Historically, financial reporting on financial instruments has been challenging for standard setters and implementers alike. It's no secret that one of the prime causes of the 2008 global financial crisis was the treatment of complex financial instruments. Good news then that the new accounting standard IPSAS 41 Financial Instruments aims to make things more straightforward.
Effective from annual periods beginning on or after 1st January 2023, IPSAS 41 is one of the newer financial reporting standards, replacing IPSAS 29 Financial Instruments: Recognition and Measurement.
Approved by the International Public Sector Accounting Standards Board (IPSASB) in 2018, IPSAS 41 was developed partly in response to IFRS 9 (also called Financial Instruments), issued by the International Accounting Standards Board (IASB) in 2014. Convergence between IPSAS and IFRS is a key objective of the IPSASB, so it was always likely that IPSAS 29 would be updated - or as it has happened, be replaced – when IFRS 9 came into force.
IPSAS 41 is more principles-based than its predecessor and was developed to address some notable issues with reporting on financial instruments. So, what are the three main features of IPSAS 41 designed to make accounting for financial instruments more straightforward?
1. A single classification and measurement model
Under the new standard, financial instruments can be financial assets or financial liabilities. So, the first major issue to be considered by IPSAS 41 is how to classify and measure financial assets – these should be sub-divided into equity instruments and debt.
In the case of equity instruments, you must carry out an assessment of whether the asset is held for trading. If it is, you account for it using fair value accounting. If it isn't, there is the option to instead deal with any gains or losses through net assets/equity.
With debt instruments, you need to answer a number of yes or no questions. Depending on the answers, you may account for debt instruments using fair value through surplus or deficit, fair value through net assets/equity, or amortised cost.
2. A forward-looking Expected Credit Loss (ECL) model
Under the previous rules of IPSAS 29, entities were not allowed to recognise impairment losses until there was objective evidence that such a loss had taken place. This ignored the reality that, in some cases, losses had been likely for some time.
In response, IPSAS 41 has introduced a single forward-looking model for recognising potential losses. Depending on the likelihood of ECLs, impairments should be assessed either for the upcoming 12-month period or, for more likely losses, over the entire life of the instrument.
3. An improved hedge accounting model
Finally, the hedging model in IPSAS 41 has been updated to align hedge accounting requirements with an entity's risk management practices. The new rules are more principles-based, allowing preparers of financial statements to take their own risk management practices into account a great deal more when reporting on hedging instruments.
There is, of course, far more detail in IPSAS 41 than it is possible to cover here, but if your entity accounts for any of the issues mentioned above, whether it be hedging instruments, ECLs or even basic financial assets, it would be wise to get to grips with the new standard in more detail. After all, as the past has shown us, the impacts of accounting for financial instruments can be profound.
You need to sign in or register before you can add a contribution.