Journal of Accounting and Public Policy, 33(6), pp.628-637.
Ramirez, J., 2015. Accounting for Derivatives: Advanced Hedging Under IFRS 9. John Wiley & Sons.