IFRS 9 Financial Instruments sets out how an entity classifies and measures its financial assets and financial liabilities, how it calculates the loss allowance for expected credit losses, and when it may apply hedge accounting. Its objective is to establish principles for the financial reporting of financial assets and financial liabilities that will give users relevant and useful information for assessing the amounts, timing and uncertainty of the entity's future cash flows (IFRS 9.1.1). It is not only for banks: ordinary trade receivables are financial instruments too.
Origin and scope
IFRS 9 was issued in phases to replace IAS 39 Financial Instruments: Recognition and Measurement: classification and measurement in 2009 and 2010, hedge accounting in November 2013, and the completed version in July 2014, which added the expected credit loss requirements. IFRS 9 is effective for annual periods beginning on or after 1 January 2018 (IFRS Foundation: IFRS 9).
The Standard applies to all types of financial instruments, with exceptions that include (IFRS 9.2.1):
- interests in subsidiaries, associates and joint ventures accounted for under IFRS 10, IAS 27 or IAS 28;
- rights and obligations under leases within IFRS 16, although a lessor's lease receivables remain subject to IFRS 9's derecognition and impairment requirements;
- employers' rights and obligations under employee benefit plans (IAS 19); and
- insurance contracts within IFRS 17, with exceptions. Notably, financial guarantee contracts stay in IFRS 9 for the issuer, unless it has previously asserted explicitly that it regards them as insurance contracts and has used insurance accounting for them; it may then choose either Standard, contract by contract.
An entity recognises a financial asset or financial liability when, and only when, it becomes party to the contractual provisions of the instrument (IFRS 9.3.1.1). It measures it initially at fair value plus or minus directly attributable transaction costs (unless the item is at fair value through profit or loss), except for trade receivables, which have their own initial-measurement rule (IFRS 9.5.1.1).
Classifying financial assets: two tests, three categories
Financial assets are classified for subsequent measurement on the basis of both the entity's business model for managing them and the asset's contractual cash flow characteristics (IFRS 9.4.1.1). Together these give three categories (IFRS 9.4.1.2, 4.1.2A, 4.1.4):
| Category | Conditions |
|---|---|
| Amortised cost | Held in a business model whose objective is to hold assets to collect contractual cash flows, and cash flows that are solely payments of principal and interest (SPPI) |
| Fair value through other comprehensive income (FVOCI) | Held in a business model whose objective is achieved by both collecting contractual cash flows and selling assets, and SPPI cash flows |
| Fair value through profit or loss (FVTPL) | Any financial asset not measured in one of the two categories above |
Business model: a matter of fact, not intention
- It is assessed at the level at which groups of assets are managed together, as determined by key management personnel, not by management's intentions for an individual instrument (IFRS 9.B4.1.1, B4.1.2).
- It is a matter of fact, not merely an assertion. Evidence includes how the assets' performance is evaluated and reported to key management, how their risks are managed and how managers are compensated (IFRS 9.B4.1.2B).
- Sales do not automatically break a hold-to-collect model. Sales due to an increase in credit risk are consistent with it whatever their frequency and value, and sales that are infrequent or insignificant in value may also be consistent with it (IFRS 9.B4.1.3A, B4.1.3B).
The cash flow characteristics (SPPI) test
For this test, principal is the fair value of the asset at initial recognition. Interest is consideration for the time value of money, for credit risk and for other basic lending risks and costs, plus a profit margin (IFRS 9.4.1.3). Cash flows that pass are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility unrelated to such an arrangement, such as exposure to equity or commodity prices, fail the test (IFRS 9.B4.1.7A).
Equity investments and the FVOCI election
Investments in equity instruments are measured at FVTPL by default. At initial recognition, however, an entity may make an irrevocable election to present subsequent changes in fair value in other comprehensive income (OCI), provided the investment is neither held for trading nor contingent consideration recognised by an acquirer in a business combination (IFRS 9.4.1.4, 5.7.5). Three rules apply to the election (IFRS 9.B5.7.1):
- It is made instrument by instrument (share by share).
- Amounts presented in OCI are not subsequently transferred to profit or loss, although the cumulative gain or loss may be transferred within equity.
- Dividends are recognised in profit or loss, unless they clearly represent a recovery of part of the cost of the investment.
Fair value option and reclassification
- At initial recognition, an entity may irrevocably designate a financial asset at FVTPL if doing so eliminates or significantly reduces an accounting mismatch (IFRS 9.4.1.5).
- Financial assets are reclassified only when the entity changes its business model for managing them, and then all affected assets are reclassified (IFRS 9.4.4.1). Financial liabilities are never reclassified (IFRS 9.4.4.2).
Financial liabilities
Financial liabilities are subsequently measured at amortised cost, except for several categories, including: liabilities at FVTPL (including derivatives that are liabilities), financial guarantee contracts, commitments to provide a loan at a below-market interest rate, and contingent consideration recognised by an acquirer in a business combination (IFRS 9.4.2.1).
A liability may be designated at FVTPL to eliminate or significantly reduce an accounting mismatch, or because a group of instruments is managed and its performance evaluated on a fair value basis under a documented strategy (IFRS 9.4.2.2). The part of the fair value change attributable to changes in the liability's own credit risk is then presented in OCI and the rest in profit or loss, unless that would create or enlarge an accounting mismatch in profit or loss (IFRS 9.5.7.7). So, as a rule, a deterioration in the entity's own creditworthiness does not show up as a gain in profit or loss.
The expected credit loss (ECL) model
An entity recognises a loss allowance for expected credit losses on debt assets measured at amortised cost or at FVOCI, lease receivables, contract assets, and loan commitments and financial guarantee contracts within the impairment requirements (IFRS 9.5.5.1). Equity investments are not on that list. For debt instruments at FVOCI, the allowance is recognised in OCI and does not reduce the carrying amount in the statement of financial position (IFRS 9.5.5.2).
Three situations: "stages" is practitioners' shorthand
Practice speaks of three "stages", but the word does not appear in the Standard. The Standard distinguishes 12-month from lifetime expected credit losses, and credit-impaired assets from others (IFRS 9.5.5.3, 5.5.5, 5.4.1):
| Situation at the reporting date | Loss allowance | Interest revenue calculated on |
|---|---|---|
| Credit risk has not increased significantly since initial recognition | 12-month ECL | Gross carrying amount |
| Credit risk has increased significantly | Lifetime ECL | Gross carrying amount |
| The asset has become credit-impaired | Lifetime ECL | Amortised cost (net of the allowance) |
Points to note:
- 12-month ECL are not the losses expected over the next 12 months. They are the portion of lifetime ECL that results from defaults possible within 12 months after the reporting date, weighted by the probability of that default (IFRS 9.B5.5.43).
- A significant increase in credit risk is judged on the change in the risk of a default over the expected life, comparing that risk at the reporting date with the risk at initial recognition, not on the change in the amount of ECL (IFRS 9.5.5.9). Indicators include changes in the borrower's credit rating, deteriorating operating results and past due status (IFRS 9.B5.5.17).
- Two rebuttable presumptions: credit risk has increased significantly when payments are more than 30 days past due (IFRS 9.5.5.11), and default occurs no later than 90 days past due (IFRS 9.B5.5.37).
- Low credit risk: an entity may assume no significant increase if the instrument has low credit risk at the reporting date (IFRS 9.5.5.10).
Measuring ECL
ECL must reflect (IFRS 9.5.5.17):
- an unbiased, probability-weighted amount determined by evaluating a range of possible outcomes;
- the time value of money; and
- reasonable and supportable information, available without undue cost or effort, about past events, current conditions and forecasts of future economic conditions.
The change in the allowance goes to profit or loss as an impairment gain or loss (IFRS 9.5.5.8). When the entity has no reasonable expectation of recovering an asset in full or in part, it directly reduces the gross carrying amount; a write-off is a derecognition event (IFRS 9.5.4.4).
The simplified approach and the provision matrix
The allowance is measured at lifetime ECL from the start, without tracking changes in credit risk (IFRS 9.5.5.15):
- mandatorily for trade receivables and contract assets arising from IFRS 15 transactions that do not contain a significant financing component; and
- as an accounting policy choice for trade receivables and contract assets that do contain a significant financing component, and for lease receivables.
Each policy may be chosen independently for trade receivables, lease receivables and contract assets (IFRS 9.5.5.16).
One practical expedient the Standard mentions is a provision matrix: fixed rates by days past due, based on historical credit loss experience adjusted as appropriate, for example 1% if not past due, 2% if less than 30 days past due, 3% if 30–90 days past due and 20% if 90–180 days past due. Receivables are grouped when loss patterns differ, for example by geographical region or type of customer (IFRS 9.B5.5.35).
Historical experience is an anchor, not an answer. It is adjusted using current observable data to reflect current conditions and forecasts that did not affect the historical period (IFRS 9.B5.5.52).
Worked example: a provision matrix
A trading company's trade receivables have no significant financing component, so it measures the allowance at lifetime ECL using a matrix. The rates are historical loss rates adjusted for management's forecasts of economic conditions. The figures are illustrative.
| Ageing band | Balance | Expected loss rate | Allowance |
|---|---|---|---|
| Not past due | 600,000 | 1% | 6,000 |
| 1–30 days | 250,000 | 3% | 7,500 |
| 31–60 days | 90,000 | 7% | 6,300 |
| 61–90 days | 40,000 | 14% | 5,600 |
| Over 90 days | 20,000 | 50% | 10,000 |
| Total | 1,000,000 | 35,400 |
The allowance balance before adjustment is 28,000, so the difference of 7,400 is recognised as an impairment loss in profit or loss (IFRS 9.5.5.8):
| Account | Debit | Credit |
|---|---|---|
| Impairment loss on trade receivables (profit or loss) | 7,400 | |
| Loss allowance | 7,400 |
The receivables are presented net, 1,000,000 − 35,400 = 964,600, with the allowance acting as a contra account (see Contra accounts). To run the same calculation on your own ageing, the IFRS 9 expected credit loss provision matrix model builds the matrix and computes the allowance and its journal entry.
Hedge accounting in brief
Hedge accounting aims to represent in the financial statements the effect of an entity's risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (IFRS 9.6.1.1). There are three types of hedging relationship (IFRS 9.6.5.2):
- Fair value hedge: of exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment.
- Cash flow hedge: of exposure to variability in cash flows of a recognised asset or liability (such as interest payments on variable-rate debt) or of a highly probable forecast transaction.
- Hedge of a net investment in a foreign operation.
A relationship qualifies only if three criteria are all met (IFRS 9.6.4.1): eligible items and instruments; formal designation and documentation at inception; and the hedge effectiveness requirements, including an economic relationship between the hedged item and the hedging instrument.
On first applying IFRS 9, an entity could choose as its accounting policy to continue applying the hedge accounting requirements of IAS 39 instead of Chapter 6, for all of its hedging relationships (IFRS 9.7.2.21).
What has changed in IFRS 9?
The first three amendments below apply for annual periods beginning on or after 1 January 2026:
- Classification and measurement amendments (May 2024). They specify when a financial liability settled through an electronic payment system can be treated as discharged before the settlement date, and how to assess the contractual cash flows of financial assets with contingent features not directly related to basic lending risks and costs, such as loans with ESG-linked targets. They also add disclosures to IFRS 7 (IFRS Foundation news release).
- Annual Improvements—Volume 11 (July 2024). Amended IFRS 9 on two subjects: lessee derecognition of lease liabilities, and "transaction price" (IFRS Foundation news release).
- Contracts Referencing Nature-dependent Electricity (December 2024). Adds guidance on whether a contract to buy electricity whose generation depends on uncontrollable natural conditions, such as the weather, is held for "own use", and permits designating a variable nominal amount of forecast electricity transactions as the hedged item (amendment text).
- IFRS 18. Replaces IAS 1 for annual periods beginning on or after 1 January 2027 and makes limited consequential amendments to IFRS 9 (IFRS Foundation: changes in the 2026 edition).
How it fits with other Standards
- IFRS 7 Financial Instruments: Disclosures: the disclosures about financial instruments and their risks sit in IFRS 7, not IFRS 9.
- IAS 32 Financial Instruments: Presentation: sets the principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities (IAS 32.2).
- IFRS 13 Fair Value Measurement: governs how the fair values used in IFRS 9 are measured.
- IFRS 15 Revenue from Contracts with Customers: the source of the trade receivables and contract assets to which the simplified approach applies.
Sources
- IFRS Foundation: IFRS 9 Financial Instruments. References in brackets are to paragraphs of the Standard and its appendices.
- IFRS Foundation: News release on the classification and measurement amendments, 30 May 2024.
- IFRS Foundation: News release on Annual Improvements—Volume 11, 18 July 2024.
- IFRS Foundation: Contracts Referencing Nature-dependent Electricity, December 2024.
- IFRS Foundation: Changes in this edition (2026).
- IFRS Foundation: IAS 32 Financial Instruments: Presentation.