Ifrs 9 PDF

Get ready for IFRS 9
Classifying and measuring

financial instruments
IFRS 9 (2014) ‘Financial Instruments’ fundamentally rewrites

the accounting rules for financial instruments. It introduces
a new approach for financial asset classification; a more
forward-looking expected loss model; and major new
requirements on hedge accounting.
While IFRS 9’s mandatory effective date of 1 January 2018
may seem a long way off, companies really need to start
evaluating the impact of the new Standard now. As well as the
impact on reported results, many businesses will need to collect
and analyse additional data and implement changes to systems.
This is the first in a series of publications designed to get
you ready for IFRS 9. In this issue, we bring you up to speed on
the Standard’s new classification and measurement requirements.
Issue 1 November 2015

Contents
1 Overview of classification and measurement requirements 1
2 The business model test 3

2.1 Determining the business model 5
2.1.1 Level of determination 5
2.1.2 Management of business unit versus management of assets within the business unit 6
2.1.3 Outcome differs from expectations 6
2.2 Hold to collect business model 7
2.2.1 Sales that may be consistent with a business model of holding assets to collect cash flows 8
2.3 Hold to collect and sell business model 9
2.4 Other business models 9
2.5 Reassessment of business models 10
2.6 Reclassification of financial assets on change in business model 10
2.6.1 Date of reclassification 12
3 Contractual cash flows characteristics test 13

3.1 Principal 14
3.2 Interest 14
3.2.1 Consideration for the time value of money 14
3.3 Leverage 15
3.4 Terms that change the contractual cash flows 16
3.4.1 Prepayment or extension options 17
3.4.2 De minimis and non-genuine contractual terms 17
3.5 Impact of collateral or subordination 17
3.6 Non-contractual terms 18
3.7 Non-recourse and limited recourse assets 18
3.8 Contractually linked instruments 19
4 Classification and measurement 21

4.1 Financial assets measured at amortised cost 22
4.2 Financial assets measured at fair value through other comprehensive income 23
4.2.1 Option to designate equity investments at fair value through other comprehensive income 23
4.3 Financial assets measured at fair value through profit or loss 24
4.3.1 Designation as at fair value through profit or loss 24
5 Classification of financial liabilities 25

5.1 Basic principles 26
5.2 Amortised cost measurement 26
5.3 Financial liabilities at fair value through profit or loss 26
5.3.1 Financial liabilities held for trading 27
5.3.2 Option to designate as at fair value through profit or loss 27
5.3.3 Changes in fair value attributable to own credit risk 28
5.4 Reclassification 28
Practical insight – next steps 29

1. Overview of classification
and measurement
requirements
IFRS 9 classifies financial assets into three main measurement categories:
• amortised cost
• fair value through other comprehensive income
• fair value through profit or loss.
Classification is determined by both:

• the entity’s business model
• the contractual cash flow characteristics of the asset.
The classification and measurement of financial assets was one of the areas of IAS 39 that
received the most criticism during the financial crisis.

In publishing the original 2009 version of IFRS 9, the IASB The diagramme below summarises the three main categories
therefore made a conscious effort to reduce the complexity in and how the business model and cash flow characteristics tests
accounting for financial assets by having just two categories determine the applicable category.
(fair value and amortised cost). However following comments In addition, IFRS 9 provides options allowing an entity to, on
that having just two categories created too sharp a dividing line initial recognition only, irrevocably designate:
and failed to reflect the way many businesses manage their • financial assets that would otherwise be measured at
financial assets, an additional category was added in July 2014 amortised cost or fair value through other comprehensive
when IFRS 9 (2014) was published. income under IFRS 9’s general principles at fair value
The result is that under IFRS 9 each financial asset is through profit or loss, if this designation would reduce or
classified into one of three main classification categories: eliminate a so-called ‘accounting mismatch’
• amortised cost • equity instruments, which will otherwise need to be
• fair value through other comprehensive income (FVTOCI) measured at fair value through profit or loss, in a special
• fair value through profit or loss (FVTPL). ‘equity – fair value through other comprehensive income’
category. This is available for any investment in equities
The classification is determined by both: within the scope of IFRS 9 apart from investments held for
a) the entity’s business model for managing the financial asset trading and contingent consideration receivable resulting
(‘business model test’); and from a business combination to which IFRS 3 ‘Business
b) the contractual cash flow characteristics of the financial Combinations’ applies.
asset (‘cash flow characteristics test’).
This publication explores the different classification categories
and the criteria that accompany them.
fair value option FVTPL fair value option

for accounting Applies to other financial assets for accounting
mismatches that do not meet the conditions for mismatches
amortised cost or FVTOCI (including
derivatives and equity investments)
FVTOCI option
for some equity
FVTOCI investments Amortised cost
Applies to debt assets for which: Applies to debt assets for which:
(a) contractual cash flows are solely 3 main (a) contractual cash flows are solely
principal and interest; and (b) business categories principal and interest; and (b) business
model is to hold to collect cash flows model is to hold to collect cash flows
and sell
2 Issue 1 November 2015

2. The business model test
The business model test is the first of the two tests that determine the
classification of a financial asset.
IFRS 9 uses the term in relation to how financial assets are managed and the
extent to which cash flows will result from collecting contractual cash flows,
selling financial assets or both.
Two business models are positively defined:

• a ‘hold to collect’ business model
• a ‘hold to collect and sell’ business model.
Debt-type financial assets that are not managed under either of these
models will need to be measured at fair value through profit or loss.
As discussed above, the classification of financial assets under IFRS 9 is determined by

both the entity’s business model for managing the financial asset and the contractual
cash flow characteristics of the financial asset.

In practice, the ‘business model test’ is Model Possible examples
relevant only for debt-type financial Hold to collect contractual cash • trade receivables
assets such as receivables, originated flows • originated loans and debt securities held to maturity
and purchased loans and debt securities.
This is because derivative financial assets Hold to collect contractual cash • liquidity portfolio
and investments in equities will be flows and to sell • assets held by an insurer to back insurance liabilities
classified at fair value though profit or

Other (not defined) • trading portfolios
loss as a result of the ‘cash flow
• assets managed on a fair value basis
characteristics test’ (see Section 3
below). This is subject to the option
to designate on initial recognition as • a business model whose objective is
measured at ‘equity - fair value through to hold the financial asset in order to
other comprehensive income’ referred collect contractual cash flows (‘hold
to in Section 1 above. to collect’)
Looking at the first of the two • a business model in which assets are
classification criteria, IFRS 9 uses the managed to achieve a particular
term ‘business model’ in terms of how objective by both collecting
financial assets are managed and the contractual cash flows and selling
extent to which cash flows will result financial assets (‘hold to collect
from collecting contractual cash flows, and sell’).
selling financial assets or both. The
Standard positively defines two such If debt-type financial assets are not
‘business models’: managed under either of these two
models, they will need to be measured
at fair value through profit or loss.
In practice, the ‘business model test’ is relevant only for

debt-type financial assets such as receivables, originated
and purchased loans and debt securities.

Classifying and measuring financial instruments
2.1 Determining the business 2.1.1 Level of determination

Example
model
An entity’s business model is determined An entity holding a portfolio of
An entity’s business model refers to how at a level that reflects how groups of mortgage loans may manage some
an entity manages its financial assets in financial assets are managed together to of the loans to collect contractual
order to generate cash flows. achieve a particular business objective. cash flows while having an objective
The business model is determined by Accordingly, the assessment does not of selling other loans within the
the entity’s key management personnel. depend on management’s intentions for portfolio in the near term. The
The Standard guides that the individual instruments. portfolio would be sub-divided, with
determination will be a matter of fact Also, for IFRS 9 purposes, an entity part of it being accounted for under
which is typically observable through the can have more than one business model. a hold to collect business model
activities the entity undertakes to achieve For example, an entity may hold a while the other loans are accounted
the objectives of the business model. The portfolio of investments that it manages for at fair value through profit or loss.
business model should be determined by in order to collect contractual cash flows
considering all relevant and objective and another portfolio of investments that
evidence, which might include: it manages by actively trading them to
• how performance is evaluated and realise fair value changes. Similarly it may
reported to the entity’s key be necessary to separate a portfolio into
management personnel sub-portfolios in some situations in order
• the risks affecting performance of the to reflect the level at which an entity
business model and how those risks manages those financial assets.
are managed
• how managers of the business are
compensated (eg whether
compensation is based on fair value
of assets managed or on contractual
cash flows collected).
Determining the model involves

expectations about the future actions of
the entity but should not be based on
scenarios that the entity does not
reasonably expect to occur (‘worst case’
or ‘stress test’ scenarios for example are
excluded when determining the model).
IFRS 9 uses the term ‘business model’ in terms of how

financial assets are managed and the extent to which cash
flows will result from collecting contractual cash flows,
selling financial assets or both.
Issue 1 November 2015 5

2.1.2 Management of business unit

Example
versus management of assets
Entity Y has operated a hold to collect business model for many years. Its
within the business unit
portfolio of assets has for many years consisted of investment grade bonds
When assessing business models, it is issued by utility companies. Entity Y’s investment policies attach importance
important to distinguish between the to both the yield and the stability afforded by such investments, and result
management of a portfolio within a in sales only in response to significant deteriorations in the credit risk of
business unit and management of the individual assets within the portfolio. Recently however there has been a wave
overall business unit. The fact that an of takeovers in the utility sector fuelled by overseas interest in the sector. As a
entity may be planning to dispose of a result, Entity Y has sold a number of the bonds within its portfolio in response
business unit does not preclude to unsolicited offers that have been made to it. Continuing interest in this sector
portfolios within the business unit from means that such sales are likely to continue in the future.
being classified as ‘hold to collect’ or
‘hold to collect and sell’. Can Entity Y’s portfolio continue to be accounted for under a held to
collect business model?
2.1.3 Outcome differs Changes in the way that assets are managed within the business model (such
from expectations as the increased frequency of sales that has taken place) do not result in the
reclassification of existing assets, but may result in new assets being classified
The business model assessment is
differently. As a result the portfolio may need to be sub-divided going forward,
forward-looking, so cash flows may
with the existing bonds continuing to be accounted for within a hold to collect
sometimes be realised in a way that
business model at amortised cost and the new bonds accounted for either at
differs from the entity’s expectations at
fair value through profit or loss or under a ‘hold to collect and sell’ business
the time of the original assessment. For
model at fair value through other comprehensive income.
example, the entity might sell more
assets from the portfolio than had been
anticipated at the time of making the
original assessment for various reasons.
This does not result in a prior period
error if the original assessment
considered all the relevant information that
was available at the time. Neither does it
change the classification of the remaining
assets that continue to be held within the
business model (unless the entity changes
its business model in a manner that meets
IFRS 9’s requirements on reclassification
– see 2.6 below). However in such an
example the increased level of sales and
the reasons for them may be relevant in
terms of assessing the business model for
new financial assets that have been
acquired or originated.

An entity’s business model for managing financial assets:

• reflects how financial assets are managed to generate cash flows
• is determined by the entity’s key management personnel
• does not depend on management’s intentions for individual instruments but is based
on a higher level of aggregation that reflects how groups of financial assets are
managed together to achieve a particular business objective.
2.2 Hold to collect business model

Factors to consider
A ‘hold to collect’ business model is one
in which assets are managed to realise
1. Frequency 2. Value of 3. Timing of 4. Reason 5.
cash flows by collecting contractual
of sales in sales in prior sales in prior for such Expectations
payments over the instruments’ lives. prior periods periods periods sales about future
In determining whether cash flows are
going to be realised by collecting the
financial assets’ contractual payments,
it is necessary to consider:
Sales in themselves however do not When assessing past sales, an entity
• the frequency, value and timing of
determine the business model and should considers the reasons for those sales,
sales in prior periods
not be considered in isolation. It is not their timing, frequency and value. The
• the reasons for those sales and
necessary then for an entity to hold all of entity also considers how the conditions
• expectations about future
the instruments until maturity. Rather, that existed at that time compare to
sales activity.
information about past sales and current conditions.
expectations about future sales provide
evidence related to how the entity’s
Objective stated objective for managing the
financial assets is achieved and,
• collect contractual payments specifically, how cash flows are realised.
over life of the instrument
• entity manages the assets held
within the portfolio to collect
those particular contractual
cash flows

2.2.1 Sales that may be consistent Where sales occur that are more than
Example
with a business model of holding infrequent and they are more than
Entity A holds investments to collect
assets to collect cash flows insignificant in value, an entity will need to
their contractual cash flows but will
assess whether and how those sales are
An entity’s business model can be ‘hold sell investments with the objective
consistent with the objective of a hold to
to collect’ even when some sales occur of minimising credit losses. A formal
collect business model. An increase in
or are expected to occur in the future. policy documents Entity A’s credit
the frequency or value of sales in a
This section looks at some examples: risk requirements and when sales
particular period is not in itself
are to be made. Provided that sales
necessarily inconsistent with a hold to
2.2.1.1 Sales due to an increase in the are made in response to conditions
collect business model, if an entity can
assets’ credit risk that are set out in the documented
explain the reasons for those sales and
policy, they will be consistent with
Sales due to an increase in the assets’ demonstrate why those sales do not
the hold to collect business model.
credit risk are not inconsistent with a hold reflect a change in the entity’s business
to collect business model because the model. For example an entity may sell
credit quality of financial assets is some assets whose credit risk has not
2.2.1.2 Sales for other reasons
relevant to the entity’s ability to collect deteriorated in order to manage credit
contractual cash flows. Other sales which are not due to an concentration risk. In such a situation,
It will be easiest to demonstrate this increase in credit risk may still be judgement will need to be applied in
when there is a documented investment consistent with a hold to collect business determining whether the sales are
policy that is aimed at minimising model. This is the case if those sales are consistent with the hold to collect
potential credit losses due to credit incidental to the overall business model. business model. No ‘bright-lines’ are
deterioration. However where such a Examples of such sales could include: given in the Standard to help entities in
policy does not exist, it may still be • sales that are insignificant in value making this assessment.
possible to show in other ways that a both individually and in aggregate,
sale has occurred due to an increase in even when such sales are frequent.
credit risk and is therefore consistent • sales that are infrequent, even when
with the hold to collect business model. the sales are significant in value
• sales made close to the maturity of
the financial assets when the
proceeds from the sales approximate
the collection of the remaining
contractual cash flows.
Where sales occur that are more than infrequent and they
are more than insignificant in value, an entity will need to
assess whether and how those sales are consistent with
the objective of a hold to collect business model.

2.3 Hold to collect and sell 2.4 Other business models

Example
business model
Entity Z operates in the If a debt-type financial asset is not held
The second defined business model in entertainment industry. Its within either a hold to collect business
IFRS 9 is often referred to as ‘hold to operations include a sports stadium. model or a hold to collect and sell
collect and sell’. This applies when key Entity Z has a long-term plan for business model, then it will be measured
management personnel have made a renovating the stadium involving at fair value through profit or loss.
decision that both collecting contractual significant investment at set points IFRS 9 gives a number of examples of
cash flows and selling financial assets are three, seven and ten years in models which will result in fair value
integral to achieving the objective of the the future. In anticipation of this through profit or loss measurement,
business model. expenditure, Entity Z invests surplus including business models in which:
In determining whether this is so, cash in bond assets. Many of the • an entity manages the financial assets
entities will need to exercise an element bonds have maturity dates that with the objective of realising cash
of judgement. This is because there is no substantially exceed the points at flows through the sale of the assets
threshold for the frequency or value of which the stadium expenditure is • an entity manages and evaluates a
sales that must occur in this business expected to take place. portfolio of financial assets on a fair
model. However, this business model will Entity Z holds these bonds to value basis
typically involve greater frequency and collect the contractual cash flows • a portfolio of financial assets that
value of sales than a hold to collect until it needs the cash to invest meets the definition of held for
model. This is because selling financial in the stadium. It may also make trading is not held to collect
assets is integral to achieving the opportunistic sales if management contractual cash flows or held both to
business model’s objective instead of considers that market prices rise collect contractual cash flows and to
being only incidental to it. to levels that significantly exceed sell financial assets.
There are various objectives that may their own assessment of the bonds’
be consistent with this type of business fundamental valuation. Accordingly
model. For example, the objective of the the bonds held by Entity Z would
business model may be to manage be accounted for under a hold to
everyday liquidity needs, to maintain a collect and sell business model.
particular interest yield profile or to
match the duration of the financial assets
to the duration of the liabilities that those
assets are funding.
This business model will typically involve greater frequency

and value of sales than a hold to collect model.

2.5 Reassessment of Examples of scenarios that do or do not lead to reclassification

business models Scenario Change of
business model?
An entity should reassess its business
models at each reporting period in order Entity A holds a group of debt assets originally intending to collect all the
to determine whether they have changed contractual cash flows. As a result of a cash shortage management decides to
since the preceding period. sell half the assets
For example an increased level of Entity B holds a portfolio of debt assets for trading and classifies them at
sales of assets within a portfolio that was FVTPL. Due to a severe financial crisis the market in these assets disappears.
assessed as ‘hold to collect’ may indicate Entity C is a financial services firm with a large retail domestic mortgage
that the business model has evolved and business. As a result of a strategic review management decides to close this
that it would be inappropriate to classify business and commences a programme to sell the loans
future additions to the portfolio in the
same way. As discussed above, this
does not however mean that the
2.6 Reclassification of IFRS 9 makes it clear that such
remaining assets within the portfolio need
financial assets on change in changes are expected to be very
to be reclassified. Reclassification would
business model infrequent and will be determined by
be required only if the original business
senior management as a result of
model assessment was made in error, or Reclassification of financial assets is
external or internal changes. The
IFRS 9’s strict conditions for required when, and only when, an entity
Standard further guides that the changes
reclassification of financial assets on changes its business model for managing
must be significant to the entity’s
change in business model are met the assets. In such cases, the entity is
operations and demonstrable to external
(see below). required to reclassify all affected
parties. In order for this to be the case,
financial assets.
an entity will need to either begin or
terminate an activity that is significant
to its operations.
Changes in business model are expected to be

very infrequent.

The Standard clarifies that the

Practical insight – reclassification of financial assets on change in
following are not changes in
business model
business model:
IFRS 9 discusses business models in the context of initial classification to
• change in intention related to
describe how different groups of assets are managed and, in turn, how this
particular financial assets (even in
is expected to affect future levels of cash collections and asset sales. This of
circumstances of significant changes
course is not how senior management would typically describe their entity’s
in market conditions)
business model from a commercial or strategic perspective.
• the temporary disappearance of a
By contrast, IFRS 9 uses the term ‘business model’ differently in the context
particular market for financial assets
of reclassification of financial assets on a change in business model. In this
• a transfer of financial assets between
context ‘business model’ is used with a more normal, strategic meaning. For
parts of the entity with different
this reason, entities might well change how they manage groups of financial
business models.
assets in a way that affects the classification of newly-acquired assets going
forward but does not trigger a reclassification of existing assets.
Even when there is a change in business
model, it would still be inappropriate to
reclassify financial assets that have been
designated at fair value through profit or
loss, or equity instruments that have
been designated as at fair value through
other comprehensive income. Such
designations are irrevocable.

2.6.1 Date of reclassification

Practical insight – effect of contractual cash flows test on reclassification
IFRS 9 states that when an entity Reassessment of whether an instrument meets the contractual cash flows test
reclassifies financial assets, the following a modification to its terms is not relevant to reclassification of the
reclassification is to be prospective from financial asset. Rather the entity should consider the modification in terms of
the reclassification date. whether or not it leads to derecognition of the original asset. A change that
The reclassification date is the first affects whether the contractual cash flows test is met or not may be one of the
day of the first reporting period following factors to consider in determining whether there is a derecognition event.
the applicable change in business model. Where a modification does not result in derecognition of the asset,
Previously recognised gains or losses reclassification will not be permitted unless there has also been a change in
(including ones relating to impairment) the business model for managing financial assets. Where the modification
and interest are not to be restated. does result in derecognition, this does not result in reclassification but rather
IFRS 9 contains detailed requirements recognition of a new instrument which will then be classified in accordance with
on how to measure a financial asset when the Standard’s usual requirements.
it is reclassified from one measurement
category to another as a result of a
change in business model. The table Practical insight – effect of interim periods
below provides a high level summary of While IFRS 9 defines the term ‘reclassification date’ by referring to the reporting
these requirements. Reference should be period that follows a change in business model, it does not define the term ‘reporting
made to the Standard itself for a proper period’ itself. Our view is that an interim reporting period should be treated as a
understanding of the requirements. reporting period for the purpose of interpreting the reclassification date.
For example, consider an entity which has a 31 December year end and which
prepares interim reports on a half yearly basis. If a change in business model
occurs in April, then our view is that the reclassification date will be treated as
1 July for the purposes of both the interim financial statements for the period
ending 30 June and the financial statements for the year ending 31 December.
Original New category Balance sheet impact P&L impact OCI impact
category
Amortised cost FVTPL FV is measured at RD* Gain/loss = difference between previous None
amortised cost and FV
FVTPL Amortised cost FV at RD becomes new gross None None

carrying amount
Amortised cost FVTOCI FV is measured at RD None Gain/loss = difference between previous

amortised cost and FV
FVTOCI Amortised cost FV at RD becomes new gross None Gain/loss previously in OCI reclassified
carrying amount as an adjustment to FV at RD
FVTPL FVTOCI None None None
FVTOCI FVTPL None Gain/loss previously recognised in OCI is reclassified from equity to profit or loss
*RD = reclassification date

3. Contractual cash flows
characteristics test
The contractual cash flow characteristics test is the second of the two tests
that determine the classification of a financial asset.
For the test to be met, the contractual terms of the financial asset must give
rise on specified dates to cash flows that are solely payments of principal
and interest.
It is only possible to classify a financial asset in the amortised cost or fair value
through other comprehensive income category where the test is met.
The second condition for classification in the amortised cost or fair value through other
comprehensive income category can be labelled the ‘solely payments of principal and
interest’ test. The requirement is that the contractual terms of the financial asset give
rise on specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.

The second condition for classification in 3.2 Interest A non-prepayable fixed rate bond or
the amortised cost or fair value through loan would for instance clearly provide
‘Interest’ consists of consideration for:
other comprehensive income category the holder with consideration for the time
• the time value of money
can be labelled the ‘solely payments of value of money. It is equally clear that an
• the credit risk associated with the
principal and interest’ test. The equity investment does not, as the cash
principal amount outstanding during
requirement is that the contractual terms flows are not usually specified.
a particular period of time
of the financial asset give rise on
• other basic lending risks and costs
specified dates to cash flows that are 3.2.1.1 Modified time value of
• a profit margin.
solely payments of principal and interest money element
on the principal amount outstanding.
3.2.1 Consideration for the time In some cases, however, the analysis
value of money may be more complicated. One such
3.1 Principal
case is when the time value of money
The time value of money represents the
For the purpose of applying this test, element has been ‘modified’ such that it
element of interest that provides
‘principal’ is the fair value of the financial does not reflect a normal relationship
consideration for the passage of time
asset at initial recognition. The Standard between the time value element and the
(ie it does not provide consideration for
acknowledges however that the principal time period (or maturity) of the
any other risks or costs associated with
amount may change over the life of the instrument. One example of a modified
the asset).
financial asset, for example as a result of time value element is a loan or bond in
In order to assess whether an
repayments of principal. which the interest rate resets periodically
element of interest provides
but based on a market rate that reflects
consideration for only the passage of
a longer or shorter time period (eg a
time, an entity applies judgement and
monthly reset based on a benchmark
considers relevant factors such as the
interest rate for a 12 month loan).
currency in which the financial asset is
denominated (see 3.2.1.3) and the period
for which the interest rate is set.
The requirement is that the contractual terms of the

financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the
principal amount outstanding.

In such cases, an entity must assess 3.2.1.2 Regulated interest rates 3.3 Leverage
the modification to determine whether the In some jurisdictions, the government or
Contractual cash flows that are
contractual cash flows represent solely a regulatory authority sets interest rates
solely payments of principal and
payments of principal and interest on the on some types of loans. This can raise
interest are consistent with a basic
principal amount outstanding. In doing questions over whether the regulated
lending arrangement.
this the objective is to determine how rate includes the necessary elements
Contractual terms that introduce
different the contractual (undiscounted) to meet IFRS 9’s definition of interest.
exposures to risks or volatility in the
cash flows could be from the IFRS 9 aims to address this by stating
contractual cash flows that are unrelated
(undiscounted) cash flows that would that, for the purpose of the ‘solely
to a basic lending arrangement, such as
arise if the time value of money element payments of principal and interest’ test,
exposure to changes in equity prices or
was not modified (the benchmark cash a regulated interest rate is considered
commodity prices, fail the solely
flows). In some cases it will be possible a proxy for the time value of money
payments of principal and interest test.
to do this by performing a qualitative element. This applies if that regulated
assessment but in more complicated interest rate provides consideration that
cases, a quantitative assessment may is broadly consistent with the passage of Example
be necessary. time and does not provide exposure to Entity X issues a bond which is
The Standard notes that in extreme risks or volatility in the contractual cash repayable after ten years. Under
economic circumstances, interest can be flows that are inconsistent with a basic the terms of the bond, interest
negative. This is an important clarification lending arrangement. resets periodically to an amount
as negative interest rates have been a determined as a fixed margin plus
real phenomenon in some jurisdictions in 3.2.1.3 Foreign currency twice the published rate of LIBOR.
recent years. They have resulted in a The bond would fail the
In considering whether an instrument
number of application issues. solely payments of principal and
provides consideration for only the
A floating contractual interest rate interest test as the interest rate
passage of time, IFRS 9 guides that
would not represent consideration for the is leveraged.
factors such as the currency in which the
time value of money and credit risk if the
financial asset is denominated should be
formula results in a decrease in the
considered. For example, if the principal Similarly contracts that increase leverage
contractual rate when the applicable
amount of an instrument was fail the test as they increase the
interest rate index increases, or vice
denominated in one currency but interest variability of the contractual cash flows
versa. An example is an instrument with a
payments were made in another currency with the result that they do not have the
rate formula such as 10% minus LIBOR
(a ‘dual currency’ bond), this would be economic characteristics of interest.
(an ‘inverse floating rate’).
inconsistent with the solely payments of Stand-alone option, forward and swap
principal and interest test. This is contracts are other examples of financial
because the relationship between assets that include such leverage. As a
principal and interest would be affected result, derivatives always ‘fail’ the solely
by foreign exchange rates. payments of principal and interest test and
must be classified in the fair value through
profit or loss category.

3.4 Terms that change the

Example
contractual cash flows
On 1 January 20X0, Entity M issues a financial instrument which matures in
Some financial assets contain terms that three years’ time and pays interest at a rate of 10% per annum. Under the
may change their contractual cash flows terms of the instrument, Entity M must pay an increased rate of 20% if it fails to
over time, such as a prepayment or make any of the annual interest payments which are scheduled to be made on
extension option. In such cases the entity 31 December each year.
must assess the contractual cash flows In order to determine whether the solely payments of principal and interest
that could arise both before and after the test is met, Entity M needs to consider the nature of the contingent event itself
change in contractual cash flows. that causes the payments to change and assess the contractual cash flows that
The holder of the asset should also could arise both before and after the change in contractual cash flows.
consider the nature of any contingent The contingent event that causes the payments to change is Entity M’s
event that would change the contractual failure to make a contractual interest payment. This feature is consistent with a
cash flows. IFRS 9 guides here that while deterioration in the credit risk of the instrument. As credit risk associated with
the nature of the contingent event in itself the principal amount outstanding during a particular period of time is one of the
is not a determinative factor in assessing components of interest (see section 3.2), the nature of the contingent event is
whether the contractual cash flows are consistent with the solely payments of principal and interest test.
solely payments of principal and interest, In terms of the contractual cash flows that could arise both before and
they may be an indicator. For example, after the term that changes the contractual cash flows is triggered, there is no
an instrument with an interest rate that evidence of leverage or another feature that would cause the instrument to fail
increases if the borrower misses a the solely payments of principal and interest test.
repayment is more likely to pass the
solely payments of principal and interest
test than another instrument with a rate Example
that changes if an equity index falls below Entity A holds a financial asset which pays a fixed rate of interest and is
a stated level. repayable on 31 December 20X2. In addition the terms of the instrument
The sub-sections below discuss some allow the holder to prepay the instrument before maturity. The prepayment
other common terms that change the amount substantially represents unpaid amounts of principal and interest on the
contractual cash flows of an asset, and principal amount outstanding, plus a penalty calculated to provide the lender
the matters to consider. with reasonable compensation for the early termination of the contract.
The prepayment option is designed to merely accelerate the repayment of
principal and the interest that would otherwise be charged on the instrument
during its life, and would therefore meet the solely payments of principal and
interest test.

3.4.1 Prepayment or 3.4.2 De minimis and non-genuine 3.5 Impact of collateral

extension options contractual terms or subordination
When a financial asset contains a Contractual cash flow terms that have The fact that an instrument is collateralised
prepayment or extension option, the holder only a ‘de minimis’ effect on the in some way, or subordinated to other
must determine whether the contractual contractual cash flows of a financial asset instruments, does not in itself prevent the
cash flows that could arise over the life of do not affect classification. IFRS 9 does instrument from passing the solely
the instrument are solely payments of not expand on the meaning of de minimis payments of principal and interest test.
principal and interest whether or not the but does make it clear that, in the case of In finalising IFRS 9, the IASB noted that
option is exercised. This means assessing contingent cash flows, this relates to the almost all forms of lending are affected by
the contractual cash flows that could arise amount of the cash flows not the some degree of subordination. This is
assuming the option is exercised, and probability that they will occur. because instruments are commonly ranked
assuming it is not exercised. Where a contractual cash flow term in terms of seniority for repayment in the
IFRS 9 also clarifies that a debt could have an effect on the contractual event of insolvency or similar financial
instrument which would meet the solely cash flows that is more than de minimis distress situations. Even in the absence of
payments of principal and interest test but the characteristic is ‘not genuine’, contractual subordination, commercial law
but for the effect of a prepayment or it does not affect the classification of in many jurisdictions sets out a basic
extension option still meets the test (and the asset. ranking for creditors.
is therefore eligible to be measured at A cash flow characteristic is not genuine The IASB concluded that it is
amortised cost or fair value through other if it affects the instrument’s contractual reasonable to assume that commercial law
comprehensive income) if all of the cash flows only on the occurrence of an does not intend to create leveraged credit
following are met: event that is extremely rare, highly exposure for general creditors such as
• the financial asset is acquired or abnormal and very unlikely to occur. trade creditors. Accordingly an instrument
originated at a premium or discount In our view it will be rare for a that is subordinated to other instruments
to the contractual par amount contractual term to be ‘not genuine’. may pass the solely payments of principal
• the prepayment amount substantially An assertion that a term is not genuine and interest test if the debtor’s non-
represents the contractual par raises a question as to why the payment is a breach of contract and the
amount and accrued (but unpaid) contracting parties took the decision holder has a contractual right to unpaid
contractual interest, which may to include the term in the contract. amounts of principal and interest even in
include reasonable additional the event of the debtor’s bankruptcy.
compensation for the early
termination of the contract
• when the entity initially recognises the
financial asset, the fair value of the
prepayment feature is insignificant.
In such cases the entity must assess the contractual cash

flows that could arise both before and after the change in
contractual cash flows.

This can still be the case even if loans 3.7 Non-recourse and limited
Example
are collateralised. For example in the recourse assets
Entity A issues an instrument which
event of bankruptcy a loan holder may
pays 5% interest and is repayable at Some assets may have contractual cash
have priority over a general creditor in
par in seven years’ time. Legislation flows that are described as principal and
relation to specific collateral. This does
in the country in which Entity A is interest but those cash flows do not
not affect the contractual right of the
based, states that Entity A is subject represent the payment of principal and
general creditor however to unpaid
to regulation by the country’s interest. This may be the case if the
principal and other amounts due.
Central Bank and that the Central financial asset creates an exposure to
Bank can impose losses on the particular assets or cash flows of the
3.6 Non-contractual terms
holders of the instruments issued borrower (instead of an exposure to the
In assessing whether the solely payments by Entity A should it determine borrower’s overall credit risk). This may
of principal and interest test is met, the that Entity A is in severe be the case when a creditor’s claim is
asset holder should only consider the financial difficulties. limited to specified assets of the debtor
contractual terms of the instrument. The instrument would meet the or the cash flows from specified assets.
solely payments of principal and A ‘non-recourse’ financial asset may
interest test as the ability for the be an example of such a situation.
Central Bank to inflict losses on Entities will need therefore to consider
the holder of the instrument is such assets carefully. However, the fact
not part of the instrument’s that a financial asset is non-recourse
contractual terms. does not in itself necessarily preclude the
financial asset from meeting the solely
payments of principal and interest test.
In such situations, the holder should
‘look through to’ the particular
underlying assets or cash flows to
determine whether the contractual cash
flows of the assets are payments of
principal and interest on the principal
amount outstanding.
The fact that an instrument is collateralised in some way, or

subordinated to other instruments, does not in itself prevent
the instrument from passing the solely payments of principal
and interest test.

3.8 Contractually linked

Example
instruments
Entity C issues a 25 year loan which is secured by a property that it is
constructing. If Entity C defaults on the loan, the holder can seize the property IFRS 9 contains specific guidance on
but cannot seek out any further compensation. This is the case even if contractually linked instruments. Such
the proceeds from the collateral are insufficient to cover the outstanding transactions are commonly seen in
borrowings. The loan pays interest at 5% per annum. Entity’s C long-term securitisations, where an issuer may
prospects and therefore the viability of the interest payments will be affected by prioritise payments to the holders of
Entity C’s development of the property among other things. financial assets using multiple
Entity C is a well-established property developer with several ongoing contractually linked instruments that
projects and revenue sources. Entity C has historically met its liabilities create concentrations of credit risk,
(including non-recourse liabilities secured over properties whose value has sometimes referred to as ‘tranches’.
declined to less than the amount borrowed). Entity C’s reputation and credit- A detailed discussion of the
worthiness would be severely affected if it failed to repay the loan in question. requirements in this area is beyond the
scope of this publication. However at a
Can the loan meet the solely payments of principal and interest test highly summarised level, a tranche can
from the perspective of the holder? only meet the solely payments of
The fact that the loan is non-recourse does not in itself prohibit it from passing principal and interest test if all of the
the solely payments of principal and interest test. Instead the holder should following conditions are met:
‘look through to’ the underlying assets or cash flows to assess the nature of • the contractual terms of the tranche
the contractual cash flows. In this case, Entity C could in theory choose not to being assessed for classification (without
repay the loan and surrender the property to the lender. However, the overall looking through to the underlying pool of
facts and circumstances indicate that the lender is exposed to Entity C’s financial instruments) give rise to cash
business as a whole and not only or mainly to the single property to which flows that are solely payments of
it has recourse. principal and interest on the principal
In this example the terms of the loan in combination with other relevant amount outstanding (eg the interest
facts and circumstances suggest nothing that is inconsistent with payments rate on the tranche is not linked to a
representing principal and interest. If however the loan was structured such commodity index);
that proceeds from the property are the only source of cash flows to repay the • the underlying pool of financial
principal and interest, it is likely that the solely principal and interest test would instruments must have certain cash
be failed. flow characteristics (in assessing this
an entity must ‘look through’ the
terms of the tranche until it can
identify the underlying pool of
instruments that are creating the cash
flows); and
• the exposure to credit risk in the
underlying pool of financial
instruments inherent in the tranche is
equal to or lower than the exposure
to credit risk of the underlying pool of
financial instruments.

Applying the ‘solely payments of principal and interest’ test

As discussed in the sections above, IFRS 9 provides extensive guidance on the solely payments of principal and interest (SPPI) test. The
following diagramme visually summarises some of the matters to consider when evaluating whether an asset meets the solely payments
of principal and interest test.
Do the contractual terms include any more complex features

that may be inconsistent with principal and interest (including
No
features that would be embedded derivatives under IAS 39)?
Yes
Assess nature and effect of more complex features in

accordance with IFRS 9’s guidance, for example:
Are the non-SPPI features ‘de minimis’ or not genuine?

No Yes
If the asset’s interest rate is variable, does the frequency of

the reset match the tenor of the interest rate (or, if not, does
No the mismatch have only an insignificant effect when compared Yes
to a benchmark instrument)? SPPI test ‘passed’
If a contractual term could change the timing or amount of the

cash flows (eg prepayment or extension features), determine
SPPI test ‘failed’ No whether they are SPPI by assessing the cash flows ‘before’ Yes
and ‘after’ the change arising from that term.
If the asset has a regulated interest rate, does it meet the

criteria in IFRS 9 to be considered a proxy for the time value
No Yes
of money element?
Are there other features which are inconsistent with SPPI? (eg
leverage to equity or commodity risk, inverse relationship to
Yes No
benchmark rates)

4. Classification and
measurement
The interaction of the business model and the cash flow characteristics tests
discussed in previous sections, determine the classification of a financial asset.
The basic classifications for a financial asset are:

• amortised cost
• fair value through other comprehensive income
In addition, IFRS 9 contains options to designate:

• equity investments at fair value through other comprehensive income
• a financial asset at fair value through profit or loss in some circumstances.
Both of these options are only available on

the initial recognition of a financial asset.
As discussed in section 1 of this publication, classification of a financial asset is

determined by both the business model test (covered in section 2) and the cash flow
characteristics test (covered in section 3).

The interaction of these two tests, and Amortised cost is defined as the amount
Summary of IFRS 9’s classification model for financial assets
the resulting classification outcomes, are at which a financial asset or financial
illustrated in the diagramme opposite. liability is measured at initial recognition
Are cash flows solely payments of
We discuss the specific requirements minus the principal repayments, plus or Fair Value through Profit or Loss*
principal and interest? No
of the different classifications in the minus the cumulative amortisation using
following sections. the effective interest Yesmethod of any
difference between that initial amount and
4.1 Financial assets measured Is business
the maturity model hold
amount. The to collect? cost
amortised Amortised cost
Yes
at amortised cost for financial assets is also adjusted for
any loss allowance. No
Financial assets are measured at
amortised cost only where both of the
Is business model hold to collect Fair Value through Other
following conditions are met: and sell? Yes Comprehensive Income*
• the asset is held within a business
No
model whose objective is to hold
assets to collect contractual *entities can elect to present fair value
Fair Value through Profit changes in certain equity investments in
cash flows (a ‘hold to collect’
or Loss Other Comprehensive Income
business model)
• the asset’s contractual terms give
rise on specified dates to cash
flows that are solely payments of
principal and interest on the principal
amount outstanding.
Investments in equity instruments fail the solely payments

of principal and interest test, meaning that they need to
be measured at fair value through profit or loss. IFRS 9
however contains an exception to this rule (see 4.2.1).

4.2 Financial assets measured at 4.2.1 Option to designate equity Furthermore, in contrast to the fair value
fair value through other investments at fair value through through other comprehensive income
comprehensive income other comprehensive income category for debt instruments:
• gains and losses recognised in other
A debt instrument is measured at fair Investments in equity instruments fail the
comprehensive income are not
value through other comprehensive solely payments of principal and interest
subsequently transferred to profit
income where both of the following test, meaning that they need to be
or loss (sometimes referred to as
conditions are met: measured at fair value through profit
‘recycling’), although the cumulative
• the asset is held within a business or loss. IFRS 9 however contains the
gain or loss may be transferred
model whose objective is achieved by following exception to this rule.
within equity
both collecting contractual cash flows An entity may on initial recognition
• equity fair value through
and selling financial assets (a ‘hold to make an irrevocable election to present
other comprehensive income
collect and sell’ business model) in other comprehensive income
instruments are not subject to
• the asset’s contractual terms give subsequent changes in the fair value of
any impairment accounting.
rise on specified dates to cash an investment in an equity instrument
flows that are solely payments of that is not held for trading and is not
Where this election is made, dividends
principal and interest on the principal contingent consideration of an acquirer
are still recognised in profit or loss unless
amount outstanding. in a business combination.
they clearly represent a recovery of part
of the cost of the investment.
Financial assets that do not meet the criteria for

classification for being measured at either amortised
cost or fair value through other comprehensive income
are measured at fair value through profit or loss.

4.3 Financial assets measured at

Practical insight – effect of contractual cash flows test on reclassification
fair value through profit or loss
Unlike IAS 39, it is not possible under IFRS 9 to measure investments in equity
Financial assets that do not meet the instruments at cost where they do not have a quoted market price and their fair
criteria for classification for being value cannot be reliably measured.
measured at either amortised cost or Although IFRS 9 requires such investments to be measured at fair value,
fair value through other comprehensive it notes that, in limited circumstances, cost may be an appropriate estimate
income are measured at fair value of fair value. IFRS 9 provides a list of indicators that cost might not be
through profit or loss. representative of fair value.
In addition it is possible to designate
a financial asset at fair value through
Summary of effect of different asset classifications
profit or loss in some circumstances
(see section 4.3.1). Category Balance sheet Statement of comprehensive income
Amortised cost • amortised cost less • presented in P&L:

4.3.1 Designation as at fair value impairment allowance − interest calculated using the effective
through profit or loss interest method
− initial impairment allowance and
IFRS 9 contains a modified version of subsequent changes
IAS 39’s ‘fair value option’ – the option
FVTOCI • fair value • changes in fair value presented in OCI
to designate a financial asset at fair
• presented in P&L:
value through profit or loss in − interest calculated using the effective
some circumstances. interest method
At initial recognition, an entity − initial impairment allowance and subsequent
may designate a financial asset as changes (with offsetting entry presented
measured at fair value through profit or in OCI)
loss that would otherwise be measured − foreign exchange gains and losses
• cumulative FV gains/losses reclassified to
subsequently at amortised cost or at fair
P&L on derecognition or reclassification
value through other comprehensive
income. Such a designation can only be FVPL • fair value • changes in fair value presented in P&L
made, however, if it eliminates or Equity FVTOCI • fair value • changes in fair value presented in OCI
significantly reduces an ‘accounting • no reclassification to P&L on disposal
mismatch’ that would otherwise arise. • dividends recognised in P&L (unless they
There is no requirement to apply the clearly represent a part-recovery of cost)
choice consistently to all similar

transactions, instead an entity is free to
choose when to use the option provided
it results in more relevant information.

5. Classification of financial
liabilities
The basic classifications for a financial liability are:
• amortised cost
Financial liabilities accounted for at fair value through profit or loss fall into
two categories:
• financial liabilities held for trading
• financial liabilities designated at fair value through profit or loss on inception.
The option to, on inception, designate financial liabilities at fair value through
profit or loss is limited to situations:
• involving embedded derivatives
• where it provides more
relevant information.
5.1 Basic principles

Under IFRS 9, most financial liabilities are accounted for at amortised cost (see section
5.2 below) or bifurcated into a host instrument measured at amortised cost and an
embedded derivative, measured at fair value.
Exceptions to these general principles are set out in the table below.

5.2 Amortised cost measurement Exception Treatment
In the same way as for financial assets, Financial liabilities at fair value through profit or loss • see section 5.3 below
financial liabilities are accounted for at Contingent consideration recognised by an acquirer • measured at fair value with changes recognised
amortised cost using the effective in a business combination to which IFRS 3 applies. in profit or loss
interest rate method.
Financial guarantee contracts • measured after initial recognition at the higher of:
The effective interest rate method is
– the amount of the loss allowance
designed to allocate and recognise interest – the amount initially recognised less, when
revenue or expense in profit or loss over appropriate, the cumulative amount of
the relevant period. When applying it, an income recognised in accordance with the
entity generally amortises any fees, points principles of IFRS 15
paid or received, transaction costs and Commitments to provide a loan at below-market • measured after initial recognition at the higher of:
other premiums or discounts that are interest rate – the amount of the loss allowance
included in the calculation of the effective – the amount initially recognised less, when
interest rate over the expected life of the appropriate, the cumulative amount of
financial instrument. income recognised in accordance with the
principles of IFRS 15
5.3 Financial liabilities at fair value Financial liabilities that arise when a transfer of a • covered by detailed guidance in the Standard
through profit or loss financial asset does not qualify for derecognition or dealing with derecognition (beyond the scope of
when the continuing involvement approach applies. this guide)
Financial liabilities that are accounted for
at fair value through profit or loss fall into
two categories: Main categories for financial liabilities management
• financial liabilities held for trading
• financial liabilities designated at
fair value through profit or loss
Fair value
on inception. Amortised
through
cost
profit or loss
We discuss these two categories in more
detail below. Note that not all changes in
the fair value of a financial liability
accounted for at fair value through profit
or loss actually go through profit or loss …embedded derivatives still separated unless ‘closely-related’ or entire
– changes attributable to own credit risk contract measured at FVTPL
are accounted for through other
comprehensive income (see section 5.3.3).

5.3.1 Financial liabilities held

Practical insight: Elimination of the exception from fair value
for trading
measurement for certain derivative liabilities
Financial liabilities that meet the definition IFRS 9 eliminates the exception from fair value measurement that existed in
of held for trading must be classified at its predecessor standard, IAS 39, for derivative liabilities that are linked to
fair value through profit or loss. A and must be settled by delivery of an unquoted equity instrument. Under
financial liability is held for trading if it: IAS 39, if those derivatives were not reliably measurable, they were required
• is acquired or incurred principally for to be measured at cost. IFRS 9 requires them to be measured at fair value.
the purpose of selling or repurchasing
it in the near term;
5.3.2.1 Application of the option in 5.3.2.2 Application of the option in
• on initial recognition is part of a
situations involving embedded derivatives situations where it provides more
portfolio of identified financial
relevant information
instruments that are managed Where a financial liability contains an
together and for which there is embedded derivative (a ‘hybrid’ The second situation where the option to
evidence of a recent actual pattern of instrument), an entity may designate the designate a financial liability at initial
short-term profit-taking; or entire contract as at fair value through recognition as at fair value through profit
• is a derivative (except for a derivative profit or loss unless either: or loss can be used is where it provides
that is a financial guarantee contract • the embedded derivative does not more relevant information. The Standard
or a designated and effective significantly modify the cash flows sets out the two circumstances when this
hedging instrument). that otherwise would be required by will be the case as follows:
the contract; or • it eliminates or significantly reduces a
5.3.2 Option to designate as at fair • it is clear when a similar hybrid measurement or recognition
value through profit or loss instrument is first considered that inconsistency (sometimes referred to
separation of the embedded derivative as ‘an accounting mismatch’) that
IFRS 9 provides entities with an option to
is prohibited by the Standard. would otherwise arise from measuring
designate a financial liability at initial
assets or liabilities or recognising
recognition as at fair value through profit
In the event that an entity is required to the gains and losses on them on
or loss. The ability to use this option,
separate an embedded derivative from different bases
which is irrevocable, is limited to
its host, but is unable to measure the • a group of financial liabilities or
situations in which:
embedded derivative separately (either at financial assets and financial liabilities
• an embedded derivative would
acquisition or at the end of a subsequent is managed and its performance is
otherwise need to be split from the
financial reporting period), it shall evaluated on a fair value basis, in
liability; or
designate the entire hybrid contract as accordance with a documented risk
• fair value through profit or loss
at fair value through profit or loss. management or investment strategy,
results in more relevant information
and information about the group is
being provided.
provided internally on that basis to the
entity’s key management personnel.

In order to apply the option to designate

a financial liability at initial recognition OCI
as at fair value through profit or loss, • own credit risk part
Split fair value gain/loss

Would presenting
an entity needs to demonstrate that own credit-related of FV gain/loss
P&L
it falls within one (or both) of these portion of FV • no recycling to P&L
100% of
two circumstances. gains/losses
FV gain/ Yes No
create or increase
loss
an accounting P&L
Example
mismatch? • remaining FV gain/
Entity C holds bonds issued by third
loss
parties that bear interest at a fixed
rate. These bonds are accounted
for at fair value through profit or
loss as they are managed on a fair 5.3.3 Changes in fair value The only exception to the new
value basis. Entity C has also issued attributable to own credit risk requirement is where the effects of
bonds. The bonds issued are in changes in the liability’s credit risk
Where an entity chooses to measure its
the same currency as the bonds would create or enlarge an accounting
own debt at fair value, IFRS 9 requires
held and also pay interest at a fixed mismatch in profit or loss, in which case
the amount of the change in fair value
rate. The issued bonds are not held all gains or losses on that liability are
due to changes in the entity’s own
for trading and would normally be to be presented in profit or loss.
credit risk to be presented in other
accounted for at amortised cost. The cumulative change in fair value
comprehensive income. This change
Management considers the issued attributable to own credit risk and
addresses the counterintuitive way in
bonds to provide a natural hedge of presented in other comprehensive income
which a company in financial trouble was
Entity C’s exposure to changes in is not reclassified to profit or loss on
under the previous Standard,
the fair value of the bonds held. derecognition. However, this amount
IAS 39, able to recognise a gain based
In this situation Entity C may opt will reduce to nil if the liability is ultimately
on its theoretical ability to buy back
to designate the issued bonds as settled at maturity on its original terms.
its own debt at a reduced cost.
at fair value through profit or loss
in order to reduce the accounting 5.4 Reclassification of
mismatch that would otherwise arise financial liabilities
from the different measurement
IFRS 9 prohibits an entity from
bases of the bonds.
reclassifying any financial liability.
Not all changes in the fair value of a financial liability

accounted for at fair value through profit or loss actually go
through profit or loss – changes attributable to own credit
risk are accounted for through other comprehensive income.

Practical insight – next steps

Although IFRS 9 (2014) only comes into mandatory effect for accounting periods beginning
on or after 1 January 2018, there are a number of actions you should consider taking now
in order to prepare for implementing the requirements. In particular we suggest you:
• study the classification and measurement requirements and evaluate how the
information will be accumulated
• engage with your auditors and business advisers now
• create and maintain buy-in from senior management within your organisation
for the project
• compile information about existing instruments in order to gauge the
Standard’s impact
• consider whether to adopt any of the classification options available on initial
recognition of the Standard
• review loan covenants and other agreements that incorporate financial ratios
and metrics, such as compensation arrangements, that could be affected by the
new Standard
• communicate what is happening and how it affects the entity
• monitor progress towards interim and final milestones and intervene where required.
Above all be clear on the impact of the Standard and be sure to tailor disclosures to
your entity’s specific circumstances.
We hope you find the information in this publication helpful in getting you ready for
IFRS 9. If you would like to discuss any of the points raised, please speak to your usual
Grant Thornton contact or visit www.grantthornton.global/locations to find your
local member firm.

www.grantthornton.global
© 2015 Grant Thornton International Ltd. All rights reserved.

“Grant Thornton” refers to the brand under which the Grant Thornton
member firms provide assurance, tax and advisory services to their clients
and/or refers to one or more member firms, as the context requires. Grant
Thornton International Ltd (GTIL) and the member firms are not a worldwide
partnership. GTIL and each member firm is a separate legal entity. Services
are delivered by the member firms. GTIL does not provide services to
clients. GTIL and its member firms are not agents of, and do not obligate,
one another and are not liable for one another’s acts or omissions.

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Get ready for IFRS 9

Classifying and measuring

IFRS 9 (2014) ‘Financial Instruments’ fundamentally rewrites

Issue 1 November 2015

2 The business model test 3

3 Contractual cash flows characteristics test 13

4 Classification and measurement 21

5 Classification of financial liabilities 25

Practical insight – next steps 29

Classification is determined by both:

fair value option FVTPL fair value option

2 Issue 1 November 2015

Two business models are positively defined:

As discussed above, the classification of financial assets under IFRS 9 is determined by

classified at fair value though profit or

In practice, the ‘business model test’ is relevant only for

4 Issue 1 November 2015

2.1 Determining the business 2.1.1 Level of determination

Determining the model involves

IFRS 9 uses the term ‘business model’ in terms of how

Issue 1 November 2015 5

2.1.2 Management of business unit

6 Issue 1 November 2015

An entity’s business model for managing financial assets:

2.2 Hold to collect business model

Issue 1 November 2015 7

8 Issue 1 November 2015

2.3 Hold to collect and sell 2.4 Other business models

This business model will typically involve greater frequency

Issue 1 November 2015 9

2.5 Reassessment of Examples of scenarios that do or do not lead to reclassification

since the preceding period. sell half the assets

Changes in business model are expected to be

10 Issue 1 November 2015

The Standard clarifies that the

Issue 1 November 2015 11

2.6.1 Date of reclassification

FVTPL Amortised cost FV at RD becomes new gross None None

Amortised cost FVTOCI FV is measured at RD None Gain/loss = difference between previous

FVTPL FVTOCI None None None

*RD = reclassification date

12 Issue 1 November 2015

The requirement is that the contractual terms of the

14 Issue 1 November 2015

Issue 1 November 2015 15

3.4 Terms that change the

16 Issue 1 November 2015

3.4.1 Prepayment or 3.4.2 De minimis and non-genuine 3.5 Impact of collateral

In such cases the entity must assess the contractual cash

Issue 1 November 2015 17

The fact that an instrument is collateralised in some way, or

18 Issue 1 November 2015

3.8 Contractually linked

Issue 1 November 2015 19

Applying the ‘solely payments of principal and interest’ test

Do the contractual terms include any more complex features

Assess nature and effect of more complex features in

Are the non-SPPI features ‘de minimis’ or not genuine?

If the asset’s interest rate is variable, does the frequency of

Amortised cost • amortised cost less • presented in P&L: