Overview

IFRS 9 Financial Instruments governs the classification, measurement, impairment and hedge accounting of financial instruments. It replaced IAS 39 and became mandatory for annual periods beginning on or after 1 January 2018. IFRS 9 has three main pillars: classification and measurement, impairment (ECL model), and hedge accounting.

IFRS 9 Classification — Amortised Cost, FVOCI, FVTPL →

Classification and Measurement

Financial assets are classified into three measurement categories based on two sequential tests:

1. Business model test (IFRS 9.4.1.2): Is the objective to hold and collect contractual cash flows, hold and sell, or neither?
2. SPPI test (IFRS 9.4.1.3): Do contractual cash flows represent solely payments of principal and interest?

The three resulting categories are:

• Amortised Cost (AC): hold-to-collect + SPPI pass → measured at amortised cost using the effective interest method; ECL recognised
• FVOCI: hold-to-collect-and-sell + SPPI pass → fair value changes in OCI; interest income and ECL through P&L
• FVTPL: all other cases, including derivatives and instruments failing SPPI → all fair value changes through P&L

→ Detailed guide: IFRS 9 Classification of Financial Assets — AC, FVOCI, FVTPL

→ SPPI mechanics: IFRS 9 SPPI Test

Impairment — Expected Credit Loss Model

IFRS 9 replaced the IAS 39 incurred loss model with a forward-looking Expected Credit Loss (ECL) model. All financial assets measured at amortised cost or FVOCI (debt instruments) are subject to ECL assessment under a three-stage approach:

• Stage 1 (performing): 12-month ECL recognised; interest on gross carrying amount
• Stage 2 (significant increase in credit risk — SICR): lifetime ECL; interest on gross carrying amount
• Stage 3 (credit-impaired): lifetime ECL; interest on net carrying amount (after ECL allowance)

→ Detailed guide: IFRS 9 Expected Credit Loss Model

→ Staging mechanics: IFRS 9 Three-Stage Impairment Model

Hedge Accounting

IFRS 9 introduced a more principles-based hedge accounting model aligned with an entity's risk management objectives, replacing the rules-based IAS 39 requirements:

• Hedging relationships: fair value hedges, cash flow hedges, net investment hedges
• Effectiveness testing: replaced the IAS 39 80–125% bright-line with a principles-based assessment
• Rebalancing: hedge ratio can be adjusted without mandatory de-designation
• Disclosures: IFRS 7.24A–24E require disclosure of hedging relationships, instruments, hedged items and ineffectiveness

→ Detailed guide: IFRS 9 Hedge Accounting

Summary