There are many creative and inventive people in the world. As a result, they invented many forms of financial instruments. It’s time, to be honest. Are you proficient in derivatives, an array of share options, warrants, certificates, convertible bonds, and so forth? Even from the view of an audit firm in Dubai, this area is very complex and hard to comprehend. A complicating factor is that financial instruments are subject to two different accounting standards: IAS 39 and IFRS 9.
We would love to explain a few things here:
Is it necessary to have two IFRS standards for the treatment of financial instruments? IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments. But you might be asking:
- Why are they similar?
- How is the situation currently?
IAS 39 or IFRS 9: Which should company audit professionals use?
The reason for IAS 39 and IFRS 9
In its current form, IAS 39 was introduced in 2005. For a company in Dubai to present financial instruments transparently and consistently, it aimed to prescribe unified reporting rules.
The reverse occurred. A lot of exceptions, inconsistent rules, and derogations were included in IAS 39. Through their audit services, most Dubai companies had difficulty applying IAS 39 correctly. They had to pay high fees for consultants.
As a result, IAS 39 was rewritten and replaced by IAS 39. IFRS 9 Financial Instruments was the new standard. However, replacing a standard as complicated as this is not easy. For this reason, there are three main phases to replacing the standard:
- Impairment methodology
- Classification and measurement
- Hedge Accounting
Keep in mind. However, IFRS 9 is currently fully implemented. But what is the current situation?
The classification and measurement phase of Phase 1 has been completed. In November 2009, the new IFRS 9 was issued. This standard revised the classification and measurement requirements for financial assets.
In October 2010 came financial liabilities, and in November 2013 hedge accounting. A final set of requirements on impairment of financial assets, own credit, and the IASB published hedge accounting in July 2014. The new standard is now complete.
IFRS 9 or IFRS 39 – which should audit services in Dubai UAE apply?
IFRS 9 will be mandatory on January 1, 2018, so you still have time to decide.
Financial audit specialists can either:
- apply IAS 39
- apply IFRS 9.
The choice is still available until January 1, 2018, after which entities in Dubai UAE have to comply with IFRS 9. Companies also need to present comparative information here. So they will also have to restate their financial instruments in accordance with IFRS 9 starting from January 1, 2017.
What is the best choice?
Auditors would probably only notice a minimal impact of switching from IAS 39 to IFRS 9 if you have only a small number of financial instruments. We would strongly suggest performing an in-depth analysis of the different impacts of IAS 39 and IFRS 9 in the case of a financial institution such as a bank or investment house. The idea behind IAS 39 and IFRS 9 will be discussed in other articles, but we will draft it briefly here.
Your books should contain information about all of your financial assets.
Through other comprehensive income, IFRS 9 allows one to value equity investments (for example, shares in another company) and certain debt instruments at fair value. Thus, you do not have to include all revaluation gains and losses in profit or loss, and your profits will be much less volatile. IFRS 9 would be beneficial if you wish to present earnings to your shareholders in a more consistent manner.
The old IAS 39 is still preferred by some Dubai institutions. According to IFRS 9, for instance, reclassification of assets will be stricter, or embedding derivatives will be eliminated – and depending on the specific circumstances, that might indeed be unappealing for some institutions.
That’s all there is to it. As one of the leading audit firms in Dubai and UAE, we understand how difficult and complex IAS 39 and IFRS 9 are compared with other standards. If you have any additional questions, please leave a comment on our website.
Better yet, you can contact us through email or phone call, and we would be happy to assist you.
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