PSAK 71 Summary

CINDY ISMANTARA | 201850636
PSAK 71 – Financial Instruments

INTRODUCTION
 PSAK 71 affects more than just financial institutions. Any entity could incur significant changes to its financial reporting,
especially those with long-term loans, equity investments, or any non-vanilla financial assets.
 Possible consequences of PSAK 71 include:
(1) More income statement volatility. PSAK 71 raises the risk that more assets will have to be measured at fair value
with changes in fair value recognised in profit and loss as they arise.
(2) Earlier recognition of impairment losses on receivables and loans, including trade receivables. Entities will have to
start providing for possible future credit losses in the very first reporting period a loan goes on the books, even if it is
highly likely that the asset will be fully collectible.
(3) Significant new disclosure requirements. Entities may need new systems and processes to collect the necessary
data, if there are significant changes.
WHY THE NEW STANDARD?
 PSAK 71 generally is effective for years beginning on or after January 1, 2020, with earlier adoption permitted.
 PSAK 71 is an adoption of IFRS 9 Financial Instruments which was developed by the International Accounting Standards
Board (IASB) to replace IAS 39 (PSAK 55) Financial Instruments – Recognition and Measurement. The new standard is
meant to respond to criticisms that IAS 39 is too complex, inconsistent with the way entities manage their businesses and
risks, and defers the recognition of credit losses on loans and receivables until too late in the credit cycle. The IASB had
always intended to reconsider IAS 39, but the financial crisis made this a priority.
 PSAK 71 deals separately with the classification and measurement of financial assets, impairment and hedging
requirements. Other aspects of PSAK 55, such as scope, recognition, and derecognition of financial assets, have survived
with only a few modifications.
A SUMMARY OF THE MAJOR CHANGES
CLASSIFICATION AND M EASUREMENT OF FINANCIAL ASSETS AFTER INI TIAL RECOGNITION
PSAK 71 replaces PSAK 55’s patchwork of arbitrary bright-line tests, accommodations, options and abuse-prevention
measures for the classification and measurement of financial assets after initial recognition with a single model that has
fewer exceptions. The new standard is based on the concept that financial assets should be classified and measured at fair
value. The PSAK 71 model is simpler than PSAK 55 but at a price—an added threat of volatility in profit and loss.
OTHER CLASSIFICATION AND MEASUREMENT CHANGES
(1) Allowing trade receivables that do not have a significant financing component to be measured at undiscounted invoice
price rather than fair value.
(2) Eliminating the exemption allowing for measurement at cost rather than fair value of investments in certain non-traded
investments in equity instruments and derivatives settled by the delivery of those instruments.
(3) Restricting optional FVPL and FVOCI designations.
(4) Permitting OCI treatment of changes in the fair value attributable to the issuer’s credit risk for liabilities as FVPL.
(5) Setting new criteria for reclassifying of financial assets and liabilities.
IMPAIRMENT OF FINANCIAL ASSETS
PSAK 71 eliminates impairment assessments for equity instruments and establishes a new approach for loans and
receivables, under an “expected loss” model (model that focuses on the risk that a loan will default rather than whether a
loss has been incurred).
EXPECTED CREDIT LOSS ES
Under the “expected credit loss” model, an entity calculates the allowance for credit losses by considering on a discounted
basis the cash shortfalls it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls
by the probability of each scenario occurring. The allowance is the sum of these probability-weighted outcomes. Because
every loan and receivable carries with it some risk of default, every such asset has an expected loss attached to it from the
moment of its acquisition. Because expected credit losses represent possible outcomes weighted by the probability of their
occurrence, these amounts are not necessarily “expected” nor “losses”, at least as those terms are generally understood. In
effect, they represent measures of an asset’s credit risk.

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CINDY ISMANTARA | 201850636

PSAK 71 – Financial Instruments

CLASSIFICATION AND M EASUREMENT OF FINANCIAL ASSETS AFTER INI TIAL RECOGNITION

OTHER CLASSIFICATION AND MEASUREMENT CHANGES

IMPAIRMENT OF FINANCIAL ASSETS

EXPECTED CREDIT LOSS ES

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