To establish comprehensive principles for the financial reporting of financial instruments.
Covers how entities should:
Recognize financial assets and financial liabilities.
Classify and measure them.
Account for impairment using an Expected Credit Loss (ECL) model.
Apply rules for hedge accounting.
The goal is to provide relevant and useful information to users for assessing the amounts, timing, and uncertainty of an entity’s future cash flows.
Applies To:
All types of financial instruments, including financial assets, financial liabilities, and many derivative contracts.
Does NOT Apply To (Selected Exceptions):
Interests in subsidiaries, associates, and joint ventures accounted for under IAS 27, IAS 28, or IFRS 10.
Employer’s rights and obligations under employee benefit plans (IAS 19). (e.g., pension obligations).
Contracts within the scope of IFRS 17 Insurance Contracts.
Lease liabilities recognized by a lessee (IFRS 16). (e.g., obligation for leased building payments).
Certain equity instruments issued by the entity treated as equity under IAS 32, and some contracts related to share-based payments (IFRS 2). (e.g., employee share options).
Rights and obligations under IFRS 15 Revenue from Contracts with Customers that are financial instruments (except those IFRS 15 specifies are under IFRS 9, like certain financing components).
Key Criteria (at initial recognition):
1. Business Model Test: How an entity manages its financial assets to generate cash flows.
Hold to collect contractual cash flows (e.g., government bonds held for interest and principal).
Hold to collect contractual cash flows AND sell financial assets (e.g., corporate bonds held for interest but also for opportunistic sale).
Other business models (e.g., held for trading, managed on a fair value basis).
2. Contractual Cash Flow Characteristics (SPPI Test): Cash flows on specified dates must be Solely Payments of Principal and Interest on the principal amount outstanding.
Principal = Fair value at initial recognition.
Interest = Consideration for time value of money, credit risk, other basic lending risks/costs, and a profit margin.
Classification Categories:
| Category | Criteria (Business Model & SPPI) | Measurement & P&L Impact |
| Amortized Cost (AC) |
Business Model: Hold to Collect.
SPPI Test: Pass. |
Measured at amortized cost using Effective Interest Rate (EIR) method. Interest income (P&L). Impairment via ECL model (P&L).
Ex: Term loan to customer. |
| Fair Value Through Other Comprehensive Income (FVOCI) |
Business Model: Hold to Collect AND Sell.
SPPI Test: Pass. |
Measured at Fair Value. FV changes in OCI. Interest income (EIR), impairment (ECL), FX gains/losses in P&L. On disposal, cumulative OCI gains/losses recycled to P&L (for debt).
Ex: Corporate bonds held for interest & potential sale. |
| Fair Value Through Profit or Loss (FVTPL) |
Default if not AC or FVOCI.
SPPI Test: Fail (e.g., convertible bond with non-closely related embedded derivative).
OR Held for trading / managed on FV basis.
OR Irrevocable designation at FVTPL (to reduce mismatch). |
Measured at Fair Value. All FV changes (incl. interest/dividends) directly in P&L.
Ex: Equity shares for trading; debt linked to commodity prices. |
SPPI Test Details:
Passes if cash flows are consistent with a basic lending arrangement (principal and interest). Standard fixed or floating rate loans usually pass.
Fails if contractual terms introduce exposure to risks or volatility unrelated to basic lending (e.g., cash flows linked to equity/commodity prices, leveraged returns, non-recourse features, prepayment options not representing substantially unpaid principal and interest). Such instruments are classified at FVTPL.
Categories & Treatments:
Most financial liabilities are subsequently measured at amortized cost using the effective interest method.
| Category | Initial Measurement | Subsequent Measurement |
| Amortized Cost |
Fair value minus transaction costs. |
Measured using EIR method. Interest expense in P&L.
Ex: Company issues a plain bond or takes a bank loan. |
| Fair Value Through Profit or Loss (FVTPL) |
Fair value (transaction costs expensed in P&L). |
Fair value changes in P&L.
Exception for Own Credit Risk: For liabilities designated at FVTPL, FV changes due to entity's own credit risk are generally presented in OCI (not P&L), unless this creates/enlarges an accounting mismatch. Other FV changes to P&L.
Ex: Derivative liabilities; bond designated at FVTPL to reduce mismatch. |
Classification:
Investments in equity instruments are by default measured at FVTPL.
Option at initial recognition (irrevocable): For equity investments not held for trading, an entity can elect to present subsequent changes in fair value in FVOCI.
Under FVOCI option: Only dividend income recognized in P&L.
Fair value gains/losses recognized in OCI and not recycled to P&L on disposal (may be transferred within equity).
Impairment losses are not separately recognized (asset already at FV).
Example: Company makes a strategic, long-term investment in shares of a non-listed start-up, not intending to trade. It may elect FVOCI presentation.
When Allowed:
Reclassification of financial assets is permitted only when the entity changes its business model for managing financial assets. Such changes are expected to be very infrequent.
Example: A portfolio of bonds previously managed as 'Hold to Collect' (Amortized Cost) is now actively managed for realizing fair value gains (FVTPL). This change in business model triggers reclassification.
Reclassification is applied prospectively from the reclassification date (first day of the next reporting period after the change in business model).
Previously recognized gains, losses, or interest are not restated.
Financial liabilities are never reclassified.
Scope of ECL Model:
Applies to debt financial assets measured at Amortized Cost and FVOCI.
Also applies to loan commitments and financial guarantee contracts not at FVTPL.
Does NOT apply to equity instruments or financial assets at FVTPL.
ECL Approaches:
| Approach | Application | Description |
| General Approach |
Most debt instruments at AC & FVOCI, loan commitments, financial guarantees. |
3-stage model based on Significant Increase in Credit Risk (SICR) since initial recognition. ECL amount depends on stage.
Ex: Corporate loans, bonds. |
| Simplified Approach |
Trade receivables, contract assets (IFRS 15), lease receivables (IFRS 16). Policy choice. |
No need to track SICR (no staging). Always measure loss allowance at lifetime ECL. Often uses provision matrix.
Ex: Manufacturer's short-term customer receivables. |
3-Stage ECL Model (General Approach):
| Stage | Criteria | ECL Measurement | Interest Revenue Calc. |
| Stage 1 |
No SICR since initial recognition, or low credit risk.
Ex: New loan to strong borrower. |
12-month ECL (default events possible within 12 months). |
On Gross Carrying Amount. |
| Stage 2 |
SICR since initial recognition, but not yet credit-impaired.
Ex: Borrower missed payments, credit rating worsened. |
Lifetime ECL (all possible default events over expected life). |
On Gross Carrying Amount. |
| Stage 3 |
Credit-impaired (default occurred or objective evidence of impairment).
Ex: Borrower in bankruptcy. |
Lifetime ECL. Asset is credit-impaired. |
On Net Carrying Amount (Gross - ECL Allowance). |
Key Inputs for ECL Calculation:
Probability of Default (PD): Likelihood of default over a specific time.
Loss Given Default (LGD): Proportion of exposure lost if default occurs (considers collateral).
Exposure at Default (EAD): Estimated exposure outstanding at default time.
Forward-Looking Information:
ECL model requires incorporating reasonable and supportable forward-looking information (e.g., macroeconomic forecasts like GDP, unemployment rates).
Example: If a recession is forecasted, an entity might increase its PDs and LGDs, leading to higher ECL provisions.
Financial Assets:
Derecognize when contractual rights to cash flows expire (e.g., loan repaid).
OR when the entity transfers the financial asset and the transfer qualifies for derecognition (assessment of transfer of risks and rewards of ownership, and then control).
Substantially all risks & rewards transferred → Derecognize. (e.g., outright sale of receivables without recourse).
Substantially all risks & rewards retained → Continue to recognize; recognize liability for consideration. (e.g., repo agreement).
Neither transferred nor retained substantially all → Assess control. If control not retained, derecognize.
Example: Company sells receivables to a factor, transferring all significant credit risk. Receivables are derecognized.
Financial Liabilities:
Derecognize when the obligation is extinguished (discharged, cancelled, or expired).
Example: Company repays a bond on its maturity date.
Substantial Modification of Liabilities:
An exchange of debt instruments with substantially different terms, or a substantial modification of existing terms, is accounted for as an extinguishment of the original liability and recognition of a new liability.
Difference between old carrying amount and consideration paid recognized in P&L.
Modification generally substantial if NPV of cash flows under new terms (using original EIR) is at least 10% different from NPV of remaining cash flows of original liability.
Example: Company renegotiates a loan with significantly lower interest and extended maturity, meeting the 10% test. Old loan derecognized, new loan recognized at FV, gain/loss to P&L.
Types of Hedges:
| Type | Description | Objective & Accounting Treatment |
| Fair Value Hedge |
Hedges exposure to FV changes of a recognized asset/liability or unrecognized firm commitment due to a particular risk. |
Hedging instrument FV changes to P&L. Hedged item's FV change due to hedged risk adjusts carrying amount & to P&L (offset in P&L).
Ex: Hedging interest rate risk of fixed-rate bond with interest rate swap. |
| Cash Flow Hedge |
Hedges exposure to cash flow variability of recognized asset/liability or highly probable forecast transaction due to a particular risk. |
Effective portion of hedging instrument's gain/loss to OCI (cash flow hedge reserve). Ineffective portion to P&L. OCI amount recycled to P&L when hedged cash flows affect P&L.
Ex: Hedging FX risk of future USD sale with forward contract. |
| Net Investment Hedge |
Hedges FX exposure of a net investment in a foreign operation (IAS 21). |
Similar to cash flow hedge. Effective portion of hedging instrument's gain/loss to OCI. Ineffective to P&L. OCI recycled to P&L on disposal of foreign operation.
Ex: Parent hedges USD net investment in US sub with USD loan. |
Qualifying Criteria for Hedge Accounting:
Eligible hedging instruments and hedged items.
Formal designation and documentation at inception (relationship, risk management objective/strategy).
Hedge effectiveness requirements met:
Economic relationship exists between hedged item and instrument.
Effect of credit risk does not dominate value changes.
Hedge ratio is consistent with entity's actual hedging practice.
No 80-125% bright-line effectiveness test. Assessed prospectively.
Discontinuation of Hedge Accounting (Prospectively):
When qualifying criteria no longer met, risk management objective changes, instrument expires/sold/terminated, or forecast transaction no longer highly probable.
Example: Forecasted sale hedged is cancelled. Hedge accounting stops; OCI amounts may be reclassified to P&L if sale not expected.
IFRS 7 mandates extensive disclosures related to IFRS 9.
Required Disclosure Areas:
| Area | Details |
| Categories & Carrying Amounts | Carrying amounts by IFRS 9 category (AC, FVOCI, FVTPL). Loss allowance movements. FVTPL designations.
Ex: Table of financial assets by category. |
| Risk Exposures | Qualitative & quantitative info on credit, liquidity, market risks. Sensitivity analyses.
Ex: Interest rate sensitivity on P&L/equity. |
| ECL Model | Credit risk practices, ECL measurement inputs/assumptions (PD, LGD, EAD, SICR criteria, forward-looking info). ECL balance reconciliation.
Ex: Macroeconomic scenarios for ECL. |
| Hedge Accounting | Risk management strategy, instruments, hedged items, risks hedged, effectiveness assessment, P&L/OCI/Balance Sheet impact.
Ex: Description of jet fuel price hedging. |
| Fair Value | FV hierarchy (Levels 1, 2, 3). Level 3 reconciliations, valuation techniques, unobservable inputs. FV of items not at FV.
Ex: Breakdown of FV assets by Level 1/2/3. |
Initial Adoption:
Generally applied retrospectively (IAS 8), but comparatives usually not restated.
Cumulative effect of initial application recognized as adjustment to opening retained earnings (or other equity) at date of initial application.
Example: If new ECL model results in $1M higher provision than IAS 39 model, opening retained earnings on transition date reduced by $1M (net of tax).
Optional Exemptions & Specific Provisions:
Hedge Accounting: Previous option to continue IAS 39 hedge accounting generally phased out. Specific transition rules for IFRS 9 hedge accounting.
Classification & Measurement: Specific provisions for assessing contractual cash flows based on facts at initial recognition/transition.
Impairment: Relief if determining SICR since original inception requires undue cost/effort for older assets.
Business Model Assessment: How assets are managed to generate cash flows (impacts classification).
SPPI Test: Whether contractual cash flows are solely payments of principal and interest.
Determining Significant Increase in Credit Risk (SICR) for ECL staging.
Measurement of ECL: Defining default; estimating PD, LGD, EAD; incorporating forward-looking information.
Designation of equity instruments at FVOCI (irrevocable choice).
Hedge Effectiveness Assessment: Economic relationship and hedge ratio.
Fair Value Measurement: Especially for Level 3 inputs (valuation models, unobservable inputs).
Assessing substantial modification of financial liabilities.
