Finance & Accounting

A brief overview of IFRS 9 on Financial Instruments


IFRS 9 is effective for the fiscal years beginning on or after January 1st, 2018, while early adoption is also permitted. The International Accounting Standards Board (or IASB) created IFRS 9 Financial Instruments (IFRS 9) to replace the IAS 39.

It is intended to address objections that IAS 39 is overly complicated, inconsistent with how entities manage their operations and risks, and postpones the recognition of credit losses on loans and receivables until too late in the business credit cycle. The IASB has always intended to revisit IAS 39, but the financial crisis forced them to do so.

Recognition and measurement under IFRS 9

The standard maintains a mixed-measurement methodology in which certain assets are measured at amortized cost and others are measured at fair value. The difference between these two models is based on each entity’s business model and the necessity to determine whether the instrument’s cashflows are solely principal and interest.

The business-model approach is central to the standard, and it aims to match accounting with how management utilizes its assets in its business while also taking into consideration the peculiarities of the business.

If both the ‘business model test’ as well as the ‘contractual cash flow characteristics test’ are fulfilled, a debt instrument must typically be assessed at amortized cost. The business model test determines if the business model’s goal of the entity is to keep the financial asset in order to receive contractual cash flows, rather than selling the instrument before its contractual maturity in order to realize fair value changes.

The contractual cash flow characteristics test determines whether the contractual conditions of the financial asset result in cash flows that are primarily payments of principal and interest on the principal amount outstanding on specified dates.

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All recognized financial assets that fall under the purview of IAS 39 will be measured at amortized cost or fair value. In contrast to IAS 39, which included several measurement categories, this standard only has two basic measurement categories for financial assets. Thus, the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale are removed, as are the standard’s tainting provisions.

A debt instrument, for example, a loan receivable, that is kept inside a business model with the goal of collecting the contractual cash flows and contains contractual cash flows that are primarily payments of principal and interest must typically be reported at amortized cost.

All other debt instruments must be valued at their fair value using profit or loss (i.e., FVTPL). Because of the presence of the conversion option, which is not judged to reflect payments of principal and interest, an investment in a convertible loan note would not qualify for assessment at amortized cost.

This criterion will allow for amortized cost calculation when the cashflows on a loan are totally fixed, such as a fixed-interest-rate loan, or when interest is floating or a blend of fixed and floating interest rates.

IFRS 9 includes an option to categorize financial assets that fulfill the amortized cost criterion as at FVTPL if doing so avoids or lessens an accounting mismatch. For example, suppose a firm has a fixed-rate loan receivable that it hedges with an interest rate swap that converts the fixed rates to floating rates.

Because the interest rate swap is kept at FVTPL, measuring the loan asset at amortized cost would result in a measurement mismatch. To minimize the accounting mismatch caused by measuring the loan at amortized cost, the loan receivable might be marked at FVTPL under the fair value option in this scenario.

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Losses and gains under IFRS 9

Any equity investments covered by IFRS 9 must be assessed at fair value in the statement of financial position, with gains and losses being recognized in profit or loss by default. Only if the equity investment is not kept for trading purposes may an irreversible decision be taken at initial measurement to assess it at fair value through other comprehensive income (or FVTOCI), with just dividend income recognized in profit or loss. Although the sums recognized in the other comprehensive income (or OCI) might well be reclassified in equity, they are not converted to profit or loss on disposal of the investment.

The exception that allowed some unquoted equity instruments and related derivative assets to be assessed at cost is no longer available under the standard. It does, however, give guidance on the few occasions where the cost of such an instrument may be an accurate assessment of fair value.

The categorization of an instrument is set at the time of initial recognition, and reclassifications are only authorized if an entity’s business model changes, which is intended to happen relatively seldom. When an organization decides to stop its mortgage business, is no longer accepting new business, and is aggressively promoting its mortgage portfolio for sale, reclassification from amortized cost to fair value may be necessary.

When a reclassification is necessary, it takes effect on the first day of the initial reporting period after the change in the business model.

All derivatives that fall under the purview of IFRS 9 must be assessed at fair value. The technique for accounting for embedded derivatives in IFRS 9 differs from that in IAS 39. As a result, embedded derivatives that would have been distinctively accounted for under IAS 39 at FVTPL since they were not strongly connected to the financial asset host would no longer be segregated. Rather, the contractual cash flows of the financial asset are evaluated as a whole and measured at FVTPL if any of them do not reflect principal and interest payments.

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The issue of whether IFRS 9 will result in more financial assets being assessed at fair value is frequently raised. It will be determined by each entity’s circumstances in terms of how it handles the instruments it possesses, the nature of those instruments, and the categorization decisions it makes. One of the most significant improvements will be the ability to calculate the amortized cost of various debt instruments, such as investments in government and corporate bonds. Many available-for-sale debt instruments will qualify for amortized cost accounting if evaluated at fair value.

Many loans and receivables, as well as investments held to maturity, will continue to be assessed at amortized cost, while some will have to be measured at FVTPL. Some securities, such as cash-collateralized loan obligations, that may have been measured wholly at amortised cost or as available-for-sale under IAS 39, will most likely be measured at FVTPL.

Hedge accounting

The rules for hedge accounting under IFRS 9 are optional. If certain eligibility and qualification requirements are fulfilled, hedge accounting enables a business to record risk management actions in financial statements by matching profits or losses on financial hedging instruments against losses or gains on the risk exposures they hedge.


IFRS 9 addresses the categorization, recognition, de-recognition, and measurement standards for all financial assets and liabilities. This standard establishes recommendations for the accounting and reporting of Financial Instruments (FI[1]), allowing stakeholders to analyze the timing and uncertainty of a business’s future cash flow.

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