PFRS 9 FINANCIAL INSTRUMENTS

I. NATURE
PFRS 9 establishes the financial reporting principles for financial assets and financial
liabilities, particularly their classification and measurement.
PFRS 9 applies to all financial instruments except those that are dealt with under other
standards, such as interests in subsidiaries (PFRS 10 Consolidated Financial
Statements), associates and joint ventures (PAS 28), those arising from employee
benefit plans (PAS 19), leases (PFRS 16 leases) and share-based payment
transactions (PFRS 2), those that are required to be classified as equity instrument
(PAS 32), and those arising from contracts with customers that are specifically
accounted for under PFRS 15 Revenue from Contracts.
BASIS OF CLASSIFICATION CLASSIFICATION
Business model: ‘Hold to Collect’ Amortization cost
Cash flow characteristics: ‘SPPI’ (e.g.,
debt instrument)
Business model: ‘Hold to collect and sell’ FVOCI (mandatory)
Cash flow characteristics: ‘SPPI’ (e.g.,
debt instrument)
Business model: Not defined FVPL
Cash flow characteristics: Not defined
(e.g., held for trading securities and
equity instrument)
Exceptions:
a. Investment in equity securities FVOCI (election)
b. Eliminate or significantly reduces FVPL (designated)
‘accounting mismatch’
Equity instrument Debt instrument
Evidence a residual interest in the net Represents a debtor-creditor relationship
assets of an entity, e.g., shares of stocks (i.e., lending transaction), e.g., bonds.

II. RECOGNITION
Initial recognition
Financial assets and financial liabilities are recognized only when the entity becomes a
party to the contractual provisions of the instrument.

Classification of Financial Assets

Are the cash flows solely payments for principal and interest (‘SPPI’)?
YES NO
FVPL
(e.g., trading portfolios, investments in
Is the business model ‘hold to collect’?
equity securities, assets managed on a
fair value basis)
 Is the business model ‘hold to collect’?
YES NO
Amortized cost Is the business model ‘hold to collect and
(e.g., receivables, debt securities) sell’?

Is the business model ‘hold to collect and sell’?

YES NO
FVOCI (mandatory)
(e.g., liquidity portfolio, assets held to FVPL
back liabilities)

Exceptions:
1. Election to measure investments in equity securities at FVOCI
2. Option to designate financial assets as FVPL

Classification of Financial Liabilities

All financial liabilities are classified as subsequently measured at amortized cost,
except for the following:
a. Financial liabilities at fair value through profit or loss (FVPL) and derivative
liabilities – subsequently measured at fair value (e.g., designated or held for
trading).
b. Financial liabilities that arise when a transfer of a financial asset does not qualify
for derecognition – subsequently measured on a basis that reflects the rights and
obligations that the entity has retained.
c. Financial guarantee contracts and commitments to provide a loan at a below-
market interest rate – subsequently measured at the higher of:
i. The amount of the loss allowance
ii. The amount initially recognized less, when appropriate, the cumulative
amount of income recognized in accordance with the principles of PFRS
15.
d. Contingent consideration recognized by an acquirer in a business combination –
subsequently measured at fair value through the profit or loss.

III. MEASUREMENT
Measurement of Financial Assets
Initial measurement
Financial assets are initially measured at fair value plus transaction costs, except
FVPL.
Financial assets classified as FVPL are initially measured at fair value; transaction
costs are expensed immediately.

Subsequent measurement
After initial recognition, financial assets are measured at
 a. Amortized cost
b. Fair value through other comprehensive income (FVOCI)
c. Fair value through profit or loss (FVPL)

Measurement of Financial Liabilities

Initial measurement
Financial liabilities are initially measured at fair value minus transaction costs, except
financial liabilities at FVPL whose transaction costs are expensed immediately.

Subsequent measurement
Financial liabilities classified as amortized cost are subsequently measured at
amortized cost.
Financial liabilities classified as held for trading are subsequently measured at fair
value with changes in fair values recognized in profit or loss.

IV. TRANSACTION
a. Sales of financial assets because of increase in credit risk.
b. Sales of financial assets with insignificant value, even when the sales are
frequent.
c. Sales of financial assets that are infrequent, even when the sales have significant
value.
d. Sales made close to the maturity when the sale proceeds approximate the
collection of the remaining contractual cash flows.
e. A debt instrument that is neither held under a “hold to collect” nor a “hold to
collect to sell” business model.
f. An equity instrument that the entity does not elect to classify as FVOCI.

V. PRESENTATION
Classification Statement
Statement of comprehensive
of financial Composition of financial
income
asset position
Debt or
Current Changes in fair value are recognized
FVPL equity
asset in profit or loss.
securities
Current or
FVOCI Equity Changes in fair value are recognized
non-current
(election) securities in OCI (‘without recycling’)
asset
 Changes in fair value are
recognized in OCI (‘with recycling’)
 Interest income computed using
Current or
FVOCI Debt the effective interest method is
non-current
(mandatory) securities recognized in profit or loss.
asset
 Impairment gains or losses are
recognized in profit or loss (with
offset to OCI)
Amortized Debt Current or  Interest income computed using
cost securities non-current the effective interest method is
 recognized in profit or loss.
asset  Impairment gains or losses are
recognized in profit or loss.

Financial liabilities designated at FVPL are subsequently measured at fair value with
changes in fair values recognized as follows:
a. The amount of change in fair value of the financial liability that is attributable to
changes in credit risk of that liability is presented in other comprehensive
income, and
b. The remaining amount of change in the fair value of the liability is presented in
profit or loss.