IFRS 9 Financial Instruments Measurement

IFRS 9 Financial Instruments Measurement uses the following criteria for determining the classification and measurement of financial assets at Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL):

IFRS 9 Financial Instruments Measurement

The critical issues for classifying and measuring financial assets are whether:

Both of these tests have to be met in order to account for an instrument at Amortized Cost or FVOCI. In this publication, when we talk of passing or meeting one of these tests, we mean the asset can be measured at Amortized Cost or FVOCI as appropriate, assuming that the other test is met. When we talk of failing the test, we mean that the asset must be measured at FVPL.

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Applying the Business Model and SPPI tests is not necessarily straightforward and their outcomes sometimes can be surprising.

Consider, for example, the following table, which illustrates how the tests can affect the classification and measurement of common types of financial assets.

Here is some additional guidance in the application of the Business Model and SPPI tests: IFRS 9 Financial Instruments Measurement

Amortised Cost or FVOCI possible FVPL mandatory

Bank deposits repayable on demand, where interest, if payable, is at a fixed or floating market rate

Investments in common shares where the holder does not designate the asset as FVOCI

Trade receivables requiring payment only of fixed amounts on fixed dates

IFRS 9 Financial Instruments Measurement

IFRS 9 Financial Instruments Measurement

Investments in mandatorily redeemable preferred shares and puttable instruments (or instruments issued by entities having a limited life) such as mutual fund units where non-payment of dividends is not a breach of contract or the holder has no claim for a fixed amount in bankruptcy

Full recourse loans or investments in debt securities that require only fixed payments on fixed dates

Self-standing derivative financial assets such as purchased options, swaps and forward contracts

Full recourse floating rate loans requiring fixed payments on fixed dates of principal and bearing interest at a floating market rate (such as the BA rate) where the interest rate is for a period that is the same as the interest rate reset period (e.g., the interest rate is reset every three months based on the 3 month BA rate)

Floating rate loans where the interest rate is for a period that does not correspond to the interest reset period (e.g., interest is reset every 3 months based on the 6 month BA rate) and the impact on cash flows is significant

Non-recourse loans (i.e., those where recourse is limited to specific assets) where at initial recognition the lender has an economic exposure to the underlying asset’s value and cash flows that is consistent with a basic lending arrangement

Non-recourse loans where at initial recognition the lender has an economic exposure to the underlying asset’s value and cash flows greater than that of a basic lender

Trade receivables, loans and investments in debt securities, having the attributes described above but that can be prepaid, subject to meeting certain criteria

Fixed or floating rate loans including terms where payments are based on factors such as equity or commodity prices, unless the terms are not genuine or their effect is de minimis

The IFRS 9 Measurement classifications

The IFRS 9 Financial Instruments Measurement classifications are as follows:

  1. Measurement at amortized cost – A financial asset is measured at amortized cost if both of the following criteria are met:
    1. The asset is held to collect its contractual cash flows; and
    2. The asset’s contractual cash flows represent ‘solely payments of principal and interest’ (“SPPI”).These financial assets are subsequently measured at amortized costs using the effective interest method.
  2. Measurement at fair value through other comprehensive income – A financial asset is measured at fair value through other comprehensive income (“FVOCI”) if both of the following criteria are met:
    1. The objective of the business model is achieved both by collecting contractual cash flows and selling financial assets; and
    2. The asset’s contractual cash flows represent SPPI.Financial assets included within the FVOCI category are initially recognized and subsequently measured at fair value. Movements in the carrying amount should be recorded through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in profit and loss. Where the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss, and
  3. Measurement at fair value through profit or loss – This is the residual category. Financial assets should be classified as FVPL if they do not meet the criteria of FVOCI or amortized cost.Financial assets included within the FVPL category should be initially and subsequently measured at fair value with all changes recorded through profit or loss.
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Interesting read: Research on reclassifications of financial assets

Food for thought – FVOCI
The FVOCI category is intended to acknowledge the practical reality that entities might invest in debt instruments to generate yield but might also sell if the price is considered advantageous or it is necessary to periodically adjust or rebalance the entity’s net risk, duration or liquidity position. Both fair value and amortized cost information is useful in helping financial statement users to predict future cash flows for instruments in this category because of the two potential value realization paths that can be taken.

This table will be used to further explain the mechanics of the Business Model and SPPI Tests in IFRS 9 The Business Model Test and IFRS 9 The Solely Payments of Principal and Interest Test.

IFRS 9 Financial Instruments Measurement

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Something else -   Instruments that failed the SPPI test

IFRS 9 Financial Instruments Measurement IFRS 9 Financial Instruments Measurement IFRS 9 Financial Instruments Measurement IFRS 9 Financial Instruments Measurement IFRS 9 Financial Instruments Measurement

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