IFRS 9 – Reclassification of financial instruments

The IFRS 9 requirements for reclassification of financial instruments are significantly different from those in IAS 39.

IAS 39


  • IAS 39 contains numerous reclassification rules for the various categories of financial instruments.
  • For instance, a change in intention or ability causes the initial classification to be inappropriate, a reliable measure of fair value becomes available or is no longer available, etc.

(IAS 39.50-54)

IFRS 9 – Reclassification of financial instruments

  • There is only one principle for reclassification of financial assets. Reclassification of financial assets is required only when an entity changes its business model for managing them.
  • No reclassification of financial liabilities is allowed.


IFRS 9 – Reclassification of financial instruments

IFRS 9 –

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IFRS 9 The Business Model Test

Under IFRS 9, a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable at Amortized Cost or FVOCI is whether the asset is part of a group or portfolio that is being managed within a business model whose objective is to collect contractual cash flows (Amortized Cost), or to both collect contractual cash flows and to sell (FVOCI). Otherwise, the asset is measured at FVPL. The key elements of this test are listed below.

Observe: IFRS 9 recommends applying the Business Model test before applying the SPPI test because this may eliminate the need to apply the more detailed SPPI test, which is applied at a more granular level. However,

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Curing of a credit-impaired financial asset

See credit-impaired financial asset for some introduction to this illustrative example.

The case

An existing loan with an effective interest rate of 10% has become credit-impaired. Lifetime expected credit losses have been recognised on the loan as of 1 January Year 20×1.

The expected shortfall in cash flows is shown in Table 1 and remain unchanged until 31 December N+3. Discounted at the effective interest rate (EIR) this gives an expected credit loss (ECL) as at 1 January of CU59,000, as shown in Table 1.

Table 1: Contractual & expected [glossary_exclude]cash [/glossary_exclude]flows

[glossary_exclude]Cash flows[/glossary_exclude] as at 31 Dec

in CU ‘000






Contractual [glossary_exclude]cash flows[/glossary_exclude]






Expected [glossary_exclude]cash flows[/glossary_exclude]




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Setting the scene: the Expected Credit Losses model

Start here to get a good understanding of  Expected Credit Losses or continue, you decide…… The model should be applied to:Setting the scene: the Expected Credit Losses model

  • investments in debt instruments measured at amortized cost;
  • investments in debt instruments measured at fair value through other comprehensive income (FVOCI);
  • all loan commitments not measured at fair value through profit or loss;
  • financial guarantee contracts to which IFRS 9 is applied and that are not accounted for at fair value through profit or loss; and
  • lease receivables that are within the scope of IFRS 16 Leases, and trade receivables or contract assets within the scope of IFRS 15 that give rise to an unconditional right to consideration.

The IFRS 9 impairment model requires impairment allowances for all exposures … Read more

Summary impairment of financial assets

The impairment requirements are applied to:

  • Financial assets measured at amortised cost (originated, purchased, reclassified or modified debt instruments incl. trade receivables),
  • Financial assets measured at fair value through other comprehensive income,
  • Loan commitments except those measured at fair value through profit or loss,
  • Financial guarantees contracts except those measured at fair value through profit or loss,
  • Lease receivables.

The impairment model follows a three-stage approach based on changes in expected credit losses of a financial instrument that determine:

  • The recognition of impairment, and
  • The recognition of interest revenue.

Initial recognition

At initial recognition of a financial asset, an entity recognises, as a standard approach, a loss allowance equal to 12-month expected credit losses. The actual loss does not need … Read more

Property development (intercompany) finance

Interest bearing term loan – Senior interest-bearing bank term debt


Parent C operates in the UK real estate sector and purchases land for development into residential units for public sale. Each potential development proposal is supported by a detailed business case which includes a due diligence report in respect of the expected Gross Development Costs (GDC) as well as an independent third party valuation of the Gross Development Value (GDV) of the completed site both of which are undertaken in order to secure bank financing. Management assesses each proposal in accordance with a number of key investment criteria, including for example, the minimum yield required on each development.

Once the proposal has been approved by Management, a new … Read more