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IFRS 9 — Financial Instruments

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Overview
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's re‐
placement of IAS 39 Financial Instruments: Recognition and Mea‐
surement. The Standard includes requirements for recognition and
measurement, impairment, derecognition and general hedge
accounting. The IASB completed its project to replace IAS 39 in
phases, adding to the standard as it completed each phase.

The version of IFRS 9 issued in 2014 supersedes all previous ver‐

sions and is mandatorily effective for periods beginning on or after 1
January 2018 with early adoption permitted (subject to local en‐
dorsement requirements). For a limited period, previous versions of
IFRS 9 may be adopted early if not already done so provided the rel‐
evant date of initial application is before 1 February 2015.

IFRS 9 does not replace the requirements for portfolio fair value
hedge accounting for interest rate risk (often referred to as the
‘macro hedge accounting’ requirements) since this phase of the
project was separated from the IFRS 9 project due to the longer term
nature of the macro hedging project which is currently at the discus‐
sion paper phase of the due process. In April 2014, the IASB pub‐
lished a Discussion Paper Accounting for Dynamic Risk manage‐
ment: a Portfolio Revaluation Approach to Macro Hedging. Conse‐
quently, the exception in IAS 39 for a fair value hedge of an interest
rate exposure of a portfolio of financial assets or financial liabilities
continues to apply.

History of IFRS 9
Date Development Comments

14 July 2009 Exposure Draft Comment dead‐

ED/2009/7 Financial In‐ line 14 Sep‐
struments: Classifica‐ tember 2009
tion and Measurement
published

12 No‐ IFRS 9 Financial Instru‐ Original effective

vember 2009 ments issued, covering date 1 January
classification and mea‐ 2013, later
surement of financial removed
assets

11 May 2010 Exposure Draft Comment dead‐

ED/2010/4 Fair Value line 16 July 2010
Option for Financial Lia‐
bilities published

28 Octo‐ IFRS 9 Financial Instru‐ Original effective

ber 2010 ments reissued, incor‐ date 1 January
porating new require‐ 2013, later
ments on accounting removed
for financial liabilities
and carrying over from
IAS 39 the requirements
for derecognition of
financial assets and
financial liabilities

4 Au‐ ED/2011/3 Amend‐ Comment dead‐

gust 2011 ments to IFRS 9 (2009) line 21 October
and IFRS 9 (2010): 2011
Mandatory Effective
Date published,
proposing the adjust
the mandatory effective
date of IFRS 9 from 1
January 2013 to 1 Jan‐
uary 2015

16 Decem‐ Mandatory Effective Amended the

ber 2011 Date and Transition Dis‐ effective date of
closures (Amendments IFRS 9 to annual
to IFRS 9 and IFRS 7) periods beginning
published on or after 1 Jan‐
uary 2015 (re‐
moved in 2013),
and modified the
relief from restat‐
ing comparative
periods and the
associated dis‐
closures in IFRS
7

28 No‐ Exposure Draft Comment dead‐

vember 2012 ED/2012/4 Classifica‐ line 28 March
tion and Measurement: 2013
Limited Amendments to
IFRS 9 (proposed
amendments to IFRS 9
(2010)) published

19 No‐ IASB issues IFRS 9 Removed the

vember 2013 Financial Instruments mandatory effec‐
(Hedge Accounting and tive date of IFRS
amendments to IFRS 9, 9 (2009) and IFRS
IFRS 7 and IAS 39) 9 (2010)
amending IFRS 9 to:
include the new
general hedge
accounting model;
allow early adop‐
tion of the require‐
ment to present
fair value changes
due to own credit
on liabilities desig‐
nated as at fair
value through
profit or loss to be
presented in other
comprehensive
income; and
remove the 1 Jan‐
uary 2015 effective
date

24 July 2014 IASB issues IFRS 9 IFRS 9 (2014)

Financial Instruments was issued as a
complete stan‐
dard including the
requirements pre‐
viously issued
and the additional
amendments to
introduce a new
expected loss im‐
pairment model
and limited
changes to the
classification and
measurement re‐
quirements for
financial assets.

This amendment
completes the
IASB’s financial
instruments
project and the
Standard is effec‐
tive for reporting
periods beginning
on or after 1 Jan‐
uary 2018 with
early adoption
permitted (sub‐
ject to local en‐
dorsement re‐
quirements).

12 Sep‐ IASB issues Applying An entity choos‐

tember 2016 IFRS 9 'Financial Instru‐ ing to apply the
ments' with IFRS 4 'In‐ overlay approach
surance Contracts' retrospectively to
(Amendments to IFRS qualifying finan‐
4) to address concerns cial assets does
about the different so when it first
effective dates of IFRS applies IFRS 9.
9 and the new insur‐ An entity choos‐
ance contracts stan‐ ing to apply the
dard deferral approach
does so for
annual periods
beginning on or
after 1 January
2018.

12 October IASB issues Prepay‐ The amendments

2017 ment Features with are to be applied
Negative Compensation retrospectively for
(Amendments to IFRS fiscal years
9) to address the con‐ beginning on or
cerns about how IFRS after 1 January
9 classifies particular 2019; early appli‐
prepayable financial cation is permit‐
assets ted.

14 May 2020 Amended by Annual Effective for

Improvements to IFRS annual periods
Standards 2018–2020 beginning on or
(fees in the ‘10 per after 1 January
cent’ test for derecog‐ 2022
nition of financial liabili‐
ties). Click for more in‐
formation

9 December IASB issues Initial Ap‐ An entity that

2021 plication of IFRS 17 and elects to apply
IFRS 9 — Comparative the amendment
Information (Amend‐ applies it when it
ment to IFRS 17) to first applies IFRS
permit entities that first 17.
apply IFRS 17 and IFRS
9 at the same time to
present comparative in‐
formation about a
financial asset as if the
classification and mea‐
surement requirements
of IFRS 9 had been
applied to that financial
asset before

Related Interpretations
None

Related projects
Financial instruments — Macro hedge accounting
Post-implementation review — IFRS 9 (Classification and mea‐
surement)

Summary of IFRS 9

The phased completion of IFRS 9

On 12 November 2009, the IASB issued IFRS 9 Financial Instruments

as the first step in its project to replace IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 introduced new requirements
for classifying and measuring financial assets that had to be applied
starting 1 January 2013, with early adoption permitted. Click for
IASB Press Release (PDF 101k).

On 28 October 2010, the IASB reissued IFRS 9, incorporating new

requirements on accounting for financial liabilities, and carrying over
from IAS 39 the requirements for derecognition of financial assets
and financial liabilities. Click for IASB Press Release (PDF 33k).

On 16 December 2011, the IASB issued Mandatory Effective Date

and Transition Disclosures (Amendments to IFRS 9 and IFRS 7),
which amended the effective date of IFRS 9 to annual periods begin‐
ning on or after 1 January 2015, and modified the relief from restat‐
ing comparative periods and the associated disclosures in IFRS 7.

On 19 November 2013, the IASB issued IFRS 9 Financial Instruments

(Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39)
amending IFRS 9 to include the new general hedge accounting mod‐
el, allow early adoption of the treatment of fair value changes due to
own credit on liabilities designated at fair value through profit or loss
and remove the 1 January 2015 effective date.

On 24 July 2014, the IASB issued the final version of IFRS 9 incorpo‐
rating a new expected loss impairment model and introducing lim‐
ited amendments to the classification and measurement require‐
ments for financial assets.   This version supersedes all previous
versions and is mandatorily effective for periods beginning on or
after 1 January 2018 with early adoption permitted (subject to local
endorsement requirements). For a limited period, previous versions
of IFRS 9 may be adopted early if not already done so provided the
relevant date of initial application is before 1 February 2015.

Overview of IFRS 9
Initial measurement of financial instruments

All financial instruments are initially measured at fair value plus or

minus, in the case of a financial asset or financial liability not at fair
value through profit or loss, transaction costs. [IFRS 9, paragraph
5.1.1]

Subsequent measurement of financial assets

IFRS 9 divides all financial assets that are currently in the scope of
IAS 39 into two classifications - those measured at amortised cost
and those measured at fair value.

Where assets are measured at fair value, gains and losses are either
recognised entirely in profit or loss (fair value through profit or loss,
FVTPL), or recognised in other comprehensive income (fair value
through other comprehensive income, FVTOCI).

For debt instruments the FVTOCI classification is mandatory for cer‐

tain assets unless the fair value option is elected. Whilst for equity in‐
vestments, the FVTOCI classification is an election. Furthermore, the
requirements for reclassifying gains or losses recognised in other
comprehensive income are different for debt instruments and equity
investments.

The classification of a financial asset is made at the time it is initially

recognised, namely when the entity becomes a party to the contrac‐
tual provisions of the instrument. [IFRS 9, paragraph 4.1.1] If certain
conditions are met, the classification of an asset may subsequently
need to be reclassified.

Debt instruments

A debt instrument that meets the following two conditions must be

measured at amortised cost (net of any write down for impairment)
unless the asset is designated at FVTPL under the fair value option
(see below):

[IFRS 9, paragraph 4.1.2]

Business model test: The objective of the entity's business

model is to hold the financial asset to collect the contractual
cash flows (rather than to sell the instrument prior to its con‐
tractual maturity to realise its fair value changes).
Cash flow characteristics test: The contractual terms of the
financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal
amount outstanding.

Assessing the cash flow characteristics also includes an analysis of

changes in the timing or in the amount of payments. It is necessary
to assess whether the cash flows before and after the change repre‐
sent only repayments of the nominal amount and an interest rate
based on them.

The right of termination may for example be in accordance with the

cash flow condition if, in the case of termination, the only outstand‐
ing payments consist of principal and interest on the principal
amount and an appropriate compensation payment where applica‐
ble. In October 2017, the IASB clarified that the compensation pay‐
ments can also have a negative sign.*
*Prepayment Features with Negative Compensation (Amendments to IFRS 9); to be applied retrospectively for
fiscal years beginning on or after 1 January 2019; early application permitted

A debt instrument that meets the following two conditions must be

measured at FVTOCI unless the asset is designated at FVTPL under
the fair value option (see below):

[IFRS 9, paragraph 4.1.2A]

Business model test: The financial asset is held within a busi‐

ness model whose objective is achieved by both collecting con‐
tractual cash flows and selling financial assets.
Cash flow characteristics test: The contractual terms of the
financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal
amount outstanding.

All other debt instruments must be measured at fair value through

profit or loss (FVTPL). [IFRS 9, paragraph 4.1.4]

Fair value option

Even if an instrument meets the two requirements to be measured at

amortised cost or FVTOCI, IFRS 9 contains an option to designate,
at initial recognition, a financial asset as measured at FVTPL if doing
so eliminates or significantly reduces a measurement or recognition
inconsistency (sometimes referred to as an 'accounting mismatch')
that would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases. [IFRS
9, paragraph 4.1.5]

Equity instruments

All equity investments in scope of IFRS 9 are to be measured at fair

value in the statement of financial position, with value changes
recognised in profit or loss, except for those equity investments for
which the entity has elected to present value changes in 'other com‐
prehensive income'. There is no 'cost exception' for unquoted equi‐
ties.

'Other comprehensive income' option

If an equity investment is not held for trading, an entity can make an

irrevocable election at initial recognition to measure it at FVTOCI with
only dividend income recognised in profit or loss. [IFRS 9, paragraph
5.7.5]

Measurement guidance

Despite the fair value requirement for all equity investments, IFRS 9
contains guidance on when cost may be the best estimate of fair
value and also when it might not be representative of fair value.

Subsequent measurement of financial liabilities

IFRS 9 doesn't change the basic accounting model for financial lia‐
bilities under IAS 39. Two measurement categories continue to exist:
FVTPL and amortised cost. Financial liabilities held for trading are
measured at FVTPL, and all other financial liabilities are measured at
amortised cost unless the fair value option is applied. [IFRS 9, para‐
graph 4.2.1]

Fair value option

IFRS 9 contains an option to designate a financial liability as mea‐

sured at FVTPL if [IFRS 9, paragraph 4.2.2]:

doing so eliminates or significantly reduces a measurement or

recognition inconsistency (sometimes referred to as an 'ac‐
counting mismatch') that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them
on different bases, or
the liability is part or a group of financial liabilities or financial
assets and financial liabilities that is managed and its perfor‐
mance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy, and in‐
formation about the group is provided internally on that basis to
the entity's key management personnel.

A financial liability which does not meet any of these criteria may still
be designated as measured at FVTPL when it contains one or more
embedded derivatives that sufficiently modify the cash flows of the
liability and are not clearly closely related. [IFRS 9, paragraph 4.3.5]

IFRS 9 requires gains and losses on financial liabilities designated as

at FVTPL to be split into the amount of change in fair value attribut‐
able to changes in credit risk of the liability, presented in other com‐
prehensive income, and the remaining amount presented in profit or
loss. The new guidance allows the recognition of the full amount of
change in the fair value in profit or loss only if the presentation of
changes in the liability's credit risk in other comprehensive income
would create or enlarge an accounting mismatch in profit or loss.
That determination is made at initial recognition and is not re‐
assessed. [IFRS 9, paragraphs 5.7.7-5.7.8]

Amounts presented in other comprehensive income shall not be sub‐

sequently transferred to profit or loss, the entity may only transfer the
cumulative gain or loss within equity.

Derecognition of financial assets

The basic premise for the derecognition model in IFRS 9 (carried

over from IAS 39) is to determine whether the asset under considera‐
tion for derecognition is: [IFRS 9, paragraph 3.2.2]

an asset in its entirety or

specifically identified cash flows from an asset (or a group of
similar financial assets) or
a fully proportionate (pro rata) share of the cash flows from an
asset (or a group of similar financial assets). or
a fully proportionate (pro rata) share of specifically identified
cash flows from a financial asset (or a group of similar financial
assets)

Once the asset under consideration for derecognition has been de‐
termined, an assessment is made as to whether the asset has been
transferred, and if so, whether the transfer of that asset is subse‐
quently eligible for derecognition.

An asset is transferred if either the entity has transferred the contrac‐

tual rights to receive the cash flows, or the entity has retained the
contractual rights to receive the cash flows from the asset, but has
assumed a contractual obligation to pass those cash flows on under
an arrangement that meets the following three conditions: [IFRS 9,
paragraphs 3.2.4-3.2.5]

the entity has no obligation to pay amounts to the eventual

recipient unless it collects equivalent amounts on the original
asset
the entity is prohibited from selling or pledging the original asset
(other than as security to the eventual recipient),
the entity has an obligation to remit those cash flows without
material delay

Once an entity has determined that the asset has been transferred, it
then determines whether or not it has transferred substantially all of
the risks and rewards of ownership of the asset. If substantially all
the risks and rewards have been transferred, the asset is derecog‐
nised. If substantially all the risks and rewards have been retained,
derecognition of the asset is precluded. [IFRS 9, paragraphs 3.2.6(a)-
(b)]

If the entity has neither retained nor transferred substantially all of

the risks and rewards of the asset, then the entity must assess
whether it has relinquished control of the asset or not. If the entity
does not control the asset then derecognition is appropriate; how‐
ever if the entity has retained control of the asset, then the entity
continues to recognise the asset to the extent to which it has a con‐
tinuing involvement in the asset. [IFRS 9, paragraph 3.2.6(c)]

These various derecognition steps are summarised in the decision

tree in paragraph B3.2.1.

Derecognition of financial liabilities

A financial liability should be removed from the balance sheet when,

and only when, it is extinguished, that is, when the obligation speci‐
fied in the contract is either discharged or cancelled or expires. [IFRS
9, paragraph 3.3.1] Where there has been an exchange between an
existing borrower and lender of debt instruments with substantially
different terms, or there has been a substantial modification of the
terms of an existing financial liability, this transaction is accounted
for as an extinguishment of the original financial liability and the
recognition of a new financial liability. A gain or loss from extinguish‐
ment of the original financial liability is recognised in profit or loss.
[IFRS 9, paragraphs 3.3.2-3.3.3]

Derivatives

All derivatives in scope of IFRS 9, including those linked to unquoted

equity investments, are measured at fair value. Value changes are
recognised in profit or loss unless the entity has elected to apply
hedge accounting by designating the derivative as a hedging instru‐
ment in an eligible hedging relationship.

Embedded derivatives

An embedded derivative is a component of a hybrid contract that

also includes a non-derivative host, with the effect that some of the
cash flows of the combined instrument vary in a way similar to a
stand-alone derivative. A derivative that is attached to a financial in‐
strument but is contractually transferable independently of that in‐
strument, or has a different counterparty, is not an embedded deriva‐
tive, but a separate financial instrument. [IFRS 9, paragraph 4.3.1]

The embedded derivative concept that existed in IAS 39 has been

included in IFRS 9 to apply only to hosts that are not financial assets
within the scope of the Standard. Consequently, embedded deriva‐
tives that under IAS 39 would have been separately accounted for at
FVTPL because they were not closely related to the host financial
asset will no longer be separated. Instead, the contractual cash
flows of the financial asset are assessed in their entirety, and the
asset as a whole is measured at FVTPL if the contractual cash flow
characteristics test is not passed (see above).

The embedded derivative guidance that existed in IAS 39 is included

in IFRS 9 to help preparers identify when an embedded derivative is
closely related to a financial liability host contract or a host contract
not within the scope of the Standard (e.g. leasing contracts, insur‐
ance contracts, contracts for the purchase or sale of a non-financial
items).

Reclassification

For financial assets, reclassification is required between FVTPL,

FVTOCI and amortised cost, if and only if the entity's business
model objective for its financial assets changes so its previous
model assessment would no longer apply. [IFRS 9, paragraph 4.4.1]

If reclassification is appropriate, it must be done prospectively from

the reclassification date which is defined as the first day of the first
reporting period following the change in business model. An entity
does not restate any previously recognised gains, losses, or interest.

IFRS 9 does not allow reclassification:

for equity investments measured at FVTOCI, or

where the fair value option has been exercised in any circum‐
stance for a financial assets or financial liability.
Hedge accounting

The hedge accounting requirements in IFRS 9 are optional. If certain

eligibility and qualification criteria are met, hedge accounting allows
an entity to reflect risk management activities in the financial state‐
ments by matching gains or losses on financial hedging instruments
with losses or gains on the risk exposures they hedge.

The hedge accounting model in IFRS 9 is not designed to accommo‐

date hedging of open, dynamic portfolios. As a result, for a fair value
hedge of interest rate risk of a portfolio of financial assets or liabili‐
ties an entity can apply the hedge accounting requirements in IAS 39
instead of those in IFRS 9. [IFRS 9 paragraph 6.1.3]

In addition when an entity first applies IFRS 9, it may choose as its

accounting policy choice to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements of Chapter 6 of
IFRS 9 [IFRS 9 paragraph 7.2.21]
Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the

following criteria are met:

1. the hedging relationship consists only of eligible hedging in‐

struments and eligible hedged items.
2. at the inception of the hedging relationship there is formal des‐
ignation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for under‐
taking the hedge.
3. the hedging relationship meets all of the hedge effectiveness
requirements (see below) [IFRS 9 paragraph 6.4.1]

Hedging instruments

Only contracts with a party external to the reporting entity may be

designated as hedging instruments. [IFRS 9 paragraph 6.2.3]

A hedging instrument may be a derivative (except for some written

options) or non-derivative financial instrument measured at FVTPL
unless it is a financial liability designated as at FVTPL for which
changes due to credit risk are presented in OCI. For a hedge of for‐
eign currency risk, the foreign currency risk component of a non-de‐
rivative financial instrument, except equity investments designated
as FVTOCI, may be designated as the hedging instrument. [IFRS 9
paragraphs 6.2.1-6.2.2]

IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the
first 6 years of cash flows of a 10 year instrument) of a hedging in‐
strument to be designated as the hedging instrument. IFRS 9 also
allows only the intrinsic value of an option, or the spot element of a
forward to be designated as the hedging instrument.  An entity may
also exclude the foreign currency basis spread from a designated
hedging instrument. [IFRS 9 paragraph 6.2.4]

IFRS 9 allows combinations of derivatives and non-derivatives to be

designated as the hedging instrument. [IFRS 9 paragraph 6.2.5]

Combinations of purchased and written options do not qualify if they

amount to a net written option at the date of designation. [IFRS 9
paragraph 6.2.6]

Hedged items

A hedged item can be a recognised asset or liability, an unrecog‐

nised firm commitment, a highly probable forecast transaction or a
net investment in a foreign operation and must be reliably measur‐
able. [IFRS 9 paragraphs 6.3.1-6.3.3]

An aggregated exposure that is a combination of an eligible hedged

item as described above and a derivative may be designated as a
hedged item. [IFRS 9 paragraph 6.3.4]

The hedged item must generally be with a party external to the

reporting entity, however, as an exception the foreign currency risk of
an intragroup monetary item may qualify as a hedged item in the
consolidated financial statements if it results in an exposure to for‐
eign exchange rate gains or losses that are not fully eliminated on
consolidation. In addition, the foreign currency risk of a highly proba‐
ble forecast intragroup transaction may qualify as a hedged item in
consolidated financial statements provided that the transaction is
denominated in a currency other than the functional currency of the
entity entering into that transaction and the foreign currency risk will
affect consolidated profit or loss. [IFRS 9 paragraphs 6.3.5 -6.3.6]

An entity may designate an item in its entirety or a component of an

item as the hedged item. The component may be a risk component
that is separately identifiable and reliably measurable; one or more
selected contractual cash flows; or components of a nominal
amount. [IFRS 9 paragraph 6.3.7]

A group of items (including net positions is an eligible hedged item

only if:

1. it consists of items individually, eligible hedged items;

2. the items in the group are managed together on a group basis
for risk management purposes; and
3. in the case of a cash flow hedge of a group of items whose
variabilities in cash flows are not expected to be approximately
proportional to the overall variability in cash flows of the group:
1. it is a hedge of foreign currency risk; and
2. the designation of that net position specifies the report‐
ing period in which the forecast transactions are
expected to affect profit or loss, as well as their nature
and volume [IFRS 9 paragraph 6.6.1]

For a hedge of a net position whose hedged risk affects different line
items in the statement of profit or loss and other comprehensive
income, any hedging gains or losses in that statement are presented
in a separate line from those affected by the hedged items. [IFRS 9
paragraph 6.6.4]

Accounting for qualifying hedging relationships

There are three types of hedging relationships:

Fair value hedge: a hedge of the exposure to changes in fair value

of a recognised asset or liability or an unrecognised firm commit‐
ment, or a component of any such item, that is attributable to a par‐
ticular risk and could affect profit or loss (or OCI in the case of an
equity instrument designated as at FVTOCI). [IFRS 9 paragraphs
6.5.2(a) and 6.5.3]

For a fair value hedge, the gain or loss on the hedging instrument is
recognised in profit or loss (or OCI, if hedging an equity instrument at
FVTOCI and the hedging gain or loss on the hedged item adjusts the
carrying amount of the hedged item and is recognised in profit or
loss. However, if the hedged item is an equity instrument at FVTOCI,
those amounts remain in OCI. When a hedged item is an unrecog‐
nised firm commitment the cumulative hedging gain or loss is recog‐
nised as an asset or a liability with a corresponding gain or loss
recognised in profit or loss. [IFRS 9 paragraph 6.5.8]

If the hedged item is a debt instrument measured at amortised cost

or FVTOCI any hedge adjustment is amortised to profit or loss based
on a recalculated effective interest rate. Amortisation may begin as
soon as an adjustment exists and shall begin no later than when the
hedged item ceases to be adjusted for hedging gains and losses.
[IFRS 9 paragraph 6.5.10]

Cash flow hedge: a hedge of the exposure to variability in cash

flows that is attributable to a particular risk associated with all, or a
component of, a recognised asset or liability (such as all or some
future interest payments on variable-rate debt) or a highly probable
forecast transaction, and could affect profit or loss. [IFRS 9 para‐
graph 6.5.2(b)]

For a cash flow hedge the cash flow hedge reserve in equity is
adjusted to the lower of the following (in absolute amounts):

the cumulative gain or loss on the hedging instrument from

inception of the hedge; and
the cumulative change in fair value of the hedged item from
inception of the hedge.

The portion of the gain or loss on the hedging instrument that is de‐
termined to be an effective hedge is recognised in OCI and any
remaining gain or loss is hedge ineffectiveness that is recognised in
profit or loss.

If a hedged forecast transaction subsequently results in the recogni‐

tion of a non-financial item or becomes a firm commitment for which
fair value hedge accounting is applied, the amount that has been ac‐
cumulated in the cash flow hedge reserve is removed and included
directly in the initial cost or other carrying amount of the asset or the
liability. In other cases the amount that has been accumulated in the
cash flow hedge reserve is reclassified to profit or loss in the same
period(s) as the hedged cash flows affect profit or loss. [IFRS 9 para‐
graph 6.5.11]

When an entity discontinues hedge accounting for a cash flow

hedge, if the hedged future cash flows are still expected to occur,
the amount that has been accumulated in the cash flow hedge
reserve remains there until the future cash flows occur; if the hedged
future cash flows are no longer expected to occur, that amount is im‐
mediately reclassified to profit or loss [IFRS 9 paragraph 6.5.12]

A hedge of the foreign currency risk of a firm commitment may be

accounted for as a fair value hedge or a cash flow hedge. [IFRS 9
paragraph 6.5.4]

Hedge of a net investment in a foreign operation (as defined in

IAS 21), including a hedge of a monetary item that is accounted for
as part of the net investment, is accounted for similarly to cash flow
hedges:

the portion of the gain or loss on the hedging instrument that is

determined to be an effective hedge is recognised in OCI; and
the ineffective portion is recognised in profit or loss. [IFRS 9
paragraph 6.5.13]

The cumulative gain or loss on the hedging instrument relating to the

effective portion of the hedge is reclassified to profit or loss on the
disposal or partial disposal of the foreign operation. [IFRS 9 para‐
graph 6.5.14]

Hedge effectiveness requirements

In order to qualify for hedge accounting, the hedge relationship must

meet the following effectiveness criteria at the beginning of each
hedged period:

there is an economic relationship between the hedged item and

the hedging instrument;
the effect of credit risk does not dominate the value changes
that result from that economic relationship; and
the hedge ratio of the hedging relationship is the same as that
actually used in the economic hedge [IFRS 9 paragraph
6.4.1(c)]

Rebalancing and discontinuation

If a hedging relationship ceases to meet the hedge effectiveness re‐

quirement relating to the hedge ratio but the risk management objec‐
tive for that designated hedging relationship remains the same, an
entity adjusts the hedge ratio of the hedging relationship (i.e. rebal‐
ances the hedge) so that it meets the qualifying criteria again. [IFRS
9 paragraph 6.5.5]

An entity discontinues hedge accounting prospectively only when

the hedging relationship (or a part of a hedging relationship) ceases
to meet the qualifying criteria (after any rebalancing). This includes
instances when the hedging instrument expires or is sold, terminated
or exercised. Discontinuing hedge accounting can either affect a
hedging relationship in its entirety or only a part of it (in which case
hedge accounting continues for the remainder of the hedging rela‐
tionship). [IFRS 9 paragraph 6.5.6]

Time value of options

When an entity separates the intrinsic value and time value of an

option contract and designates as the hedging instrument only the
change in intrinsic value of the option, it recognises some or all of
the change in the time value in OCI which is later removed or reclas‐
sified from equity as a single amount or on an amortised basis (de‐
pending on the nature of the hedged item) and ultimately recognised
in profit or loss. [IFRS 9 paragraph 6.5.15] This reduces profit or loss
volatility compared to recognising the change in value of time value
directly in profit or loss.

Forward points and foreign currency basis spreads

When an entity separates the forward points and the spot element of
a forward contract and designates as the hedging instrument only
the change in the value of the spot element, or when an entity
excludes the foreign currency basis spread from a hedge the entity
may recognise the change in value of the excluded portion in OCI to
be later removed or reclassified from equity as a single amount or on
an amortised basis  (depending on the nature of the hedged item)
and ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.16]
This reduces profit or loss volatility compared to recognising the
change in value of forward points or currency basis spreads directly
in profit or loss.

Credit exposures designated at FVTPL

If an entity uses a credit derivative measured at FVTPL to manage

the credit risk of a financial instrument (credit exposure) it may desig‐
nate all or a proportion of that financial instrument as measured at
FVTPL if:

the name of the credit exposure matches the reference entity of

the credit derivative (‘name matching’); and
the seniority of the financial instrument matches that of the in‐
struments that can be delivered in accordance with the credit
derivative.

An entity may make this designation irrespective of whether the

financial instrument that is managed for credit risk is within the
scope of IFRS 9 (for example, it can apply to loan commitments that
are outside the scope of IFRS 9). The entity may designate that
financial instrument at, or subsequent to, initial recognition, or while
it is unrecognised and shall document the designation concurrently.
[IFRS 9 paragraph 6.7.1]

If designated after initial recognition, any difference in the previous

carrying amount and fair value is recognised immediately in profit or
loss [IFRS 9 paragraph 6.7.2]

An entity discontinues measuring the financial instrument that gave

rise to the credit risk at FVTPL if the qualifying criteria are no longer
met and the instrument is not otherwise required to be measured at
FVTPL. The fair value at discontinuation becomes its new carrying
amount. [IFRS 9 paragraphs 6.7.3 and 6.7.4]
Impairment

The impairment model in IFRS 9 is based on the premise of provid‐

ing for expected losses.

Scope

IFRS 9 requires that the same impairment model apply to all of the
following:

[IFRS 9 paragraph 5.5.1]

Financial assets measured at amortised cost;

Financial assets mandatorily measured at FVTOCI;
Loan commitments when there is a present obligation to extend
credit (except where these are measured at FVTPL);
Financial guarantee contracts to which IFRS 9 is applied
(except those measured at FVTPL);
Lease receivables within the scope of IFRS 16 Leases; and
Contract assets within the scope of IFRS 15 Revenue from
Contracts with Customers (i.e. rights to consideration fol‐
lowing transfer of goods or services).
General approach

With the exception of purchased or originated credit impaired finan‐

cial assets (see below), expected credit losses are required to be
measured through a loss allowance at an amount equal to:

[IFRS 9 paragraphs 5.5.3 and 5.5.5]

the 12-month expected credit losses (expected credit losses

that result from those default events on the financial instrument
that are possible within 12 months after the reporting date); or
full lifetime expected credit losses (expected credit losses that
result from all possible default events over the life of the finan‐
cial instrument).

A loss allowance for full lifetime expected credit losses is required for
a financial instrument if the credit risk of that financial instrument has
increased significantly since initial recognition, as well as to contract
assets or trade receivables that do not constitute a financing trans‐
action in accordance with IFRS 15. [IFRS 9 paragraphs 5.5.3 and
5.5.15]

Additionally, entities can elect an accounting policy to recognise full

lifetime expected losses for all contract assets and/or all trade re‐
ceivables that do constitute a financing transaction in accordance
with IFRS 15. The same election is also separately permitted for
lease receivables. [IFRS 9 paragraph 5.5.16]

For all other financial instruments, expected credit losses are mea‐
sured at an amount equal to the 12-month expected credit losses.
[IFRS 9 paragraph 5.5.5]

Significant increase in credit risk

With the exception of purchased or originated credit-impaired finan‐

cial assets (see below), the loss allowance for financial instruments is
measured at an amount equal to lifetime expected losses if the credit
risk of a financial instrument has increased significantly since initial
recognition, unless the credit risk of the financial instrument is low at
the reporting date in which case it can be assumed that credit risk
on the financial instrument has not increased significantly since initial
recognition. [IFRS 9 paragraphs 5.5.3 and 5.5.10]

The Standard considers credit risk low if there is a low risk of default,
the borrower has a strong capacity to meet its contractual cash flow
obligations in the near term and adverse changes in economic and
business conditions in the longer term may, but will not necessarily,
reduce the ability of the borrower to fulfil its contractual cash flow
obligations. The Standard suggests that ‘investment grade’ rating
might be an indicator for a low credit risk. [IFRS 9 paragraphs
B5.5.22 – B5.5.24]

The assessment of whether there has been a significant increase in

credit risk is based on an increase in the probability of a default
occurring since initial recognition. Under the Standard, an entity may
use various approaches to assess whether credit risk has increased
significantly (provided that the approach is consistent with the re‐
quirements). An approach can be consistent with the requirements
even if it does not include an explicit probability of default occurring
as an input. The application guidance provides a list of factors that
may assist an entity in making the assessment. Also, whilst in princi‐
ple the assessment of whether a loss allowance should be based on
lifetime expected credit losses is to be made on an individual basis,
some factors or indicators might not be available at an instrument
level. In this case, the entity should perform the assessment on ap‐
propriate groups or portions of a portfolio of financial instruments.

The requirements also contain a rebuttable presumption that the

credit risk has increased significantly when contractual payments are
more than 30 days past due. IFRS 9 also requires that (other than for
purchased or originated credit impaired financial instruments) if a
significant increase in credit risk that had taken place since initial
recognition and has reversed by a subsequent reporting period (i.e.,
cumulatively credit risk is not significantly higher than at initial recog‐
nition) then the expected credit losses on the financial instrument
revert to being measured based on an amount equal to the 12-
month expected credit losses. [IFRS 9 paragraph 5.5.11]

Purchased or originated credit-impaired financial assets

Purchased or originated credit-impaired financial assets are treated

differently because the asset is credit-impaired at initial recognition.
For these assets, an entity would recognise changes in lifetime
expected losses since initial recognition as a loss allowance with any
changes recognised in profit or loss. Under the requirements, any
favourable changes for such assets are an impairment gain even if
the resulting expected cash flows of a financial asset exceed the
estimated cash flows on initial recognition. [IFRS 9 paragraphs
5.5.13 – 5.5.14]

Credit-impaired financial asset

Under IFRS 9 a financial asset is credit-impaired when one or more

events that have occurred and have a significant impact on the
expected future cash flows of the financial asset. It includes observ‐
able data that has come to the attention of the holder of a financial
asset about the following events:

[IFRS 9 Appendix A]

significant financial difficulty of the issuer or borrower;

a breach of contract, such as a default or past-due event;
the lenders for economic or contractual reasons relating to the
borrower’s financial difficulty granted the borrower a conces‐
sion that would not otherwise be considered;
it becoming probable that the borrower will enter bankruptcy or
other financial reorganisation;
the disappearance of an active market for the financial asset
because of financial difficulties; or
the purchase or origination of a financial asset at a deep dis‐
count that reflects incurred credit losses.
Basis for estimating expected credit losses

Any measurement of expected credit losses under IFRS 9 shall

reflect an unbiased and probability-weighted amount that is deter‐
mined by evaluating the range of possible outcomes as well as in‐
corporating the time value of money. Also, the entity should consider
reasonable and supportable information about past events, current
conditions and reasonable and supportable forecasts of future eco‐
nomic conditions when measuring expected credit losses. [IFRS 9
paragraph 5.5.17]

The Standard defines expected credit losses as the weighted aver‐

age of credit losses with the respective risks of a default occurring
as the weightings. [IFRS 9 Appendix A] Whilst an entity does not
need to consider every possible scenario, it must consider the risk or
probability that a credit loss occurs by considering the possibility
that a credit loss occurs and the possibility that no credit loss
occurs, even if the probability of a credit loss occurring is low. [IFRS
9 paragraph 5.5.18]

In particular, for lifetime expected losses, an entity is required to esti‐

mate the risk of a default occurring on the financial instrument during
its expected life. 12-month expected credit losses represent the life‐
time cash shortfalls that will result if a default occurs in the 12
months after the reporting date, weighted by the probability of that
default occurring.

An entity is required to incorporate reasonable and supportable in‐

formation (i.e., that which is reasonably available at the reporting
date). Information is reasonably available if obtaining it does not
involve undue cost or effort (with information available for financial
reporting purposes qualifying as such).

For applying the model to a loan commitment an entity will consider

the risk of a default occurring under the loan to be advanced, whilst
application of the model for financial guarantee contracts an entity
considers the risk of a default occurring of the specified debtor. 
[IFRS 9 paragraphs B5.5.31 and B5.5.32]

An entity may use practical expedients when estimating expected

credit losses if they are consistent with the principles in the Standard
(for example, expected credit losses on trade receivables may be
calculated using a provision matrix where a fixed provision rate
applies depending on the number of days that a trade receivable is
outstanding). [IFRS 9 paragraph B5.5.35]

To reflect time value, expected losses should be discounted to the

reporting date using the effective interest rate of the asset (or an ap‐
proximation thereof) that was determined at initial recognition. A
“credit-adjusted effective interest” rate should be used for expected
credit losses of purchased or originated credit-impaired financial
assets.  In contrast to the “effective interest rate” (calculated using
expected cash flows that ignore expected credit losses), the credit-
adjusted effective interest rate reflects expected credit losses of the
financial asset. [IFRS 9 paragraphs B5.5.44-45]

Expected credit losses of undrawn loan commitments should be dis‐

counted by using the effective interest rate (or an approximation
thereof) that will be applied when recognising the financial asset
resulting from the commitment. If the effective interest rate of a loan
commitment cannot be determined, the discount rate should reflect
the current market assessment of time value of money and the risks
that are specific to the cash flows but only if, and to the extent that,
such risks are not taken into account by adjusting the discount rate.
This approach shall also be used to discount expected credit losses
of financial guarantee contracts. [IFRS 9 paragraphs B5.5.47]

Presentation

Whilst interest revenue is always required to be presented as a sepa‐

rate line item, it is calculated differently according to the status of the
asset with regard to credit impairment. In the case of a financial
asset that is not a purchased or originated credit-impaired financial
asset and for which there is no objective evidence of impairment at
the reporting date, interest revenue is calculated by applying the
effective interest rate method to the gross carrying amount. [IFRS 9
paragraph 5.4.1]

In the case of a financial asset that is not a purchased or originated

credit-impaired financial asset but subsequently has become credit-
impaired, interest revenue is calculated by applying the effective
interest rate to the amortised cost balance, which comprises the
gross carrying amount adjusted for any loss allowance. [IFRS 9 para‐
graph 5.4.1]

In the case of purchased or originated credit-impaired financial

assets, interest revenue is always recognised by applying the credit-
adjusted effective interest rate to the amortised cost carrying
amount. [IFRS 9 paragraph 5.4.1] The credit-adjusted effective inter‐
est rate is the rate that discounts the cash flows expected on initial
recognition (explicitly taking account of expected credit losses as
well as contractual terms of the instrument) back to the amortised
cost at initial recognition. [IFRS 9 Appendix A]

Consequential amendments of IFRS 9 to IAS 1 require that impair‐

ment losses, including reversals of impairment losses and impair‐
ment gains (in the case of purchased or originated credit-impaired
financial assets), are presented in a separate line item in the state‐
ment of profit or loss and other comprehensive income.

Disclosures

IFRS 9 amends some of the requirements of IFRS 7 Financial Instru‐

ments: Disclosures including adding disclosures about investments
in equity instruments designated as at FVTOCI, disclosures on risk
management activities and hedge accounting and disclosures on
credit risk management and impairment.

Interaction with IFRS 4

On 12 September 2016, the IASB issued amendments to IFRS 4 pro‐

viding two options for entities that issue insurance contracts within
the scope of IFRS 4:

an option that permits entities to reclassify, from profit or loss to

other comprehensive income, some of the income or expenses
arising from designated financial assets; this is the so-called
overlay approach;
an optional temporary exemption from applying IFRS 9 for enti‐
ties whose predominant activity is issuing contracts within the
scope of IFRS 4; this is the so-called deferral approach.

An entity choosing to apply the overlay approach retrospectively to

qualifying financial assets does so when it first applies IFRS 9. An
entity choosing to apply the deferral approach does so for annual
periods beginning on or after 1 January 2018. The application of
both approaches is optional and an entity is permitted to stop apply‐
ing them before the new insurance contracts standard is applied.
Thích 282

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