IFRS 9 Financial Instruments

OBJECTIVE: IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities that
will present relevant and useful information to users of financial statements for their assessment of the amounts, timing
and uncertainty of an entity’s future cash flows.

IFRS 9 does NOT define financial instruments. You can find the definitions of financial instruments in IAS 32
Financial Instruments: Presentation.
IFRS 9 does NOT deal with your own (issued) equity instruments like your own shares, issued warrants,
written options for equity, etc.
IFRS 9 DOES deal with the equity instruments of someone else, because they are financial assets from your
point of view.
IFRS 9 does NOT deal with your investments in subsidiaries, associates and joint ventures (look to IFRS 10,
IAS 28 and related).

When to recognize a financial instrument?

You should recognize a financial asset or a financial liability in the statement of financial position when the
entity becomes a party to the contractual provisions of the instrument (IFRS 9 par. 3.1.1). Unlike in other IFRS
standards that put emphasis on the future economic benefits, IFRS 9 is more about the contract.

When to derecognize a financial instrument?

1. Derecognition of financial assets

Determine WHAT you’re dealing with (IFRS 9 par. 3.2.2):
A financial asset (or a group of similar financial assets) in its entirety, or
A part of a financial assset (or a part of a group of similar financial assets) meeting
specified conditions.
Derecognize the asset when (IFRS 9 par. 3.2.3):
The contractual rights to the cash flows from the financial asset expire – that’s an easy and clear
option; or
An entity transfers the financial asset and the transfer qualifies for the derecognition.

Transfers of financial assets:

a. Decide whether the asset (or its part) was transferred or not,
b. Determine whether also risks and rewards from the financial asset were transferred.
c. If you have neither retained nor transferred substantially all of the risks and rewards of the asset, then
you need to assess whether you have retained control of the asset or not.

2. Derecognition of a financial liability

An entity shall derecognize a financial liability when it is extinguished. It happens when the obligation
specified in the contract is discharged, cancelled or expires.
How to measure financial instruments?

Initial measurement
Financial asset or financial liability shall be initially measured at:
Fair value: all financial instruments at fair value through profit or loss; Unrealized gains and losses from fair
value changes shall be charged to other income and expense, respectively.
Fair value plus transaction cost: all other financial instruments (at amortized cost or fair value through other
comprehensive income).

Subsequent measurement
Subsequent measurement depends on the category of a financial instrument
Financial assets shall be subsequently measured either at fair value or at amortized cost;
Financial liabilities are measured at amortized cost unless the fair value option is applied.
 Classification of financial instruments

IFRS 9 classifies financial assets based on two characteristics:

1. Business model test
What is the objective of holding financial assets? Collecting the contractual cash flows? And Selling?

2. Contractual cash flows’ characteristics test

Are the cash flows from the financial assets on the specified dates solely payments of principal and
interest on the principal outstanding? Or, is there something else?

Based on these two tests, the financial assets can be classified in the following categories:
1. At amortized cost - is the initial recognition amount of the investment minus repayments, plus amortization of
discount, minus amortization of premium, and minus reduction for impairment or uncollectibility

A financial asset falls into this category if BOTH of the following conditions are met:
o Business model test is met, i.e. you hold the financial assets only to collect contractual cash flows (not to
sell them), and
o Contractual cash flows’ characteristics test is met, i.e. the cash flows from the asset are only the
payments of principal and interest.

Examples: Debt securities, Receivables, Loans.

2. At fair value through other comprehensive income (FVOCI)

a. If a financial asset meets contractual cash flows characteristics test (i.e. debt assets only) and the
business model is to collect contractual cash flows AND SELL financial assets, then such an asset
mandatorily falls into this category (unless FVTPL option is chosen; see below)
b. You can voluntarily choose to measure some equity instruments at FVOCI. This is an irrevocable
election at initial recognition.
Normally classified as non-current asset. Any gain or loss from disposal shall be charged to Retained
Earnings

Examples: Equity and Debt Securities

3. At fair value through profit or loss (FVTPL)

All other financial assets fall in this category. Derivative financial assets are automatically classified at
FVTPL. Moreover, regardless of the above categories, you may decide to designate the financial asset at fair
value through profit or loss at its initial recognition.

Examples: Equity and Debt Securities

Trading securities – debt and equity securities that are purchased with the intention of selling them in the
near term and normally classified as current assets.
Any gain or loss from disposal shall be recognized in profit or loss.

How to classify financial liabilities?

IFRS 9 classifies financial liabilities as follows:
1. Financial liabilities at fair value through profit or loss: these financial liabilities are subsequently measured at
fair value and here, all derivatives belong.

2. Other financial liabilities measured at amortized cost using the effective interest method.
 Effective interest method - is the rate that exactly discounts estimated future cash flows through the
expected life of the financial asset/liability to the gross carrying amount of a financial asset or to the
amortised cost of a financial liability. Gross carrying amount is the amortised cost of a financial asset before
adjusting for any loss allowance. It is the method that is used in the calculation of the amortised cost of a
financial asset/liability and in the allocation and recognition of the interest revenue or interest expense in
P/L over the relevant period.

SUMMARY OF THE MEASUREMENT RULES

EQUITY INVESTMENT MEASUREMENT EQUITY INVESTMENT MEASUREMENT

Held for trading (Trading FVTPL Unquoted Equity Cost if fair value cannot
securities) Instruments be measured reliably
Not held for trading FVTPL or FVOCI by 20% - 50% (Investment in Equity Method
irrevocable election Associates)
All other investments in quoted FVTPL More than 50% Consolidation Method
equity instruments* (Investment in
Subsidiaries)

DEBT INVESTMENT MEASUREMENT DEBT INVESTMENT MEASUREMENT

Held for trading (Trading FVTPL Held for collection of CCF FVOCI***
Securities) and sale of financial asset
Held for collection of Amortized Cost FVTPL by irrevocable
contractual cash flows (CCF)** designation
FVTPL by irrevocable
designation
*Quoted securities are those traded in the Stock Exchange
**Solely payments of principal and interest on the principal outstanding
***On derecognition, the cumulative gain or losses shall be reclassified to profit or loss