IFRS 9 – Financial Instruments
IFRS 9 covers classification, measurement, impairment, and hedge accounting for financial assets and financial liabilities.
1. Classification of Financial Assets
Financial assets are classified based on:
(A) Business Model Test
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Hold to collect cash flows
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Hold to collect and sell
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Other (e.g., trading)
(B) Cash Flow Characteristics Test (SPPI Test)
SPPI = Solely Payments of Principal and Interest
If cash flows are NOT SPPI → must be at FVTPL.
Financial Asset Categories
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Amortised Cost
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FVOCI (Fair Value through Other Comprehensive Income)
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FVTPL (Fair Value through Profit or Loss)
1.1 Amortised Cost (AC)
Conditions:
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Business model = hold to collect
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SPPI cash flows
Examples:
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Trade receivables
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Loan receivables
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Term deposits
Example (Amortised Cost Calculation – Effective Interest Method)
A company buys a bond:
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Cost: $95,000
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Face value: $100,000
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Coupon rate: 5%
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Market rate: 7%
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Term: 3 years
Year 1 Interest Income:
Carrying amount × market rate
= 95,000 × 7% = 6,650
Cash received = 100,000 × 5% = 5,000
Increase in carrying amount = 1,650
New carrying amount = 96,650
(Continue same method for other years.)
1.2 FVOCI (Debt Instruments)
Conditions:
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Hold to collect and sell
-
SPPI test passed
Changes in fair value → OCI
Interest income → P/L
Impairment → P/L
On sale: OCI recycled to P/L.
Example:
Bond FV changes from 100,000 → 103,000
→ Gain of 3,000 to OCI.
1.3 FVTPL
Use when:
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Fails SPPI test
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Held for trading
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Designated as FVTPL
Changes in FV → P/L.
Example:
Equity investment increases from $20,000 → $25,000
→ Gain of $5,000 in profit or loss.
2. Classification of Financial Liabilities
Two categories:
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Amortised Cost (most liabilities)
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FVTPL (for trading or designated)
Examples:
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Bank loans → Amortised cost
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Derivative liabilities → FVTPL
Example (Liability – Amortised Cost)
Loan: $100,000, interest 8%, effective rate 10%.
Interest expense = 100,000 × 10% = 10,000
Cash paid = 100,000 × 8% = 8,000
Liability increases by 2,000.
3. Impairment – Expected Credit Loss (ECL) Model
IFRS 9 uses forward-looking ECL, not incurred loss.
ECL applies to:
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Amortised cost financial assets
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FVOCI debt instruments
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Lease receivables
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Contract assets (IFRS 15)
3 Stages of Impairment (General Model)
Stage 1 – 12-month ECL
Credit risk not increased significantly.
Recognize 12-month ECL.
Stage 2 – Lifetime ECL
Credit risk increased significantly.
Stage 3 – Credit Impaired
Recognize lifetime ECL
Interest income based on net carrying amount.
Simplified Approach (Trade Receivables)
Always use lifetime ECL, no staging.
Example – ECL Calculation (Simplified Approach)
Receivable: $100,000
Loss rate: 4%
ECL = 100,000 × 4% = $4,000 impairment loss.
Example – ECL (General Model)
Loan carrying amount = $500,000
PD (12-month) = 2%
LGD = 40%
EAD = $500,000
12-month ECL = PD × LGD × EAD
= 2% × 40% × 500,000
= $4,000
If credit risk increases significantly:
Lifetime ECL example (PD lifetime = 15%).
= 15% × 40% × 500,000
= $30,000
4. Hedge Accounting
IFRS 9 allows 3 types of hedging:
(A) Fair Value Hedge
Hedge changes in fair value of an asset or liability.
Example:
Hedging a fixed-rate debt.
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Gain on hedging instrument → P/L
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Loss on hedged item → P/L
(Offsets.)
(B) Cash Flow Hedge
Hedge variability in cash flows.
Example:
Forecast sale in EUR.
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Effective portion → OCI
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Ineffective portion → P/L
(C) Net Investment Hedge
For foreign operations.
5. Derecognition
Derecognition of Financial Assets
Occurs when:
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Contractual rights to cash flows expire
or -
Asset is transferred and substantially all risks/rewards are transferred.
Example:
Sells a receivable with full transfer of risk → derecognise it.
Derecognition of Financial Liabilities
Occurs when:
-
Liability is cancelled, settled, or expired.
Example:
Debt settlement:
Pay $90,000 to settle a loan of $100,000 → gain $10,000.
6. Comprehensive Example (Combined)
Company purchases a bond:
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Cost: $90,000
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Face value: $100,000
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Coupon 4%
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Market rate 6%
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Meets SPPI
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Business model: Hold to collect → Amortised Cost
(1) Year 1 Interest
Interest income = 90,000 × 6% = 5,400
Cash received = 100,000 × 4% = 4,000
Increase in carrying amount = 1,400
Carrying amount = 91,400
(2) Expected Credit Loss
PD = 3%
LGD = 50%
EAD = 91,400
ECL = 3% × 50% × 91,400 = $1,371
Loss recognized in P/L.
(3) Fair Value Change (if designated FVTPL)
If FV increases to 93,000 → gain of 1,600 to P/L.