IFRS 9 — Financial Instruments

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Overview
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS
39 Financial Instruments: Recognition and Measurement. 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 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.
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 discussion paper phase of the due process. In April
2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: a
Portfolio Revaluation Approach to Macro Hedging. Consequently, the exception in IAS 39 for a
fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabili-
ties continues to apply.

History of IFRS 9

Date Development Comments

14 July 2009 Exposure Draft ED/2009/7 Financial In- Comment deadline 14

struments: Classification and Measure- September 2009
ment published

12 November 2009 IFRS 9 Financial Instruments issued, Original effective date 1

covering classification and measurement January 2013, later
of financial assets removed

11 May 2010 Exposure Draft ED/2010/4 Fair Value Comment deadline 16 July
Option for Financial Liabilities published 2010

28 October 2010 IFRS 9 Financial Instruments reissued, in- Original effective date 1
corporating new requirements on January 2013, later
accounting for financial liabilities and removed
carrying over from IAS 39 the require-
ments for derecognition of financial assets
and financial liabilities

4 August 2011 ED/2011/3 Amendments to IFRS 9 (2009) Comment deadline 21

and IFRS 9 (2010): Mandatory Effective October 2011
 Date published, proposing the adjust the
mandatory effective date of IFRS 9 from 1
January 2013 to 1 January 2015

16 December 2011 Mandatory Effective Date and Transition Amended the effective
Disclosures (Amendments to IFRS 9 and date of IFRS 9 to annual
IFRS 7) published periods beginning on or
after 1 January 2015
(removed in 2013), and
modified the relief from
restating comparative
periods and the associated
disclosures in IFRS 7

28 November 2012 Exposure Draft ED/2012/4 Classification Comment deadline 28

and Measurement: Limited Amendments March 2013
to IFRS 9 (proposed amendments to IFRS
9 (2010)) published

19 November 2013 IASB issues IFRS 9 Financial Instruments Removed the mandatory
(Hedge Accounting and amendments to effective date of IFRS 9
IFRS 9, IFRS 7 and IAS 39) amending (2009) and IFRS 9 (2010)
IFRS 9 to:
o include the new general hedge
accounting model;
o allow early adoption of the re-
quirement to present fair
value changes due to own
credit on liabilities designated
as at fair value through profit
or loss to be presented in
other comprehensive income;
and
o remove the 1 January 2015
effective date

24 July 2014 IASB issues IFRS 9 Financial Instruments IFRS 9 (2014) was issued
as a complete standard
including the requirements
previously issued and the
additional amendments to
introduce a new expected
loss impairment model and
limited changes to the
 classification and mea-
surement requirements for
financial assets.
This amendment
completes the IASB’s
financial instruments
project and the Standard is
effective for reporting
periods beginning on or
after 1 January 2018 with
early adoption permitted
(subject to local endorse-
ment requirements).

12 September IASB issues Applying IFRS 9 'Financial An entity choosing to

2016 Instruments' with IFRS 4 'Insurance apply the overlay approach
Contracts' (Amendments to IFRS 4) to retrospectively to qualify-
address concerns about the different ing financial assets does so
effective dates of IFRS 9 and the new when it first applies IFRS
insurance contracts standard 9. An entity choosing to
apply the deferral
approach does so for
annual periods beginning
on or after 1 January 2018.

12 October 2017 IASB issues Prepayment Features with The amendments are to be
Negative Compensation (Amendments to applied retrospectively for
IFRS 9) to address the concerns about how fiscal years beginning on
IFRS 9 classifies particular prepayable or after 1 January 2019;
financial assets early application is
permitted.

14 May 2020 Amended by Annual Improvements to Effective for annual

IFRS Standards 2018–2020 (fees in the periods beginning on or
‘10 per cent’ test for derecognition of after 1 January 2022
financial liabilities). Click for more infor-
mation

9 December 2021 IASB issues Initial Application of IFRS 17 An entity that elects to
and IFRS 9 — Comparative Information apply the amendment
(Amendment to IFRS 17) to permit entities applies it when it first
that first apply IFRS 17 and IFRS 9 at the applies IFRS 17.
same time to present comparative informa-
tion about a financial asset as if the classi-
fication and measurement requirements of
IFRS 9 had been applied to that financial
asset before

Related Interpretations
 o None

Related projects
o Financial instruments — Macro hedge accounting
o Post-implementation review — IFRS 9 (Classification and measurement)
o Post-implementation review — IFRS 9 (Impairment)

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 intro-
duced 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 beginning on or after 1 January 2015, and modified the relief from restating 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 model, 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 incorporating a new expected loss
impairment model and introducing limited amendments to the classification and measurement
requirements for financial assets. This version supersedes all previous versions and is manda-
torily 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 classifica-
tions - 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 certain assets unless the fair
value option is elected. Whilst for equity investments, the FVTOCI classification is an election.
Furthermore, the requirements for reclassifying gains or losses recognised in other comprehen-
sive 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 contractual 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]
o 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 contractual maturity to realise its fair value changes).
o 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 represent 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 outstanding payments consist of principal and interest on the
principal amount and an appropriate compensation payment where applicable. In October 2017,
the IASB clarified that the compensation payments 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]
o Business model test: The financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows and selling financial
assets.
o 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 inconsis-
tency (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 invest-
ments for which the entity has elected to present value changes in 'other comprehensive
income'. There is no 'cost exception' for unquoted equities.
'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 liabilities 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, paragraph 4.2.1]
Fair value option
IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9,
paragraph 4.2.2]:
o doing so eliminates or significantly reduces a measurement or recognition inconsis-
tency (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, or
o the liability is part or a group of financial liabilities or financial assets and financial lia-
bilities that is managed and its performance is evaluated on a fair value basis, in ac-
cordance with a documented risk management or investment strategy, and informa-
tion about the group is provided internally on that basis to the entity's key manage-
ment 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 attributable to changes in credit risk of the liability, presented
in other comprehensive 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 reassessed. [IFRS 9, paragraphs 5.7.7-5.7.8]
Amounts presented in other comprehensive income shall not be subsequently 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 consideration for derecognition is: [IFRS 9, paragraph 3.2.2]
o an asset in its entirety or

o specifically identified cash flows from an asset (or a group of similar financial assets)
or
o a fully proportionate (pro rata) share of the cash flows from an asset (or a group of
similar financial assets). or
o 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 determined, an assessment is
made as to whether the asset has been transferred, and if so, whether the transfer of that asset
is subsequently eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual 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 arrange-
ment that meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5]
o the entity has no obligation to pay amounts to the eventual recipient unless it collects
equivalent amounts on the original asset
o the entity is prohibited from selling or pledging the original asset (other than as
security to the eventual recipient),
o 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 derecognised. If sub-
stantially 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; however 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 continuing 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 extin-
guished, that is, when the obligation specified 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 extinguishment 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 instrument 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 instrument but is
contractually transferable independently of that instrument, or has a different counterparty, is not
an embedded derivative, 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 derivatives 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,
insurance 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:
o for equity investments measured at FVTOCI, or

o where the fair value option has been exercised in any circumstance 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 statements 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 accommodate hedging of open,
dynamic portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of
financial assets or liabilities 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 instruments and eligible
hedged items.
2. at the inception of the hedging relationship there is formal designation and docu-
mentation of the hedging relationship and the entity’s risk management objective
and strategy for undertaking 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 instru-
ments. [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 foreign currency risk,
the foreign currency risk component of a non-derivative financial instrument, except equity in-
vestments designated as FVTOCI, may be designated as the hedging instrument. [IFRS 9 para-
graphs 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 instrument 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 desig-
nated 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 unrecognised firm commitment, a highly
probable forecast transaction or a net investment in a foreign operation and must be reliably
measurable. [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 foreign exchange rate
gains or losses that are not fully eliminated on consolidation. In addition, the foreign currency
risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consoli-
dated 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 manage-
ment 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 reporting 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 commitment, or a component of any such item, that is attribut-
able to a particular 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 unrecognised firm commitment the cumulative hedging gain or loss is
recognised 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 ad-
justment is amortised to profit or loss based on a recalculated effective interest rate. Amortisa-
tion 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 transac-
tion, and could affect profit or loss. [IFRS 9 paragraph 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):
o the cumulative gain or loss on the hedging instrument from inception of the hedge;
and
o 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 determined 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 recognition of a non-financial item or
becomes a firm commitment for which fair value hedge accounting is applied, the amount that
has been accumulated 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 paragraph 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 immediately 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:
o the portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge is recognised in OCI; and
o 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 paragraph 6.5.14]
Hedge effectiveness requirements
In order to qualify for hedge accounting, the hedge relationship must meet the following effec-
tiveness criteria at the beginning of each hedged period:
o there is an economic relationship between the hedged item and the hedging instru-
ment;
o the effect of credit risk does not dominate the value changes that result from that
economic relationship; and
o 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 requirement relating to the
hedge ratio but the risk management objective for that designated hedging relationship remains
the same, an entity adjusts the hedge ratio of the hedging relationship (i.e. rebalances 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. Dis-
continuing 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 relationship).
[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 reclassified from equity as a
single amount or on an amortised basis (depending on the nature of the hedged item) and ulti-
mately recognised in profit or loss. [IFRS 9 paragraph 6.5.15] This reduces profit or loss volatil-
ity 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 ul-
timately recognised in profit or loss. [IFRS 9 paragraph 6.5.16] This reduces profit or loss volatil-
ity 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 designate all or a proportion of that financial instrument as
measured at FVTPL if:
o the name of the credit exposure matches the reference entity of the credit derivative
(‘name matching’); and
o the seniority of the financial instrument matches that of the instruments 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 commit-
ments 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 desig-
nation 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 providing for expected losses.
Scope
IFRS 9 requires that the same impairment model apply to all of the following:
[IFRS 9 paragraph 5.5.1]
o Financial assets measured at amortised cost;

o Financial assets mandatorily measured at FVTOCI;

o Loan commitments when there is a present obligation to extend credit (except where
these are measured at FVTPL);
o Financial guarantee contracts to which IFRS 9 is applied (except those
measured at FVTPL);
o Lease receivables within the scope of IFRS 16 Leases; and
 o Contract assets within the scope of IFRS 15 Revenue from Contracts
with Customers (i.e. rights to consideration following transfer of goods or
services).
General approach
With the exception of purchased or originated credit impaired financial 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]
o 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
o full lifetime expected credit losses (expected credit losses that result from all possible
default events over the life of the financial 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 transaction 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 receivables that do constitute a financing transaction in ac-
cordance 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 measured 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 financial 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 recogni-
tion, 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 requirements). 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 principle 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 appropriate groups or portions of a portfolio of financial instruments.
The requirements also contain a rebuttable presumption that the credit risk has increased signif-
icantly 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 subse-
quent 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
observable data that has come to the attention of the holder of a financial asset about the
following events:
[IFRS 9 Appendix A]
o significant financial difficulty of the issuer or borrower;

o a breach of contract, such as a default or past-due event;

o the lenders for economic or contractual reasons relating to the borrower’s financial dif-
ficulty granted the borrower a concession that would not otherwise be considered;
o it becoming probable that the borrower will enter bankruptcy or other financial reorgan-
isation;
o the disappearance of an active market for the financial asset because of financial diffi-
culties; or
o the purchase or origination of a financial asset at a deep discount 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 proba-
bility-weighted amount that is determined by evaluating the range of possible outcomes as well
as incorporating the time value of money. Also, the entity should consider reasonable and sup-
portable information about past events, current conditions and reasonable and supportable
forecasts of future economic conditions when measuring expected credit losses. [IFRS 9
paragraph 5.5.17]
The Standard defines expected credit losses as the weighted average 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 estimate the risk of a default
occurring on the financial instrument during its expected life. 12-month expected credit losses
represent the lifetime 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 information (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 con-
sistent with the principles in the Standard (for example, expected credit losses on trade receiv-
ables 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 approximation 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-ad-
justed effective interest rate reflects expected credit losses of the financial asset. [IFRS 9 para-
graphs B5.5.44-45]
Expected credit losses of undrawn loan commitments should be discounted 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 separate line item, it is calcu-
lated 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 cal-
culated 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 paragraph 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 interest 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 impairment losses, including
reversals of impairment losses and impairment gains (in the case of purchased or originated
credit-impaired financial assets), are presented in a separate line item in the statement of profit
or loss and other comprehensive income.
Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclo-
sures 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 providing two options for
entities that issue insurance contracts within the scope of IFRS 4:
o 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;
o an optional temporary exemption from applying IFRS 9 for entities 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 applying them before the new insurance contracts
standard is applied.