IFRS 9

Financial Instruments

1Objective and scope

IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities, to present relevant and useful information for assessing the amounts, timing and uncertainty of an entity's future cash flows. It covers classification and measurement, impairment (using an expected credit loss model), derecognition, and hedge accounting.

2Key definitions

Business model test

An assessment of how an entity manages a group of financial assets to generate cash flows - by collecting contractual cash flows, by both collecting contractual cash flows and selling, or otherwise (e.g. trading).

SPPI test

Whether the contractual terms of a financial asset give rise, on specified dates, to cash flows that are Solely Payments of Principal and Interest on the principal amount outstanding.

Amortised cost

The amount at which a financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method, adjusted for any loss allowance.

Expected credit losses (ECL)

A probability-weighted estimate of credit losses over the relevant period, recognised even before a default has actually occurred - a forward-looking impairment model.

3Classification and measurement of financial assets

Business model	Cash flows meet SPPI?	Classification
Held to collect contractual cash flows	Yes	Amortised cost
Held to collect contractual cash flows AND to sell	Yes	Fair value through other comprehensive income (FVOCI)
Any other business model (e.g. trading)	Either	Fair value through profit or loss (FVTPL)
Equity investment (not held for trading)	n/a	FVTPL by default, or an irrevocable election to FVOCI (with no recycling of gains/losses to profit or loss on disposal)

Financial liabilities are generally measured at amortised cost, except those held for trading and derivative liabilities, which are measured at fair value through profit or loss, and any liability for which the entity elects the fair value option.

4Impairment and derecognition

IFRS 9 requires a forward-looking expected credit loss model, applied in three stages for most financial assets: Stage 1 (performing, no significant increase in credit risk since origination) recognises 12-month expected credit losses; Stage 2 (a significant increase in credit risk since origination, but not yet credit-impaired) recognises lifetime expected credit losses; Stage 3 (credit-impaired) also recognises lifetime expected credit losses, with interest revenue calculated on the net carrying amount. A simplified approach is mandatory for trade receivables, contract assets and lease receivables without a significant financing component: lifetime expected credit losses are recognised from initial recognition, typically using a provision matrix based on historical default rates adjusted for forward-looking factors.

A financial asset is derecognised when the contractual rights to its cash flows expire, or when the entity transfers substantially all the risks and rewards of ownership. Hedge accounting (optional) allows an entity to match the timing of gain/loss recognition on a hedging instrument with the hedged item, across three types: fair value hedges, cash flow hedges, and hedges of a net investment in a foreign operation.

5Examinable focus

What KASNEB tests

Classifying a financial asset from scenario facts (applying the business model and SPPI tests), amortised cost and effective interest rate computations for bonds issued at a discount or premium (with an amortisation table), and expected credit loss provision computations for trade receivables using a provision matrix, are all heavily and numerically examined - IFRS 9 is one of the most consistently tested standards at KASNEB's advanced levels.