The migration from IAS 39 to IFRS 9 is expected to result in changes to the accounting treatment of different types of financial instruments. Some of these accounting changes will have implications for the level and volatility of reported profits, which may in turn drive changes in investment behavior. This paper discusses some potential effects of IFRS 9 on bond and equity investment1 strategies and styles, focusing on three key areas:
- Fixed income investing, and the introduction of expected credit losses calculation, which may encourage more detailed credit analysis and active management of bond portfolios.
- Equity investing, and the potential attractiveness of high dividend strategies now that realized gains or losses are not booked into the profit or loss if an election to present fair value changes in Other Comprehensive Income has been made.
- Hedge accounting, and the relative ease of qualification, which is likely to encourage the use of derivatives to manage certain portfolio risks.
SECTION 1: Fixed Income Investing
- Classification for investment in bonds
- Fixed income: Accounting for expected credit losses
- The importance of credit analysis and active bond management under IFRS 9
- Fixed income: Ending the concept of “tainting”
SECTION 2: Equity Investing
Classification for investment in equities
Equity investments: Accounting for realized gains/losses
SECTION 3: Hedge Accounting
- Removal of the IAS 39 quantitative effectiveness test
- Example 1: Accounting for the time value of options under IFRS 9
- Example 2: Use of interest rate derivatives to enhance asset duration
SECTION 4: Embedded Derivatives
- More embedded derivatives will be marked-to-market
1 This paper focuses on direct investments in bonds and equities, rather than indirect investments, for example via mutual funds.