It is believed that one of the key reasons for the onset of the financial crisis of 2008 was the approach banks took to determine losses on bad loans. Banks' policies were as per the earlier IAS 9 guidelines, which had severe shortcomings. International Financial Reports Standards (IFRS 9) was introduced by the International Accounting Standards Board's (IASB) to counter this crisis, and address the accounting for financial instruments. It replaced IAS 9 with a single integrated standard and came into effect from January 1, 2018.
Classification refers to the way financial assets and financial liabilities are accounted for in financial statements, particularly in the way they are measured on an ongoing basis. For the classification of financial assets, IFRS 9 brought in a logical integrated approach driven by cash flow characteristics and the business model in which an asset is held. It is a single impairment model applied to all financial instruments.
During the financial crisis, the delayed recognition of credit losses on loans and other financial instruments were linked to weak accounting standards. With IFRS 9, the IASB's new expected-loss impairment model mandated more timely recognition of expected credit losses. The new standard asked for entities to account for expected credit losses from the moment when financial instruments are first identified. IFRS 9 acknowledges the full lifetime expected losses on a more regular basis.
IFRS 9 introduced a significantly enhanced model for hedge accounting, with improved disclosures about risk management activity. The model helps to align accounting treatment with risk management activities, and allows entities to better reflect all these activities in their financial statements. Also, because of these changes, users of the financial statements are provided with better information about risk management and the effect of hedge accounting in their financial statements.
After banks make all calculations on an account level granularity, they need to be able to report and analyse not just point-in-time data but also trends in however the provisions have evolved across all accounts.