IFRS 9 Financial Instruments: A Guide for Finance and Accounting Professionals

What Is IFRS 9?

IFRS 9 Financial Instruments replaced IAS 39 and covers the classification and measurement of financial assets and liabilities, impairment of financial assets, and hedge accounting. It applies to annual periods beginning on or after 1 January 2018. IFRS 9 introduced the Expected Credit Loss (ECL) model for impairment — a forward-looking approach that replaced the incurred loss model of IAS 39 and was designed to address the "too little, too late" criticism of the old standard during the 2008 financial crisis.

Classification and Measurement of Financial Assets

Under IFRS 9, financial assets are classified based on two criteria: the business model for managing the financial assets and the contractual cash flow characteristics (whether cash flows are solely payments of principal and interest — the SPPI test). The three measurement categories are: Amortised Cost (AC) for assets held to collect contractual cash flows that pass the SPPI test; Fair Value through Other Comprehensive Income (FVOCI) for assets held both to collect and to sell; and Fair Value through Profit or Loss (FVTPL) for all others.

The Expected Credit Loss Model

The ECL model requires entities to recognise expected credit losses on financial assets measured at AC or FVOCI from the date of initial recognition — not just when a loss event occurs. The three-stage model: Stage 1 (12-month ECL for assets with no significant increase in credit risk since origination), Stage 2 (lifetime ECL when credit risk has increased significantly), Stage 3 (lifetime ECL for credit-impaired assets, with interest recognised on net carrying amount). The ECL calculation requires forward-looking macroeconomic scenarios and probability-weighted estimates.

Hedge Accounting

IFRS 9 simplified hedge accounting by aligning it more closely with risk management activities. The key change was replacing the 80–125% effectiveness test with a more principles-based requirement. More instruments qualify as hedging instruments under IFRS 9, and more risk components can be designated as hedged items.

Impact on Banks and Financial Institutions

IFRS 9 had the most significant impact on banks, where loan portfolios required substantial ECL provisioning. Provisions under IFRS 9 are typically higher and more volatile than under IAS 39. The interaction between IFRS 9 provisions and regulatory capital (Basel III/IV) is a key area of expertise for bank finance professionals.

Further Reading

• Accounting Standards CPD
• ACCA FR Guide
• Insurance Finance Careers

CPD on IFRS 9

Learnsignal's CPD library includes IFRS 9 ECL methodology and financial instruments modules. Explore CPD.

FAQ

What is the SPPI test?

Solely Payments of Principal and Interest. A financial asset passes the SPPI test if the contractual cash flows represent only repayment of principal and interest on the outstanding principal — i.e. it behaves like a basic lending arrangement. Instruments with leverage, inverse floating rates, or convertible features typically fail the SPPI test and are classified at FVTPL.