IFRS 9 "Financial Instruments"

Master’s Degree programme – Second Cycle
(D.M. 270/2004)
in Amministrazione, Finanza e Controllo
Final Thesis
IFRS 9 “Financial Instruments”

Background, Development and Expected Impact
Supervisor
Ch. Prof. Carlo Marcon
Co-Supervisor
Ch. Prof. Moreno Mancin
Graduand
Alberto Emanuele Sichirollo
Matriculation Number 832347
Academic Year
2014 / 2015
IFRS 9 “Financial Instruments”
Background, Development and Expected Impact
Introduction
1. Chapter I - The starting point: IAS 39 1
1.1. Overview 1
1.2. Scope 1
1.3. Recognition and derecognition 3
1.3.1. Initial recognition 3
1.3.2. Derecognition of financial assets 4
1.3.3. Derecognition of financial liabilities 7
1.4. Classification and measurement 7
1.4.1. Initial measurement of financial instruments 7
1.4.2. Subsequent measurement of financial assets 8
1.4.3. Subsequent measurement of financial liabilities 12
1.4.4. Embedded derivatives 14
1.4.5. Reclassifications 16
1.5. Impairment 18
1.5.1. Impairment of financial assets at amortized cost 19
1.5.2. Impairment of financial assets at cost 20
1.5.3. Impairment of available-for-sale financial assets 20
1.6. Hedge accounting 21
1.6.1. Types of hedging relationships 21
1.6.2. Hedging instruments 22
1.6.3. Hedged items 23
1.6.4. Qualifying criteria for hedge accounting 25
1.6.5. Accounting for fair value hedges 26
1.6.6. Accounting for cash flow hedges 27
1.6.7. Accounting for hedges of a net investment in a foreign operation 29
2. Chapter II - The development of IFRS 9 31
2.1. Overview 31
2.2. Lack of convergence with US GAAPs 32
2.3. Pros and cons of the incremental approach 33
2.4. Mar. 2008 – DP Reducing Complexity in Reporting Financial Instruments 34
2.5. Mar. 2009 – ED/2009/3 Derecognition: Proposed Amendments to IAS 39 and IFRS 7 35
2.6. Jun. 2009 – DP/2009/2 Credit Risk in Liability Management 36
2.7. Jul. 2009 – ED/2009/7 Financial Instruments: Classification and Measurement 38
2.8. Nov. 2009 – IFRS 9 (2009) Classification and Measurement of Financial Assets 40
2.9. Nov. 2009 – ED/2009/12 Financial Instruments: Amortized Cost and Impairment 41
2.10. May 2010 – ED/2010/4 Fair Value Option for Financial Liabilities 43
2.11. Oct. 2010 – IFRS 9 (2010) Classification and Measurement of Financial Liabilities 45
2.12. Dec. 2010 – ED/2010/13 Financial Instruments: Hedge Accounting 45
2.13. Jan. 2011 – Supplement to ED/2009/12 Financial Instruments: Impairment 51

2.14. Nov. 2012 – ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9 52
2.15. Feb. 2013 – ED/2013/2 Novation of Derivatives and Continuation of Hedge Accounting 55
2.16. Mar. 2013 – ED/2013/3 Financial Instruments: Expected Credit Losses 56
2.17. Jun. 2013 – Amendments to IAS 39: Novation of Derivatives and Continuation of Hedge Accounting 58
2.18. Nov. 2013 – IFRS 9 (2013) General Hedge Accounting 59
2.19. Jul. 2014 – IFRS 9 (2014) FVTOCI Category and Impairment 62
3. Chapter III - The complete IFRS 9 63
3.1. Effective date and transition 63
3.2. Objective and scope 64
3.3. Recognition and derecognition 65
3.4. Classification and measurement 65
3.4.1. Initial measurement of financial instruments 66
3.4.2. Classification and subsequent measurement of financial assets 66
3.4.3. Classification and subsequent measurement of financial liabilities 70
3.4.4. Embedded derivatives 72
3.4.5. Reclassifications 73
3.5. Impairment 74
3.5.1. General approach 74
3.5.2. Determining significant increases in credit risk 76
3.5.3. 1st special case: purchased or originated credit-impaired financial assets 77
3.5.4. 2nd special case: trade receivables, contract assets and lease receivables 77
3.5.5. Guidance on expected credit losses 78
3.5.6. Modifications 79
3.6. Hedge accounting 80
3.6.1. Types of hedging relationships 80
3.6.2. Hedging instruments 81

3.6.3. Hedged items 83
3.6.4. Qualifying criteria for hedge accounting 85
3.6.5. Accounting for fair value hedges 86
3.6.6. Accounting for cash flow hedges 87
3.6.7. Accounting for hedges of a net investment in a foreign operation 88
3.6.8. Discontinuation of hedge accounting 88
4. Chapter IV - IFRS 9: a change for the better? 91
4.1. Technical assessment of IFRS 9 91
4.2. Extent of improvements over IAS 39 94
4.3. Costs for preparers and users 97
4.4. Impact on banks 97
4.5. Impact on insurers 99
4.6. Conclusions 100
Bibliography
Introduction
The accounting for financial instruments is among the most complex areas of financial
reporting. The manifold flaws of IAS 39 Financial Instruments: Recognition and
Measurement became all the more clear with the onset of the global financial crisis, and the
International Accounting Standard Board has worked for several years toward its
replacement with a new Standard. IFRS 9 Financial Instruments was at last completed in
July 2014 and will become effective on 1 January 2018. The new Standard represents a major
overhaul of financial instrument accounting and is widely seen in most of its areas as an
improvement.
This work begins with a detailed portrait of IAS 39 to inform the reader of its requirements
and underlying issues. The second chapter then retraces the milestones in the development
of IFRS 9 (i.e. Discussion Papers and Exposure Drafts), aiming to provide further insight
into the debate that led to its final content. Next, we move on to analyzing the requirements
and guidance of the final version of IFRS 9. Lastly, the fourth chapter assesses to what extent
IFRS 9 represents an improvement over IAS 39, in light of its usefulness for users of financial
statements as well as its expected impact on businesses (above all, financial institutions).
1
Chapter I – The starting point: IAS 39
1.1. Overview
IAS 39 Financial Instruments: Recognition and Measurement lays out requirements for the
recognition, measurement, impairment, and hedge accounting of financial assets, financial
liabilities, and some contracts to buy or sell non-financial items. The Standard was originally
issued in 1999 by the International Accounting Standard Committee (IASC), the predecessor
of the International Accounting Standard Board (IASB), in substitution of a previous
Standard. The IASB adopted it in 2001, amended its requirements several times over a few
years, and in 2008 began a momentous project to overhaul the accounting for financial
instruments by replacing IAS 39 with IFRS 9 Financial Instruments (whose effective date is
1 January 2018, with earlier application permitted). This chapter presents an outline of the
version of IAS 39 in force in 2008, i.e. the starting point from which the IASB developed the
above-mentioned project.1 The main weaknesses of IAS 39 and its similarities with IFRS 9
are briefly pointed to the reader’s attention, but will be discussed in the next chapters.
1.2. Scope
The scope of IAS 39 (which was entirely carried forward into IFRS 9, with some additions)
includes all financial instruments, except the following [IAS39.2]:
1
NB: the 2008 version of IAS 39 is almost the same as the one currently applicable until the effective date
of IFRS 9, except for the amendments approved during the project, in particular an amendment relative to
the treatment of novated derivatives in a hedging relationship.
2
a) interests in subsidiaries, associates, and joint ventures, to which IFRS 10

Consolidated Financial Statements, IAS 27 Separate Financial Statements or IAS 28
Investments in Associates and Joint Ventures apply. Derivatives on such items are
instead under the scope IAS 39.
b) Rights and obligations under leases, to which IAS 17 Leases applies. However, lease
receivables (recognized by a lessor), lease payables (recognized by a lessee), and
derivatives embedded in leases are subject to the requirements of IAS 39 relative to
derecognition, impairment and embedded derivatives, as applicable.
c) Employers’ rights and obligations under employee benefit plans, to which IAS 19
Employee Benefits applies.
d) Equity instruments issued by the reporting entity (but those held fall within its scope).
e) Rights and obligations under insurance contracts as defined in IFRS 4 Insurance
Contracts. However, financial guarantee contracts2 issued by the entity are within the
scope of IAS 39, unless the issuer has explicitly asserted that it regards such contracts
as insurance contacts and treated them accordingly. Held financial guarantee
contracts instead are always outside the scope of IAS 39.
f) Forward contracts to buy or sell an entity that will result in a business combination
within the scope of IFRS 3 Business Combinations.
g) Loan commitments issued by the entity, to which IAS 37 Provisions, Contingent
Liabilities and Contingent Assets applies (although they are subject to the
derecognition provisions of IAS 39). However, issued loan commitments shall be
accounted for according to IAS 39 if they [IAS39.4]:
can be settled net in cash;
are commitments to provide a loan below-market rate;
are designated as financial liabilities at fair value through profit or loss
(FVTPL);
2
I.e. a contract that requires the issuer to make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due. Financial guarantees can have the legal
form of a guarantee, a letter of credit, a credit default contract, or an insurance contract.
3
the entity has the past practice of selling the resulting assets (i.e. the loans)
shortly after origination.
h) Rights to reimbursement payments for expenditures that the entity is required to make
to settle liabilities recognized as provisions.
i) Financial instruments, contracts and obligations under share-based payment
transactions, to which IFRS 2 Share-based Payment applies, except for those that
meet the description below.
IAS 39 shall be applied to those contracts to buy or sell non-financial items that can be settled
net in cash or another financial instrument, or by exchanging financial instruments, with the
exception of contracts that were entered into and continue to be held for the purpose of actual
receipt or delivery of a non-financial item in accordance with the entity’s expected purchase,
sale, or usage requirements (the so-called ‘own use’ exemption) [IAS39.5].3
1.3. Recognition and derecognition
In a 2009 Exposure Draft (ED), the IASB acknowledged that the recognition and
derecognition requirements in IAS 39 were too complex and in need of change. However,
one year later the Board revised its work plan to focus on more urgent matters, and ended up
carrying forward all those requirements unchanged to IFRS 9, albeit enhancing the related
requirements in IFRS 7 Financial Instruments: Disclosures.
1.3.1. Initial recognition
An entity shall recognize a financial instrument, be it an asset or a liability, only when the
entity becomes a party to the contractual provisions of the instrument [IAS39.14]. A regular
3
Under IFRS 9, a contract to buy or sell a non-financial item that can be settled net may be irrevocably
designated as measured at FVTPL even if it was entered into for the purpose of receipt or delivery, if such
designation eliminates or significantly reduces an accounting mismatch.
4
way purchase or sale of financial assets4 shall be recognized and derecognized using either
trade date accounting or settlement date accounting [IAS39.38].
1.3.2. Derecognition of financial assets
An entity normally applies the derecognition requirements to a financial asset (or a group of
similar financial assets) in its entirety. However, it shall apply the requirements to part of a
financial asset (or part of a group of similar financial assets) when one the three following
conditions is met [IAS39.16]:
a) the part being considered for derecognition comprises only specifically identified
cash flows (e.g. the interest payments) from a financial asset (or a group of similar
financial assets).
b) The part comprises only a specific portion of the cash flows (e.g. 90% of all cash
flows) from a financial asset (or a group of similar financial assets).
c) The part comprises only a specific portion of specifically identified cash flows (e.g.
90% of the interest payments) from a financial asset (or a group of similar financial
assets).
IAS 39 requires that an entity derecognize a financial asset5 only in two occasions
[IAS39.17]:
when the contractual rights to the cash flows from the asset expire; or
when the entity transfers the financial asset and, as a separate condition, the transfer
qualifies for derecognition.
With reference to the second point above, a transfer of a financial asset is said to occur
[IAS39.18]:
when the entity transfers the contractual rights to receive the cash flows from the
financial asset; or
4
I.e. a purchase or sale of a financial asset under a contract whose terms require delivery of the asset
within the time frame established generally by regulation or convention in the marketplace concerned.
5
For simplicity’s sake, the term ‘financial asset’ will now refer to either a financial asset in its entirety (or
a group of similar financial assets) or part of a financial asset (or part of a group of similar financial assets).
5
when the entity retains the contractual rights to receive the cash flows from the
financial asset (the ‘original asset’) but assumes the obligation to pay those cash flows
to one or more entities (the ‘eventual recipients’). In this case, the transaction needs
to meet three further conditions to be considered a transfer of a financial asset, namely
that the entity [IAS39.19]:
a) has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset;
b) is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as a security to the eventual recipients for the
obligation to pay them cash flows; and
c) has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay.
Even when a transfer has actually occurred, it has yet to qualify for derecognition. The entity
proceeds as follows [IAS39.20]:
a) if the entity has transferred substantially all the risks and rewards of ownership of the
financial asset,6 it shall derecognize the financial asset and recognize separately as
assets or liabilities at fair value any rights and obligations created or retained in the
transfer.
b) If instead the entity has retained substantially all the risks and rewards of ownership,7
it shall continue to recognize the asset and shall recognize a liability for the
consideration received. In subsequent periods, the entity shall recognize any income
on the transferred asset and any expense incurred on the financial liability.
6
An entity has transferred substantially all the risks and rewards if its exposure to the variability in the
present value of the future net cash flows from the financial asset is no longer significant in relation to the
asset’s total variability.
7
An entity has retained substantially all the risks and rewards if the exposure mentioned above does not
significantly change as a result of the transfer.
6
c) In those cases in which the entity has neither transferred nor retained substantially all
the risks and rewards of ownership, it shall determine whether it has retained control
of the financial asset,8 and behave as follows:
if the entity has not retained control, it shall derecognize the financial asset
and recognize separately as assets or liabilities any rights and obligations
created or retained in the transfer.
If the entity has retained control, it shall continue to recognize the financial
asset to the extent of its continuing involvement in the asset.9 The entity shall
also recognize an associated liability, measured in such a way that the net
carrying amount of the transferred asset and associated liability is equal to the
amortized cost or fair value of the retained asset (depending on whether the
transferred asset was measured at amortized cost or fair value). The entity
shall continue to recognize any income arising on the transferred asset to the
extent of its continuing involvement and shall recognize any expense incurred
on the associated liability.
In the case of transfers that qualify for derecognition, the difference between 1) the financial
asset’s carrying amount and 2) the sum of 2a) the consideration received and 2b) any
cumulative gain or loss that had been recognized in OCI, shall be recognized in profit or loss
[IAS39.26].
However, if the qualifying transfer (or the continuing involvement) involves only part of a
financial asset, the previous carrying amount of the entire financial asset shall be allocated
between the part that continues to be recognized and the part that is derecognized, based on
their relative fair values on the date of the transfer. Then, the difference between 1) the
carrying amount allocated to the part derecognized and 2) the sum of 2a) the consideration
received and 2b) any cumulative gain or loss previously recognized in OCI shall be
recognized in profit or loss [IAS39.27].
8
An entity has not retained control if the transferee has the practical ability to sell the asset in its entirety
to an unrelated third party and can do so unilaterally.
9
I.e. the extent to which it is exposed to changes in the value of the transferred asset.
7
1.3.3. Derecognition of financial liabilities
An entity shall derecognize a financial liability (or part thereof) only when it is extinguished,
i.e. it is transferred, cancelled or expired [IAS39.39]. The difference between the carrying
amount of a financial liability that has been transferred or cancelled and the consideration
paid (including any non-cash assets transferred or liabilities assumed) shall be recognized in
profit or loss [IAS39.41].
An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability
and the recognition of a new financial liability [IAS39.40]. Similarly, a substantial
modification of the terms of an existing financial liability or part thereof shall be accounted
for as an extinguishment of the original financial liability and the recognition of a new one
[IAS39.40].
1.4. Classification and measurement
1.4.1. Initial measurement of financial instruments
At initial recognition, an entity shall measure a financial instrument (asset or liability) at its
fair value plus, in the case of a financial instrument not at FVTPL, transaction costs that are
directly attributable to the acquisition or issue of the instrument [IAS39.43].
However, if an entity determines that at initial recognition the financial instrument’s fair
value differs from the transaction price (which normally constitutes the best evidence of fair
value), it shall behave as follows [IAS39.43A]:
a) if the fair value is evidenced by a quoted price in an active market for an identical
asset or liability (Level 1 input of the fair value hierarchy), or is based on a valuation
technique that uses only data from observable markets (Level 2 input), the entity shall
recognize the difference between the fair value at initial recognition and the
transaction price as a gain or loss [IAS39.AG.76].
8
b) The Board affirmed in the Basis for Conclusions [IAS39.BC.104] that in all cases
different from a), the transaction price gives the best evidence of fair value and shall
be the basis of initial measurement. However, the Board appears to contradict itself
by stating in the Application Guidance [IAS39.AG.76] that in all cases different from
point a) above, the entity shall recognize after initial recognition the difference
between the ‘fair value’ at initial recognition and the transaction price, to the extent
that such difference arises from a change in a factor (including time) that market
participants would take into account when pricing the asset or liability. In addition to
the ambiguous practical application of such requirement, it appears to contradict the
position stated in the Basis for Conclusions, i.e. it appears to be using the term ‘fair
value’ in a different way, thereby confusing the reader.
1.4.2. Subsequent measurement of financial assets
The measurement categories for financial assets in IAS 39 were criticized as being too
numerous, complex, and rule-based. Consequently, the IASB discarded them entirely and
introduced in IFRS 9 fewer and more principle-based categories.
IAS 39 classifies financial assets in the following categories [IAS39.45]:

a) financial assets at FVTPL. A financial assets is measured in this category when
[IAS39.9]:
it is classified as held-for-trading. A financial asset is held for trading in three
cases: 1) it is acquired principally for the purpose of selling it in the near term;
2) on initial recognition it is part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of a
recent pattern of short-term profit-taking; 3) it is a derivative, unless it is
accounted for as a hedging instrument.
Upon initial recognition, it is designated by the entity in such category via the
fair value option. An entity may use this designation 1) when allowed by the
requirements for embedded derivatives or 2) when doing so results in more
relevant information, either because it eliminates or significantly reduces an
9
accounting mismatch,10 or because a group of financial instruments is

managed and its performance is evaluated on a fair value basis and so
presented to key management personnel. However, investments in equity
instruments that do not have a quoted market price in an active market and
whose fair value cannot be estimated reliably cannot be designated under the
fair value option.
Financial assets in this category shall be subsequently measured at their fair values,
without any deduction for transaction costs incurred on sale or other disposal
[IAS39.46], and gains or losses arising from changes in their fair value shall be
b) Held-to-maturity investments. These are non-derivative financial assets with fixed or
determinable payments and fixed maturity that an entity has the positive intention11
and ability to hold to maturity, other than those designated as at FVTPL or as available
for sale or that meet the definition of loans and receivables [IAS39.9].
A so-called tainting provision [IAS39.9] forbids the entity from classifying financial
assets as held to maturity if it has, during the current financial year or the two
preceding ones, sold or reclassified more than an insignificant amount (in relation to
their total amount) of held-to-maturity investments before maturity, other than sales
or reclassifications that: 1) are so close to maturity that changes in market interest rate
would not have a significant effect on the asset’s fair value; 2) occur after the entity
has collected substantially all of the asset’s original principal; or 3) are attributable to
an isolated event that is beyond the entity’s control, is not recurring, and could not
have been reasonably anticipated by the entity.12
10
I.e. a measurement or recognition inconsistency that would otherwise arise from measuring assets or
liabilities or recognizing the gains and losses on them on different bases.
11
The circumstances in which an entity does not have such positive intention include when: a) it intends
to hold the asset for an undefined period; b) it stands ready to sell asset in response to changes in market
interest rates or other risks, liquidity needs, etc.; c) the issuer (counterparty) has the right to settle the debt
instrument (asset) at an amount significantly below its amortized cost.
12
Sales before maturity are compatible with the entity’s positive intention to hold other investments until
maturity if they are attributable to the following: a) disaster scenarios such as a bank run; b) a significant
deterioration in the issuer’s creditworthiness; c) a change in tax-law that eliminates or significantly reduces
10
Financial assets in this category shall be subsequently measured at amortized cost

using the effective interest method [IAS39.46].13 Gains or losses are recognized in
profit or loss through the amortization process and when the financial asset is
derecognized or impaired [IAS39.56].
c) Loans and receivables. [IAS39.9] These are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market (and that may or
may not have fixed maturity, and only in the latter case the entity may plan to hold
them until maturity), other than the financial assets:
that are held for trading;
that are designated at initial recognition as at FVTPL;
that are designated at initial recognition as available for sale; or
for which the holder may not recover substantially all of its initial investment
(other than because of credit deterioration) which shall be classified as
available for sale.
Note that loans and receivables may or may not have fixed maturity, and only in the
latter case may the entity plan to hold them until maturity (otherwise they would meet
the definition of held-to-maturity). In fact, a financial asset with fixed maturity will
be classified into held-to-maturity investments or into loans and receivable depending
on the entity’s intentions about the holding period. Put it differently, an entity may
have the positive intention of holding until maturity an instrument measured in loans
and receivables only if that instrument has no fixed maturity. In fact, if such
instrument had fixed maturity along with the entity’s positive intention, it would be
by definition a held-to-maturity investment.
Loans and receivables, like held-to-maturity investments, shall be subsequently
measured at amortized cost using the effective interest method [IAS39.46]. Gains or
the tax-exempt status of interest on the investment; d) a major disposition or business combination; e)
changes in statutory or regulatory requirements that causes an entity to dispose of the investment.
13
The effective interest rate inherent in a financial instrument is the rate that exactly discounts the
estimated cash flows through the instrument’s expected life. The computation includes all fees and points
paid or received, directly attributable transaction costs, and all other premiums or discounts.
11
losses are recognized in profit or loss through the amortization process and when the
financial asset is derecognized or impaired [IAS39.56].
d) Available-for-sale financial assets. These are non-derivative financial assets that are
designated as available for sale or that are not classified as 1) loans and receivables,
2) held-to-maturity investments or 3) financial assets at FVTPL. Investments in equity
instruments normally belong to this category, unless they are designated as at FVTPL
or they are measured at cost [IAS39.9].
Gains or losses arising from changes in the fair value of available-for-sale financial
assets are recognized in equity in other comprehensive income (OCI), except for
impairment losses14 and certain foreign exchange gains and losses [IAS39.46].15 In
addition, any interest calculated using the effective interest rate method (e.g. on loans
measured as available for sale) is recognized in profit or loss. Dividends on an
available-for-sale equity instrument are recognized in profit or loss when the entity’s
right to receive payment is established [IAS39.55]. When the financial asset is
derecognized, the cumulative gains and losses in OCI shall be reclassified from equity
to profit or loss.
e) Some investments in equity instruments are measured at cost16 if they do not have a
quoted price in an active market and their fair value cannot be estimated reliably; such
equity instruments cannot be designated under the fair value option [IAS39.9].
For financial assets recognized using settlement date accounting that are carried at cost or
amortized cost, any change in fair value during the period between the trade date and the
settlement date is not recognized, except for impairment losses. If they are carried at fair
14
Despite the fact that available-for-sale financial assets are measured at fair value through OCI, they are
subject to the impairment requirements of IAS 39, which will be explained shortly.
15
[AG83] For the purpose of recognizing foreign exchange gains and losses, a monetary available-for-
sale financial asset is treated as if it were carried at amortized cost in the foreign currency. Accordingly,
for such a financial asset exchange differences resulting from changes in amortized cost are recognized in
profit or loss. For available-for-sale financial assets that are not monetary items (e.g. equity instruments),
the gain or loss that is recognized in OCI according to the default method includes any related foreign
exchange component.
16
NB: under cost measurement, the difference between the value at initial recognition and the value at
disposal (or other derecognition) is not subject to accrual accounting, whereas under amortized cost
measurement such amount is accrued by using the effective interest rate method. Only the former type of
measurement is applicable to equity instruments.
12
value, however, the change in fair value shall be recognized in profit or loss or in OCI
[IAS39.57].
Notwithstanding the above requirements, financial assets that are designated as hedged items
are subject to measurement under the hedge accounting requirements. Furthermore, all
financial assets other than those measured at FVTPL are subject to the impairment
requirements [IAS39.46].
1.4.3. Subsequent measurement of financial liabilities
The measurement requirements for financial liabilities in IAS 39 were usually not considered
very problematic. A conspicuous exception was the fair value option for financial liabilities
(known as the ‘own credit’ issue), which counter-intuitively led to accounting for a gain when
a liability’s fair value declined (hence likely obfuscating the worsening credit standing of the
entity) and, vice versa, to a loss when a liability’s fair value increased. The IASB eventually
decided to carry forward all IAS 39 requirements for the measurement of financial liabilities
unchanged to IFRS 9 except for the fair value option, which was modified to solve the own
credit issue. The requirements of IAS 39 are the following.
Under IAS 39, after initial recognition an entity measures by default all financial liabilities
at amortized cost using the effective interest method [IAS39.47]. In this case, gains or losses
are recognized in profit or loss through the amortization process and when the financial
liability is derecognized. However, if specific criteria are met, financial liabilities shall be
measured in the following categories:
a) financial liabilities at FVTPL. A financial liability is measured in this category if it
meets any of the following conditions [IAS39.9]:
it is classified as held for trading. A financial liability is held for trading in four
cases: 1) it is incurred principally for the purpose of repurchasing it in the near
term; 2) on initial recognition, it is part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of a
recent actual pattern of short-term profit-taking; 3) it is a derivative, except if it
is accounted for as a hedging instrument or if it is linked to and must be settled
13
by delivery of an equity instrument that does not have a quoted price in an active
market for an identical instrument and whose fair value cannot be reliably
measured; 4) it is an obligation to deliver financial assets borrowed but not yet
owned by the seller (i.e. short-selling).
It is contingent consideration of an acquirer in a business combination that is
under the scope of IFRS 3 Business Combinations.17
Upon initial recognition, it is designated by the entity in such category under
the fair value option. An entity may use this designation 1) when allowed by
the requirements for embedded derivatives or 2) when doing so results in more
relevant information, either because it eliminates or significantly reduces an
accounting mismatch, or because a group of financial instruments is managed
and its performance is evaluated on a fair value basis and so presented to key
management personnel.
Financial liabilities in this category shall be subsequently measured at their fair values
[IAS39.47], and gains or losses arising from changes in their fair value shall be
b) Derivative liabilities measured at cost. A derivative liability is normally measured at
FVTPL, but it shall be measured at cost if it is linked to and must be settled by
delivery of an equity instrument that does not have a quoted price in an active market
for an identical instrument and its fair value cannot be reliably measured [IAS39.47].
c) Financial liabilities that arise when a transfer of a financial asset does not qualify for
derecognition or when the continuing involvement approach applies [IAS39.47] (see
paragraph 1.3.2).
d) Financial guarantee contracts. After initial recognition, an issuer of such a contract
shall measure it at the higher of a) the amount determined in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets and b) the amount initially
recognized less, when appropriate, cumulative amortization recognized in accordance
with IAS 18 Revenue [IAS39.47].
17
Contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity
interests to the former owners of the acquiree.
14
e) Commitments to provide a loan at below-market interest rate, which shall be

measured in the same way as financial guarantee contracts [IAS39.47].
Notwithstanding the above requirements, financial liabilities that are designated as hedged
items are subject to measurement under the hedge accounting requirements [IAS39.47].
1.4.4. Embedded derivatives
IAS 39 lays out specific requirements for the splitting of hybrid (combined) contracts
containing an embedded derivative component,18 mainly to prevent entities from
circumventing the recognition and measurement requirements for derivatives simply by
embedding one in a non-derivative contract [IFRS9.BCZ4.89,90]. Much of the so-called
bifurcation approach in IAS 39 was criticized as being complex and rule-based, and thus the
IASB decided not to include it in IFRS 9 with regard to hybrid contracts with a financial asset
host, but kept it for hybrid contracts with other host.
Under IAS 39, an embedded derivative shall be separated from the host contract and
accounted for as a derivative if all the following conditions are met [IAS39.11]:
a) the economic characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host contract;19
b) a separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative; and
c) the hybrid instrument is not measured at fair value with changes in fair value
recognized in profit or loss (i.e. a derivative that is embedded in a financial asset or
financial liability at fair value through profit or loss is not separated). The problematic
nature of this condition is discussed in the last paragraph of this section.
18
An embedded derivative is a component of a hybrid instrument that also contains a non-derivative host
contract, with the effect some of the cash flows of the hybrid instrument vary in a way similar to a
standalone derivative [IAS39.10].
19
See the Application Guidance on IAS 39 para. AG30 and AG33 for many examples of when such
condition is or is not met.
15
Notwithstanding the above requirements, if the entity is unable to measure the embedded
derivative separately either at acquisition or at the end of a subsequent reporting period, it
shall designate the entire hybrid contract as at FVTPL [IAS39.12].
If an embedded derivative is separated, the host contract shall be accounted for under IAS 39
if it is a financial instrument, or in accordance with other Standards if it is not a financial
instrument, while the separated derivative shall measured as a normal derivative [IAS39.11].
The confusing way in which condition c) is spelled out in IAS 39 (above reported verbatim
from the Standard) seems to mean that hybrid contracts whose host contract is a financial
instrument not measured at FVTPL or a non-financial item are subject to bifurcation
(provided the other conditions are met), but hybrid contracts whose host contract is a financial
asset or financial liability measured at FVTPL are never subject to bifurcation requirements.
This interpretation (which seems the only logical one) would render such requirement
incoherent with other parts of IAS 39. To understand why, let us remember that the Standard
states that a financial instrument is measured at FVTPL either because it is held for trading,
or because the entity elected the fair value option [IAS39.9]. It is also states that an entity
may use the fair value option 1) when allowed by the requirements for embedded derivatives
or 2) when doing so results in more relevant information (either because it avoids an
accounting mismatch, or because a group of financial instruments is managed at fair value).
Eligibility criterion no. 1 refers to the following requirements [IAS39.11A]:
if a contract contains one or more embedded derivatives, an entity may designate the
entire hybrid contract as a financial asset or financial liability at FVTPL unless: i) the
embedded derivative(s) does not significantly modify the cash flows that otherwise
would be required by the contract, and ii) when it is clear with little or no analysis
that separation of the embedded derivative is prohibited (e.g. by law).
First, according to a recommendation by the (IFRIC),20 the scope of para. 11A is unclear as
to whether such fair value option is applicable only to hybrid contracts that have financial
hosts or also to hybrid contracts that have non-financial hosts. However, even leaving that
20
Reported in the footnote of IAS39.11A
16
problem aside and assuming that the former restrictive interpretation is correct, para. 11A
apparently allows any hybrid contract (with financial host) to be elected under the fair value
option unless condition i) or ii) occur. A question thus arises: whether a hybrid contract that
fits either condition i) or ii) above is still eligible for the fair value option under eligibility
criterion no. 2 or not. In other words, it is unclear whether eligibility criteria no. 1 and 2 are
mutually exclusive or can be used interchangeably. For instance, consider a hybrid
instrument whose cash flows are not significantly influenced by the embedded derivative
component. Para. 11A would prevent such contract from being measured under the fair
option, yet it appears possible for an entity to simply measure the financial host under the
fair value option (provided it is part of a group of financial instruments managed at fair value
or if doing so avoids an accounting mismatch). Then, condition c) above explicitly states that
a derivative that is embedded in a financial asset or financial liability at fair value through
profit or loss is not separated. Therefore, the embedded derivative requirements in IAS 39
either contain a loophole or severely lack clarity. However, much of this discussion is
rendered moot by the fact that IFRS 9 dispensed with large part of these requirements.
1.4.5. Reclassifications
The reclassification requirements for financial assets in IFRS 9 obviously do not bear much
resemblance to those in IAS 39, since measurement categories for assets in the two Standards
are very different. On the other hand, IFRS 9 carries forward the prohibition of IAS 39 to
reclassify financial liabilities; this is coherent with the decision to retain most of the
classification and measurement requirements for financial liabilities from IAS 39.
Under IAS 39 [IAS39.50], an entity:

a) shall never reclassify a derivative out of the FVTPL category.
b) Shall never reclassify a financial instrument out of the FVTPL category if it has been
so designated with the fair value option.
c) Shall never reclassify a financial instrument into the FVTPL category.
d) May reclassify a held-for-trading financial asset out of the FVTPL category if it is no
longer held for the purpose of selling or repurchasing it in the short term. The
Standard specifies that such reclassifications (for instance, into the amortized cost or
17
available-for-sale categories) should only take place in rare circumstances

[IAS39.50B]. However, such limitation of frequency does not apply to a held-for-
trading financial asset that is compatible with the definition of loans and receivables,
if the entity reclassifies it out of the FVTPL category with the intention and ability to
hold it for the foreseeable future or until maturity [IAS39.50D].21 The new cost or
amortized cost of financial asset reclassified out of the FVTPL category shall be
measured as its fair value at the date of reclassification, and any gains or losses
already recognized in profit or loss shall not be reversed [IAS39.50C].
e) May reclassify a financial asset that is compatible with the definition of loans and
receivables out of the available-for-sale category and into loans and receivables, if
the entity has the intention and ability to hold it for the foreseeable future or until
maturity [IAS39.50E]. The new amortized cost of such financial asset shall be its fair
value at the date of reclassification.
f) May reclassify a held-to-maturity investment into the available-for-sale category if a
change in intention or ability make the original classification no longer appropriate
[IAS39.51]. Whenever sales or reclassifications of more than a significant amount of
held-to-maturity investments do not meet the conditions in para. IAS39.9, all the
remaining held-to-maturity investments shall be reclassified as available for sale
(tainting provision) [IAS39.52].
If, as a result of a change in intention or ability, or in the rare circumstance that a reliable
measure of fair value is no longer available, or because ‘two of the preceding financial years’
referred to in IAS39.9 have passed, it becomes appropriate to carry a financial asset or
financial liability at cost or amortized cost rather than fair value, the fair value carrying
amount of that financial instrument on that date becomes its new cost or amortized cost
[IAS39.54]. Any previously recognized gains or losses in OCI shall be accounted for as
follows:
21
NB: in the latter case the instrument should not have fixed maturity, otherwise it would meet the
definition of held-to-maturity investment. Unfortunately, this part of the Standard appears rather confused.
18
in the case of a financial asset with a fixed maturity, the gain or loss shall be amortized
over the remaining life of the held-to-maturity investment using the effective interest
method. Any difference between the new amortized cost and the maturity amount
shall also be amortized over the remaining life of the financial asset using the effective
interest rate method, similar to the amortization of a discount or premium. If the
financial asset is subsequently impaired, any gain or loss that has been recognized in
OCI is reclassified to profit or loss.
In the case of a financial asset that does not have a fixed maturity, the gain or loss
shall be recognized in profit or loss when the financial asset is sold or otherwise
disposed of. If the financial asset is subsequently impaired, any previous gain or loss
that has been recognized in OCI is reclassified to profit or loss.
The following changes in circumstances are not considered reclassifications [IAS39.50A]:

a derivative that was previously a designated and effective hedging instrument in a
cash flow hedge or net investment hedge no longer qualifies as such.
A derivative becomes a designated and effective hedging instrument in a cash flow
hedge or net investment hedge.
A financial asset that is reclassified when an insurance company changes its
accounting policies in accordance with para. 45 of IFRS 4 Insurance Contracts.
1.5. Impairment
The ‘incurred loss’ model for impairment in IAS 39 has been heavily criticized for
systematically delaying the recognition of impairment losses until after the credit loss event
has actually occurred. Another major complaint was the complexity arising from having to
apply the impairment model to the many categories of financial assets. With IFRS 9, the
IASB introduced a more principle-based and forward-looking impairment model that is
conceptually superior and more dependent on judgment.
Under IAS 39, an entity shall assess at the end of each reporting period whether there is any
objective evidence that a financial asset or group of financial assets is impaired [IAS39.58].
19
Objective evidence of impairment results from a ‘loss event(s)’ that has occurred since initial
recognition financial asset, with an impact on the asset’s estimated future cash flows that is
reliably estimated. Importantly, losses expected as a result of future events, no matter how
likely, are not recognized. Examples of objective evidence of impairment include observable
data about the following events [IAS39.59]:
a) a significant financial difficulty of the issuer or obligor emerges.
b) There is a breach of contract.
c) The entity (lender) grants a concession to the counterparty (borrower) due to financial
difficulty of the latter.
d) It becomes probable that the borrower will enter bankruptcy.
e) The active market for that financial asset disappears because of financial difficulty.
f) There is a measurable decrease in the estimated future cash flows from a group of
financial assets, even though such decrease cannot yet be identified with individual
financial assets.
g) Relatively to equity instrument, there are significant adverse changes in the
technological, market, economic, or legal environment in which the issuer operates
indicating that the cost of the investment may not be recovered.
h) There is a significant or prolonged decline in the fair value of an investment in equity
below its cost.
It is important to note that a decline in the fair value of a financial asset below its carrying
amount (cost or amortized cost) is not necessarily evidence of impairment (e.g. a decline in
the fair value of a bond that results from an increase in the risk-free interest rate) [IAS39.60].
1.5.1. Impairment of financial assets at amortized cost
If there is objective evidence that an impairment loss has been incurred on an asset carried at
amortized cost (i.e. loans and receivables or held-to-maturity investments), the amount of the
loss is measured as the difference between a) the asset’s carrying amount and b) the present
value of estimated future cash flows (excluding future losses that have not been incurred)
discounted at the asset’s original effective interest rate. The carrying amount shall be reduced
20
either directly or through use of an allowance account, and the amount of the loss shall be
If the amount of the impairment loss decreases in a subsequent period (i.e. fair value
increases) for a reason that can be objectively related to an event occurring after the
impairment was recognized, the previous impairment loss shall be reversed either directly or
by adjusting the allowance account, with the reversal amount recognized in profit or loss.
The reversal shall not result in a carrying amount of the financial asset that exceeds what the
amortized cost would have been, had the impairment not been recognized, at the date the
impairment is reversed [IAS39.65].
1.5.2. Impairment of financial assets at cost
If there is objective evidence that an impairment loss has been incurred on an equity
instrument measured at cost (i.e. that is not quoted in an active market nor its fair value is
reliably measured), or on a derivative asset that is linked to and must be settled by delivery
of such equity instrument, the amount of the impairment loss is measured as the difference
between a) the asset’s carrying amount and b) the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset. Such impairment
loss shall not be reversed. [IAS39.66]
1.5.3. Impairment of available-for-sale financial assets
When a decline in the fair value of an available-for-sale financial asset has been recognized
in OCI and objective evidence that the asset is impaired emerges, an amount of accumulated
losses shall be reclassified from equity to profit or loss as a reclassification adjustment, even
though the asset has not been derecognized [IAS39.67]. Such amount shall be the difference
between i) the acquisition cost (net of any principal repayment and amortization) and ii)
current fair value, less any impairment loss on that financial asset previously recognized in
profit or loss [IAS39.68].
If in a subsequent period the amount of the impairment loss on an available-for-sale debt

instrument decreases (i.e. its fair value increases) for a reason that can be objectively related
21
to an event occurring after the impairment was recognized, the previously recognized
impairment loss shall be reversed, with the reversal amount recognized in profit or loss
[IAS39.70]. On the other hand, if impairment is recognized for an available-for-sale equity
investment and the fair value subsequently increases, the increase in value shall be
recognized in OCI and not as a reversal of the impairment loss through profit or loss
[IAS39.69].
1.6. Hedge accounting
The hedge accounting requirements in IAS 39 have been criticized for being complex and at
times arbitrary, and for not representing actual risk management activities. Consequently, the
IASB introduced a new general hedge accounting model in IFRS 9, which maintained the
general concepts from the previous one but loosened the eligibility and effectiveness criteria
in order to reflect more closely risk management practices.
IAS 39 does not specify how an entity should manage its risk, but lays out a series of
requirements for hedge accounting to take place, i.e. there must be an eligible hedging
instrument and an eligible hedged item, and the hedging relationship must satisfy certain
qualification criteria.
1.6.1. Types of hedging relationships
IAS 39 presents the following types of possible hedging relationships (which must meet
further criteria in order to qualify for hedge accounting) [IAS39.86]:
a) fair value hedge, which offsets an exposure to changes in fair value that is attributable
to a specific risk of a recognized asset or liability or an unrecognized firm
commitment (or an identified portion of those items) and could affect profit or loss.
b) Cash flow hedge, which offsets the exposure to variability in cash flows that is
attributable to a specific risk of a recognized asset or liability or a highly probably
forecast transaction (or an identified portion of those items) and could affect profit or
loss.
22
c) A hedge of a net investment in a foreign operation as defined in IAS 21 The Effects

of Changes in Foreign Exchange Rates.
A hedge of the foreign currency risk of a firm commitment may be accounted for as either a
cash flow hedge or a fair value hedge [IAS39.87].
1.6.2. Hedging instruments
An entity may designated a derivative as hedging instrument in any qualifying hedging

relationships, with the exception of some written options. On the other hand, an entity may
designate a non-derivative financial asset or liability as hedging instrument only in a hedge
of foreign currency risk [IAS39.72].
Written options are problematic instruments for hedging purposes, because their potential
loss may be significantly greater than the potential gain in value of a related hedged item.
Therefore, a written option is not usually considered an effective hedging instrument.
Furthermore, interest rate collars or other derivatives that combine a written option with a
purchased option cannot be designated as hedging instruments if they are a net written option
(for which a net premium is received). However, a written option does qualify as a hedging
instrument if it is designed to offset a purchased option, including one that is embedded in
another financial instrument. [IAS39.AG94]
For hedge accounting purposes, only instruments that involve a party external to the reporting
entity can be designated as hedging instruments, whereas internal hedges normally cannot.
Intragroup hedging transactions that transfer risk between different companies within a group
are not reported in the consolidated financial statement, although they may be reported in the
separate financial statement of an individual entity of the group. Intra-entity hedging
transactions between different divisions within the same company are not reported in the
entity’s financial statements. [IAS39.73]
An entity normally designates a hedging instrument in its entirety for a hedging relationship.
Exceptions are permitted if the entity [IAS39.74]:
23
a) separates the intrinsic value and time value of an option contract and designates as
the hedging instrument only the change in intrinsic value;
b) separates the interest element and the spot price of a forward contract and designates
as the hedging instrument only the spot element;22 or
c) designates as the hedging instrument only a proportion of the entire instrument, such
as 50% of the notional amount. However, a hedging relationship may not be
designated for only a portion of the time of the instrument’s life. [IAS39.75]
Furthermore, an entity may designate a single hedging instrument as a hedge for multiple
types of risk provided that a) the risks hedged can be identified clearly, b) the effectiveness
of the hedge can be demonstrated, and c) it is possible to ensure that there is specific
designation of the hedging instrument and the different risk positions. [IAS39.76]
An entity may also view in combination multiple derivatives, or proportions of them (or, in
the case of a hedge of currency risk, multiple non-derivatives or proportions of them, or a
combination of derivatives and non-derivatives), and jointly designate them as one hedging
instrument [IAS39.77]. The Standard then affirms that none of the individual derivatives
jointly designed can be a written option or a net written option. The rationale of this
restriction seems at odds with the previously stated possibility for the entity to designate as
a hedging instrument an interest rate collar or an other derivative that combines a written
option with a purchased option (unless it is a net written option). There does not seem to be
any relevant difference between such derivative (that contains a written option) and a
combination of multiple derivatives (that contains a written option), yet the Standard allows
only the former to be designated as a hedging instrument.
1.6.3. Hedged items
A hedged item can be [IAS39.78]:

a) a single recognized asset or liability, an unrecognized firm commitment, a highly
probable forecast transaction or a net investment in a foreign operation.
22
Exceptions a) and b) are permitted because the intrinsic value of an option and the premium on a forward
contract (and hence its spot value) can generally be measured separately.
24
b) A group of assets, liabilities, firm commitments, highly probable forecast transactions

or net investments in foreign operations, all with similar risk characteristics. The
change in fair value attributable to the hedged risk for each individual item in the
group shall be expected to be approximately proportional to the overall change in the
fair value of the group attributable to the hedged risk [IAS39.83].23
c) For a portfolio hedge of interest rate risk only, a portfolio portion made up of financial
assets or financial liabilities that share the risk being hedged.
A firm commitment to acquire a business combination cannot be a hedged item except for
foreign currency risk, because the other risks cannot be specifically identified and measured
since they are general business risks [IAS39.AG98]. In addition, an equity method
investment cannot be a hedged item in a fair value hedge because the equity method
recognizes in profit or loss the investor’s share of the associate’s profit or loss, rather than
changes in the investment’s fair value. The same applies to an investment in a consolidated
subsidiary [IAS39.AG99].
Unlike loans and receivables, a held-to-maturity investment cannot be a hedged item with
respect to interest rate risk or prepayment risk given that such designation requires the
intention to hold the investment until maturity [IAS39.79].
For hedge accounting purposes, assets, liabilities, firm commitments, or highly probable
forecast transactions that involve a party internal to the entity cannot be designated as hedged
items. As an exception, the foreign currency risk of an intragroup monetary item (e.g.
payable/receivable between two subsidiaries) may qualify as a hedged item in the
consolidated financial statements if it results in an exposure to foreign exchange rate gains
or losses that would not be fully eliminated on consolidation (because the monetary item is
transacted between two sub-entities with different functional currencies). [IAS39.80]
With respect to a financial asset or liability, the entity may choose to designate as a hedged
item just a portion of its cash flows or fair value, provided that effectiveness can be measured
23
This restrictive condition was criticized for being often impossible to satisfy, thereby making such
hedging strategy unavailable.
25
[IAS39.81]. Exclusively in a fair value hedge of interest rate exposure on a portfolio of either
financial assets or financial liabilities, the hedged portion may be designated in terms of an
amount of currency rather than individual instruments [IAS39.81A]. Inflation components
of financial instruments that are not contractually specified are assumed to not be separately
identifiable and reliably measurable, and hence can never be separately designated as the
hedged item [IAS39.AG99F(b)]. Conversely, a contractually-specified inflation portion of
an inflation-linked bond (assuming bifurcation does not take place) is separately identifiable
and reliably measurable provided the other cash flows from the instruments are not affected
by inflation, and hence may be designated as the hedged item [IAS39.AG99F(c)].
A hedge of a net position (e.g. the net of all fixed rate assets and fixed rate liabilities with
similar maturities) does not qualify for hedge accounting [IAS39.81A, IAS39.AG101].
Non-financial assets and non-financial liabilities may be designated as hedged items in its
entirety for all risks or just for foreign currency risk, because cash flows or fair value changes
attributable to other risks are too difficult to isolate and measure [IAS39.82].
1.6.4. Qualifying criteria for hedge accounting
A hedging relationship qualifies for hedge accounting if all the following conditions are met
[IAS39.88]:
a) at the inception of the hedge there is formal designation and documentation of the
hedging relationship and of the entity’s risk management objective and strategy for
undertaking the hedge.24
b) The hedge is highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk, consistently with the originally documented risk
management objective for that particular hedging relationship. A hedge qualifies as
highly effective if: 1) at inception and at least annually, the hedge is assessed
prospectively as highly effective and such expectation can be reliably explained (e.g.
24
The documentation shall include identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s
effectiveness.
26
through comparison with past changes or statistical correlation), and 2) the actual
results of the hedge have been within a range of 80-120 percent throughout the
financial reporting periods for which the hedge was designated.25 [IAS39.AG105]
c) The effectiveness of the hedge can be reliably measured, that is, the fair value or cash
flows of the hedged item that are attributable to the hedged risk and the fair value of
the hedging instrument can be measured reliably.
d) For cash flow hedges, the hedged forecast transaction must be highly probable and
potentially affect profit or loss.
1.6.5. Accounting for fair value hedges
A qualifying fair value hedge shall be accounted for as follows [IAS39.89]:

a) the gain or loss from remeasuring the hedging instrument at fair value (for a derivative
hedging instrument) or the foreign currency component of its carrying amount (for a
non-derivative hedging instrument) shall be recognized in profit or loss.
b) For hedged items otherwise measured at cost, the gain or loss on the hedged item
attributable to the hedged risk shall adjust the item’s carrying amount and be
recognized in profit or loss. If the hedged item is an available-for-sale financial asset,
such gain or loss shall be recognized in profit or loss.
c) Any adjustment arising from point b) above to the carrying amount of hedged
financial instrument for which the effective interest method is used shall be amortized
to profit or loss. The adjustment is based on a recalculated effective interest rate at
the date amortization begins. However, exclusively in the case of a fair value hedge
of interest rate exposure on a portfolio of financial assets or liabilities, the adjustment
may be amortized using a straight-line method if the using a recalculated effective
interest rate is not practical. [IAS39.92]
d) In case the hedged item is an unrecognized firm commitment, its subsequent
cumulative change in fair value attributable to the hedged risk is recognized as an
25
For instance, if the loss on the hedging instrument is €110 and the gain on the hedged item is €100,
hedge effectiveness can be calculated as either €110/€100=10% or €100/110€=91%, both within the
allowed range.
27
asset or liability with a corresponding gain or loss recognized in profit or loss.

[IAS39.93]
The entity shall discontinue prospectively a fair value hedge in any of the following
circumstances [IAS39.91]:
the hedging instrument expires or is sold, terminated or exercised. However, the
replacement or roll-over of a hedging instrument is not considered an expiration or
termination if it is part of the entity’s documented hedging strategy;26
the hedge no longer meets the qualifying criteria for hedge accounting; or,
the entity revokes the designation.
1.6.5. Accounting for cash flow hedges
A qualifying cash flow hedge shall be accounted for as follows:

a) the portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge shall be recognized in OCI, whereas the ineffective portion shall be
b) The separate component of equity associated with the hedged item is adjusted to the
lesser of i) the cumulative gain or loss on the hedging instrument from inception of
the hedge and ii) the cumulative change in fair value (present value) of the expected
future cash flows on the hedged item from inception [IAS39.96].
If a hedge of a forecast transaction subsequently results in the recognition of a financial asset

or financial liability, the associated gain or loss that were recognized in OCI according to
point a) above shall be reclassified to profit or loss as a reclassification adjustment in the
same period(s) during which the hedged forecast cash flows affect profit or loss. However,
the entity shall reclassify into profit or loss as a reclassification adjustment any portion of a
loss recognized in OCI that it expects not to recover in future periods [IAS39.97].
26
In June 2013, the IASB amended this requirement introducing an exception for derivative instruments
that are novated to a central counterparty as a consequence of laws or regulations.
28
If instead a hedge of a forecast transaction subsequently results in the recognition of a non-

financial asset or non-financial liability, or a forecast transaction for such items becomes a
firm commitment for which fair value hedge accounting is applied, the entity shall
consistently behave in one of the following ways [IAS39.98]:
it can reclassify the associated gains and losses recognized in OCI in accordance with
para. IAS39.95 to profit or loss as a reclassification adjustment in the same period(s)
during which the asset acquired or liability assumed affects profit or loss. However,
the entity shall reclassify into profit or loss as a reclassification adjustment any
portion of a loss recognized in OCI that it expects not to recover in future periods.
It can remove the associated gains and losses recognized in OCI in accordance with
para. IAS39.95 and include them in the initial carrying amount of the asset or liability.
For all other cash flow hedges, the entity shall reclassify the amounts recognized in OCI to
profit or loss as a reclassification adjustment in the same period(s) during which the hedged
forecast cash flows affect profit or loss [IAS39.100].
The entity shall discontinue prospectively a cash flow hedge in any of the following
circumstances [IAS39.101]:
a) the hedging instrument expires or is sold, terminated or exercised. In this case, the
amount that was previously accumulated in OCI shall remain separately in equity
until the forecast transaction occurs. However, the replacement or roll-over of a
hedging instrument is not considered an expiration or termination if it is part of the
entity’s documented hedging strategy.
b) The hedge no longer meets the qualifying criteria for hedge accounting. Again, the
amount that was previously accumulated in OCI shall remain separately in equity
until the forecast transaction occurs.
c) The forecast transaction is no longer expected to occur, in which case the amount that
was previously accumulated in OCI shall be reclassified to profit or loss as a
reclassification adjustment.
29
d) The entity revokes the designation, in which case the amount that was previously
accumulated in OCI shall remain separately in equity until the forecast transaction
occurs or is no longer expected to occur.
1.6.5. Accounting for hedges of a net investment in a foreign operation
Such hedges shall be accounted for similarly to cash flow hedges [IAS39.102]:
the portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge shall be recognized in OCI, whereas the ineffective portion shall be
recognized in profit or loss.
The gain or loss on the hedging instrument that has been recognized in OCI shall be
reclassified to profit or loss as a reclassification adjustment on the disposal of the
investment in a foreign operation.
30
31
Chapter II – The development of IFRS 9
2.1. Overview
The final version of IFRS 9 Financial Instruments, issued in July 2014, is the culmination of
the IASB’s profound revision of the accounting for financial instruments. The former
Standard IAS 39 Financial Instruments: Recognition and Measurement had long been
criticized for several reasons, such as lack of relevance and understandability of the
information provided, but it was only after the global financial crisis had struck that the IASB
decided to replace IAS 39 altogether. In response to recommendations of the G20 and other
international bodies, the Board decided to renovate financial instrument accounting
expeditiously. As mentioned, the goal was to address stakeholder concerns that the
requirements in IAS 39 were difficult to understand, apply and interpret, and to create a more
principle-based Standard instead of a rule-based one.
The IASB divided the project in three phases, which brought the following innovations:
1) a reformed model for classification and measurement of financial assets, introduced
with the first version of IFRS 9 of November 2009, to which in October 2010 were
added requirements for financial liabilities almost unchanged from IAS 39.
2) A forward-looking impairment model that applies to all items subject to impairment,
included in the Standard in July 2014 as the result of three previous exposure
documents.
3) A new model for general hedge accounting that is more closely aligned with actual
risk management practices, included in the Standard in November 2013.
32
The specific requirements of the final Standard are discussed in the next chapter, while the
following paragraphs retrace the stepping stones of the revision of financial instruments
accounting. The reader will often find that requirements proposed in the IASB’s exposure
documents, and sometimes even in allegedly finalized chapters of the Standard, are
subsequently modified by the IASB in light of information arising from additional feedback.
It is therefore recommended to use this chapter only as a guide in understanding the gradual
emergence of the concepts and requirements that eventually crystalized in IFRS 9.
2.2. Lack of convergence with US GAAPs
The IASB’s extensive project for the reformation of financial instruments accounting began
in concert with the Financial Accounting Standards Board (FASB), the U.S.-specific standard
setter. The two Boards had set up together the Financial Crisis Advisory Group (FCAG) in
October 2008 in a cooperative effort to improve and possibly converge the reporting of
financial instruments.27 Initially, the FASB decided to work toward the introduction of new
requirements in one solution, whereas the IASB opted for a piecemeal approach aimed at
ensuring as a prompt response as possible to the crisis, dividing the project in three main
phases. To the dismay of many, the two Boards eventually parted ways, the widespread desire
for convergence giving way to divergent preferences of the two Boards and part of their
constituency, and also to differences in the existing legal frameworks. In the 2014 Global
IFRS Banking Survey by Deloitte, over half of the respondent banks said they were
disappointed by the lack of convergence (Deloitte, Jun. 2014). In fact, investors and other
users of financial statements are confused by the lack of comparability, while preparers
(above all, banks with global operations) incur higher compliance costs. The FASB is
expected to issue its new Standard for financial instruments in the fourth quarter of 2015
(FASB, Technical Agenda), which will:
27
The long-term objective of convergence was first affirmed in the Memorandum of Understanding known
as “Norwalk Agreement” in 2002, and consequently in “A Roadmap for Convergence between IFRSs and
US GAAP2006-2008” and later updates.
33
1) make targeted improvements to existing classification and measurement (which are

similar to those in IAS 39) requirements;
2) introduce an impairment model in which lifetime expected losses are recognized for
all instruments;
3) make targeted improvements to their existing hedge accounting requirements (which
are similar to those in IAS 39), although not in the same direction as IFRS 9.
Although the lack of convergence is a disappointment to many, investors and preparers in

the EU may find solace in the assessment in the Draft Endorsement Advice by European
Financial Reporting Advisory Group (EFRAG) that IFRS 9 will lead to higher quality
financial reporting than the corresponding US GAAP [DEA.A2.57,66,73].
2.3. Pros and cons of the incremental approach
As the IASB begun to issue the first exposure documents of the project, part of its
constituency suggested that the IASB’s preferred approach of incremental changes may
cause more complexity than the single issuing of a fully-formed Standard (IASB, Mar. 2008).
Their concerns mainly related to the uncertainty that would stem from pending requirements
as well as the difficulty of evaluating parts of the Standard absent the whole picture. Later in
the process, many also voiced concerns about the Board’s rapid pace in the process, noting
that revisions of so complex a topic needed more time to be properly considered both by the
Board and its constituents (IASB, Jul. 2009). The difficulty of handling the large number of
documents issued and of analyzing and commenting on each proposal was also highlighted.
On the other hand, the prospect of improving expeditiously the accounting for financial
instruments, and especially its most problematic areas, was widely supported by constituents
such as the G20 and other international bodies. Furthermore, a more flexible approach would
allow the Board to receive detailed feedback and change the direction of future deliberations
accordingly. The IASB thus decided not to change its approach, also confident that the
process was going to be quick. However, the Board failed repeatedly to finalize the project
as expeditiously as promised. In fact, the complete Standard was initially meant to become
34
effective on 1 January 2013. Yet, in December 2011 the effective date was postponed to 1
January 2015. But in November 2013, when the new general hedge accounting model was
released, that effective date was simply removed. The definitive effective date, included in
the final Standard, is 1 January 2018.
2.4. Mar. 2008 - DP Reducing Complexity in Reporting Financial Instruments
Following the steps of the IASB’s rigorous due diligence process,28 the first document we
encounter is the Discussion Paper (DP) Reducing Complexity in Reporting Financial
Instruments, jointly issued by the IASB and FASB in March 2008. The excessive number of
ways for measuring financial instruments (considering both the IASB and the FASB
Standards) was identified as a paramount cause of complexity in reporting financial
instruments. Under IAS 39 alone, financial instruments were being measured in at least four
categories, namely, fair value through profit or loss (FVTPL), held-to-maturity investments,
available-for-sale financial assets, and loans and receivables. Many other topics were
identified as problematic, most prominently hedge accounting and the impairment models,
but also several other requirements (definitions, scope of Standards, derecognition rules,
presentation, disclosure, etc.).
The DP laid out suggestions as to which intermediate and long-term solutions to the plethora
of possible accounting treatments were available. The DP affirmed that the best ultimate
solution would be the introduction of a single measurement category for all financial
instruments, namely fair value. However, the Boards admitted that addressing all the
concerns arising from having this single measurement category could require large systemic
adjustments of highly uncertain prospects. The DP therefore presented a number of
28
As described in the IFRS Foundation Constitution and the Due Diligence Handbook, the steps in the
due diligence process are the following.
1) Research program: gaining knowledge on a problematic topic through a DP.
2) Developing a proposal for publication via internal consultation and publication of ED(s).
3) Consideration of feedback received, further internal improvement, and possible re-exposure.
4) Final internal consultation and publication of the Standard and accompanying material.
5) Post-implementation review after the Standard has been applied for about two years.
35
intermediate solutions that, in line with the long-term objective of increasing fair value use,
could decrease complexity and enhance usefulness and understandability. Some solutions
envisioned imposing narrower measurement requirements, introducing a single fair value
measurement principle with exceptions, or eliminating or simplifying hedge accounting.
The Boards received many comment letters, which were considered in the deliberations
leading to the ensuing EDs. Most users of financial statements supported the long-term
solution of a single fair value category, holding it as more relevant in understanding an
entity’s current economic conditions, while promoting consistency and comparability (IASB,
Mar. 2008). Conversely, most preparers and auditors did not support the single fair value
category, arguing that an exit price (as fair value is) is not relevant for financial instruments
that an entity intends to hold until maturity. They argued that in these cases amortized cost is
the best reflection of future cash flows. Many preparers were also concerned about the
unreliability of fair value when markets are not fully developed or suddenly become illiquid,
or when it cannot be determined reliably. On the other hand, respondents were unanimous in
objecting the proposed elimination hedge accounting, arguing that the resulting increased
volatility in earnings would not reflect the economics of risk management.
2.5. Mar. 2009 – ED/2009/3 Derecognition: Proposed Amendments to IAS 39 and IFRS7
The Derecognition ED was published in order to abate the complexity of derecognition

requirements in IAS 39, and simultaneously progress toward convergence with U.S. GAAPs.
Previous amendments to IAS 39 earlier in the decade had already improved the original
derecognition requirements without radically modifying them. A 2002 ED clarified topics
including derecognition concepts (risks and rewards of ownership, control and continuing
involvement), partial derecognition, pass-through arrangements, and transfers not qualifying
for derecognition [IFRS9.BCZ3.1-29]. In spite of all efforts, the 2009 ED pointed out that
there was still much complexity arising from the derecognition requirements in IAS 39,
which were even deemed internally inconsistent (IASB, Mar. 2009). The ED proposed a new
36
derecognition approach that would place greater importance on the element of control rather
than on the combination of several concepts, and simplify other requirements.
Despite all the problems highlighted above, in 2010 the IASB revised its work plan and
decided to abandon any major modifications of the derecognition requirements. Even though
the relevant disclosure requirements were improved via amendments to IFRS 7, all
derecognition requirements of IAS 39 were carried forward unchanged to IFRS 9. With this
decision, the IASB has left unaddressed an accounting area that many perceived as
problematic.
2.6. Jun. 2009 – DP/2009/2 Credit Risk in Liability Management
This DP and a related Staff Paper explored one of the most problematic areas of IAS 39,
namely how a liability’s credit risk (i.e. the probability that an entity will fail to perform as
required) influences its measurement, known as the ‘own credit’ issue. Under IAS 39,
financial liabilities are normally measured at amortized cost, but an entity can measure a
financial liability under the ‘fair value option’, which requires presenting the entire fair value
change (including from changes in its credit risk) in profit or loss. In this case, a decrease in
the liability’s credit quality and hence in its market price (fair value) would translate in a gain
in the borrower’s income statement. Conversely, if the financial liability’s credit quality
improved, a loss would be recorded, leading once again to a potentially counterintuitive
outcome. This DP reported the best arguments for and against incorporating credit risk in the
current measurement of financial liabilities, soliciting feedback on the proposed
measurement approaches to deal with the own credit issue. Briefly, the main arguments in
favor of continuing to reflect a liability’s changes in credit risk in profit or loss ran as follows:
Consistency. A loan liability is initially measured at fair value, given that the proceeds
from the loan represent the fair value of the future payments promised to the debt
holders. This includes the effects of the borrower’s credit risk, as well as of other things
such as collateral and guarantees. It is therefore consistent to include fair value also in
subsequent measurements.
37
Wealth transfer. Equity and liabilities represent claims on an entity’s assets. When, for
any reason, the fair value of liabilities decreases (increases), then a greater (lesser) share
of the entity’s assets is allocated to the equity holders, and thus a gain (loss) ensues.29
Accounting mismatch. Changes in credit spreads may simultaneously affect certain
financial liabilities and financial assets measured at fair value. Preventing the
measurement of financial liabilities from incorporating changes in credit spreads may
create an accounting mismatch.
On the other hand, the arguments against were:

Counter-intuitive results. This aspect generated great interest due to the general
deterioration in credit quality during the global financial crisis. Reporting a gain (loss)
from a decline (improvement) in a liability’s credit quality was seen as counter-intuitive
and potentially disguising deteriorated economic conditions. In fact, the position of the
borrowing entity (or the wealth of its shareholders) has hardly improved, seeing that its
contractual obligations have not changed and that future borrowing may become more
expensive after a deterioration in credit quality.
Accounting mismatch. The same line of argument can also be used against the
recognition of own credit risk. A decline in an entity’s credit standing may well derive
from value changes that do not appear in financial statements, such as changes in the
value of assets measured at amortized cost (e.g. fixed assets and goodwill), unrecognized
intangible assets, or simply in the case of declining market confidence in the entity’s
management. Recognizing a liability’s credit-related changes in profit or loss may
therefore create an accounting mismatch.
Realization. Measuring assets at fair value can be informative because the management
is usually able to sell them when it desires. Conversely, many liabilities are never
transferred, because it is unpractical to do so or counterparty permission is required. It
would be reasonable to measure a liability at fair value if the entity could benefit from
changes in its value (i.e. if it is held for trading). However, this is rarely the case when
29
A liability’s fair value may change because of a change in: the estimated cash flows (e.g. worsening of
the liability’s credit risk), the entity’s credit standing, interested rates, credit spreads from similar
liabilities, exchange rates.
38
credit-related changes occur: repurchasing the loans (even at the lower price) may be
hard precisely because the entity has lower credit standing. If instead the liability’s credit
quality has increased along with its fair value, the entity of course has no incentive to
repurchase its own more-costly loans.
Most respondents strongly agreed that the effects of a liability’s credit risk ought not to affect
profit or loss (unless the liability is held for trading), although none of the proposed
measurement approaches received support [IFRS9.BC4.48-53]. The IASB later decided to
carry forward most of the requirements unchanged from IAS 39 to IFRS 9. The Board
believed that financial liabilities measured at amortized cost did not pose any problem, nor
did those held for trading. The Board dealt with the only group of financial liabilities for
which credit-related changes remained an issue (i.e. those designated under the fair value
option) in its 2010 Own Credit Risk ED, which proposed to present such changes in OCI.
2.7. Jul. 2009 – ED/2009/7 Financial Instruments: Classification and Measurement
This ED proposed new requirements for the classification and measurement of financial
assets and financial liabilities in order to eliminate the complexity arising from the many
categories and relative impairment methods in IAS 39. According to proposed ‘mixed
attribute’ approach, a financial asset or liability would be measured at amortized cost when
the following conditions are met:
the instrument has only basic loan features, i.e. it gives rise on specific dates to cash
flows that are payments of principal and interest on the principal outstanding. Other
contractual terms that change the timing or amount of those payments are not basic loan
features, unless they protect the creditor or debtor.30
The instrument is managed on a contractual yield basis, which depends on whether, at a
business-unit level, management focuses on the cash flows contractually generated by
30
As in the case of contractual features that limit the variability (e.g. caps and floors), or permit the issuer
to prepay or the holder to put the instrument if such option is not contingent on future events and the
prepaid amount substantially represents unpaid principal and interest.
39
the instrument rather than the cash flows that could arise from its sale (asset) or
repurchase (liability). 31
Any financial instrument that does not meet both conditions would be measured at FVTPL.
As under IAS 39, the proposal would allow a fair value option to designate at initial
recognition any financial instrument as measured at FVTPL if doing so eliminates an
accounting mismatch.
The ED would also continue to allow entities to designate irrevocably at initial recognition
equity investments that are not held for trading as at fair value through other comprehensive
income (FVTOCI). On the other hand, the ED proposed that unquoted equity instruments
with unreliable fair value should to still be measured at the best fair value estimate rather
than, as under IAS 39, at cost less impairment.
While IAS 39 always required the separation of embedded derivatives from their host
contracts, the proposals in the ED would require such operation only for certain hybrid
contracts where the host is a non-financial instrument, and never if the host is a financial
instrument. The IASB believed that eliminating the bifurcation requirements at least for
hybrid contracts with financial hosts would reduce the complexity in financial reporting by
eliminating yet another classification approach [IFRS9.BC4.89].
The ED proposed to prohibit reclassification of both financial assets and financial liabilities
between the categories of amortized cost and fair value. The IASB would consequently be
convinced by respondents that such prohibition should not take place for financial assets
because it is inconsistent with their actual management [IFRS9.BC4.114].
Finally, the ED proposed to eliminate the so-called tainting provision of IAS 39, i.e. the
restriction from measuring financial assets at amortized cost if the entity has sold any of them
before maturity.
31
The IASB recognized the importance of an entity’s business model in predicting how a financial
instrument would originate cash flows, i.e. whether contractually or via sale (asset) or repurchase
(liability).
40
Almost all respondents to the ED supported the direction of the proposed changes. Yet, many
said that more application guidance was needed, especially on the concepts of ‘basic loan
features’ and ‘managed on a contractual yield basis’. Many pointed out that the Board’s fast
pace could impair the quality of the resulting Standard; these respondents encouraged the
Board to slow down, perhaps addressing financial assets first and financial liabilities later,
since the latter had not been a major source of concern.
2.8. Nov. 2009 – IFRS 9 (2009) Classification and Measurement of Financial Assets
In November 2009, the IASB finalized the first chapters of IFRS 9 on the classification and
measurement of financial assets. The Board heeded to the feedback from the previous ED by
prioritizing the classification and measurement of financial assets over that of financial
liabilities. This decision was meant to allow entities to move away expeditiously (through
early adoption) from the inadequate requirements in IAS 39, as well as to lay the foundation
for the other requirements being developed.
IFRS 9 (2009) prescribed only two alternative measurement categories for all financial
assets: amortized cost and fair value (but a third one would be introduced in the final version
of IFRS 9). A debt instrument that is held within a business model whose objective is to
collect contractual cash flows (the business model test)32 and has contractual cash flows that
are solely payments of principal and interest (the SPPI criterion)33 must be measured at
amortized cost. A fair value option (as in IAS 39) allows entities to designate at initial
recognition debt instruments meeting both criteria at FVTPL if doing so eliminates or
significantly reduces an accounting mismatch. All other financial assets (e.g. equity
investment, derivatives) must be measured at FVTPL. One exception is made for equity
instruments that are not held for trading, which can be irrevocably designated at initial
recognition as at FVTOCI, with only dividend income being recognized in profit or loss.
32
Similar to the vaguer concept of assets measured ‘on a contractual yield basis’ in the 2009 Classification
and Measurement ED.
33
Similar to the vaguer concept of ‘basic loan features’ in the 2009 Classification and Measurement ED.
41
Reclassification of financial assets between amortized cost and FVTPL is required if the
relevant business model objective has changed. Such changes are expected to be infrequent.
The tainting provision of IAS 39 is removed, meaning that sales of financial assets measured
at amortized cost, even for reasons other than credit deterioration (e.g. to fund capital
expenditure), do not invalidate that measurement method for similar instruments, provided
they are occasional and non-significant in amount (either individually and in aggregate). To
ensure proper disclosure, IAS 1 Presentation of Financial Statements and IFRS 7 Financial
Instruments: Disclosures have been enhanced, requiring among other things that when a debt
instrument measured at amortized cost is derecognized prior to maturity the gain or loss on
disposal be presented separately in the statement of comprehensive income.
Finally, with regard to embedded derivatives, IFRS 9 (2009) adopted the approach proposed
in the preceding ED, whereby a hybrid contract should always be measured as a whole if the
host contract is a financial instrument. If the host is not a financial item, separation is only
required for non-closely related embedded derivatives.
2.9. Nov. 2009 – ED/2009/12 Financial Instruments: Amortized Cost and Impairment
This ED proposed modification to the requirements for the amortized cost measurement
category and the impairment of financial assets. This document related to the second phase
of the financial instruments project, which was initiated just as the classification and
measurement of financial asset drew to a close with the issue of IFRS 9 (2009), on which it
logically had to be based. The goal of this phase was to develop an impairment model in
order to replace the incurred loss model in IAS 39, whose weaknesses had starkly emerged
during the global financial crisis. In fact, such model would systematically delay the
recognition of impairment losses to when a credit loss event occurred, forbidding any insight
on future losses from being reflected in financial statements. Another weakness was the
complexity arising from the different impairment applied to amortized cost assets and
available-for-sale assets measured at FVTOCI. The FCAG recommended finding a simpler
impairment model that would take account of forward-looking information.
42
In the lead up to this ED, the IASB discussed two possible impairment models for assets
measured at amortized cost, one based on fair value and the other on expected losses.
According to the former, a financial asset’s impairment loss would be measured by reference
to its fair value at the date of impairment testing, resulting in immediate recognition of
economic losses. This approach was considered too complex and inconsistent with the cost-
based approach, and thus rejected by the IASB (IASB, Nov. 2009). The 2009 Impairment
ED proposed requirements for a forward-looking impairment model for financial assets
measured at amortized cost. The objective of amortized cost measurement was for the first
time34 clearly stated as “to provide information about the effective return on a financial asset
or financial liability by allocating interest revenue or interest expense over the expected life
of the financial instrument” (IASB, Nov. 2009). Amortized cost is the present value of the
expected cash flows over the remaining life of the financial instrument discounted using the
effective interest rate.
The proposed approach consisted in measuring a financial asset’s current amortized cost at
the expected credit-adjusted cash flows discounted at the original credit-adjusted effective
interest rate, accounting for any difference as an impairment loss. An entity would recognize:
at initial recognition, lifetime expected credit losses through the credit-adjusted effective
interest rate; and
subsequent changes in expected credit losses. A favorable change in the estimate of
expected credit losses would result in a reversal of an impairment loss. Since the initial
estimate of expected credit losses is included in determining the effective interest rate,
the proposal allowed a favorable change in such estimate to increase the carrying amount
of a financial asset above its initial value.
Respondents overall supported the proposals because they would result in earlier recognition
of credit losses compared to the existing incurred loss model and hence avoid the systematic
bias toward late recognition. Nonetheless, many were concerned about the significant
operational challenges that the new method posed, such as maintaining information about
expected credit losses for a large number of financial instruments [IFRS9.BC5.89]. The IASB
34
IAS 39 offered only general guidance rather than a clear definition.
43
(aided by the Expert Advisory Panel) later modified its proposals twice, in a Supplementary
Document to this ED in 2011 and again in the final model issued in July 2014.
2.10. May 2010 – ED/2010/4 Fair Value Option for Financial Liabilities
Based on the feedback from the Credit Risk DP, the Board concluded that proposed
measurement approaches for financial liabilities would not be a worthwhile improvement
over the existing requirements in IAS 39, which overall had never posed significant
problems. However, whether to recognize credit-related changes in fair value for liabilities
under the fair value option was still an unsolved problem. The so-called ‘own credit’ issue
was the subject of this ED.
For a liability under the fair value option, IAS 39 required to recognize in profit or loss the
changes in fair value arising from changes in its credit risk. As explained previously, this
requirement was regarded as not providing useful information and potentially misleading,
unless the liability is held for trading. This is because an entity whose liability’s credit quality
falls would record a gain in profit or loss as the fair value of a liability decreases, potentially
hiding deterioration in the creditworthiness of the entity. On the other hand, improvements
in its credit standing may result in the recognition of losses in profit or loss, possibly
offsetting the entity’s gains that led to the improvement in credit quality.
The present ED distinguished between financial liabilities held for trading and those
designated at FVTPL under the fair value option. The former would continue to be measured
at fair value with changes in the credit risk recognized in profit or loss. For the latter, the ED
proposes a two-step approach so that changes in credit risk would not affect profit or loss.
An entity would first present the entire fair value change in profit or loss, and then translate
the portion relating to changes in credit risk into OCI. The IASB recognized that a one step-
approach where credit risk changes go directly into OCI, albeit less transparent, could have
the advantage of being less complicated (and in fact that is how it was eventually
implemented).
44
A potential drawback is to create an accounting mismatch when the entity is offsetting

liabilities under the fair value option with financial assets also measured at FVTPL. Such
problem could be avoided by mandating the proposals unless they create an accounting
mismatch, but the Board did not offer this possibility in the present ED, believing such
instances to be rare and not outweighing the benefits of consistency.
In order to determine the amount of change in fair value of a financial liability that is
attributable to changes in its credit risk, entities would need to follow the preexisting
disclosure guidance in IFRS 7. Under the ‘proxy method’ in IFRS 7, changes in a fair value
that are not attributable to changes in market risk (by default identified with changes in the
benchmark interest rate) are attributed to its credit risk.35 Entities would be allowed to use
any proxy for market risk (e.g. the price another entity’s financial instruments, a currency
exchange rate, a commodity price, etc.) if it provides a more faithful representation of the
change in credit risk.
Finally, the ED proposed to prohibit recycling (i.e. reclassifying) the amounts from OCI to
profit or loss, but allowing recycling to other components of equity (e.g. retained earnings).
Note that if the entity repays the liability according to the contractual terms, the cumulative
effect of changes in the liability’s credit risk eventually net to zero, and with no amounts left
to recycle. Conversely, if the liability is settled before maturity (e.g. repurchased) there could
be amounts in accumulated OCI which would be realized when the liability is derecognized.
The IASB proposed not to reclassify such amounts to profit or loss, consistently with its view
that a gain or loss should be recognized only once [IFRS9.BC5.52-57].
35
The IASB specified that a change in a liability’s credit risk does not include changes in asset-specific
performance risk, i.e. the risk arising when an obligation is linked to the performance of single assets or a
group thereof.
45
2.11. Oct. 2010 – IFRS 9 (2010) Classification and Measurement of Financial Liabilities
As thoroughly explained, the IASB concluded that the general requirements of IAS 39 for
financial liabilities accounting, excluding the own credit issue, were not in need of change.
Hence, the IAS 39 classification categories of amortized cost and FVTPL were carried
forward unchanged to IFRS 9, thus completing the first phase (classification and
measurement) of the project.
As a slight modification of the proposals in the Fair Value Option ED, the IASB decided that
for a financial liability under the fair value option, changes in the liability’s credit risk shall
be recognized directly in OCI (a one-step rather than two-step approach). As the ED
proposed, amounts recognized in OCI are not recycled to profit or loss when the liability is
settled or otherwise derecognized, but transfers to other components of equity are allowed.
Financial liabilities held for trading (e.g. derivatives), along with loan commitments and
financial guarantee contracts36 that are designated under the fair value option continue to be
measured entirely at FVTPL. The IASB did not eliminate the IAS 39 bifurcation
requirements for derivatives embedded in financial liabilities (as opposed to financial assets,
which shall be treated as a whole).
2.12. Dec. 2010 – ED/2010/13 Financial Instruments: Hedge Accounting
With this lengthy ED, the IASB begun addressing the third phase of the project. The hedge
accounting requirements in IAS 39 had been criticized as rule-based and complex, and for
not reflecting actual risk management activities. The ED proposed a new general hedge
accounting model that retained the basic concepts in IAS 39 of fair value hedge, cash flow
hedges, and hedges of net investments, but relaxed the rules relating to eligibility and
effectiveness, thus making hedge accounting available for more types of hedging
relationships.
36
A financial guarantee contract is a contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due.
46
Given the complexity of the topic, the IASB decided to focus this ED on requirements for
hedging relationships in the context of closed portfolios. In such portfolios, hedged items are
individually identified, with changes accounted for in the same way as for single hedging
relationships. The IASB decided to separate the topic of open portfolios and in particular of
portfolio fair value hedges of interest rate risk (so-called ‘macro-hedge’ accounting) from the
IFRS 9 project and is still currently deliberating on the matter.
According to the ED, the objective of hedge accounting is to reflect the effects of an entity’s
risk management activities which employ financial instruments to manage risk exposures
that could affect profit or loss.
Eligible hedging instruments. The ED proposed that an entity might designate as a hedging
instrument any financial asset or liability (both derivative and non-derivative) that is
measured at FVTPL other than a net written option. For a hedge of foreign currency risk,
also financial instrument measured at amortized cost could be an eligible hedging instrument.
Seeing that under IFRS 9 (2009) embedded derivatives are not bifurcated (i.e. accounted
separately) from the host asset, they are not eligible as hedging instruments in their own right
but only as part of the entire hybrid contract.
Equity instruments designated as at FVTOCI. The proposals would prohibit equity

investments designated under the FVTOCI option from being designated as hedged items,
seeing that all their fair value changes are permanently recognized in OCI and never affect
profit or loss. Only dividend income received on such investments, which is measured
through profit or loss, would be an eligible hedged item (e.g. for foreign currency risk).
Respondents criticized this proposal as not representing the reality of risk management.
Consequently, the IASB did not included it in the final version of the general hedge
accounting model.
Hedges of aggregate exposures. The ED proposed that an aggregate (or synthetic) exposure
(i.e. a combination of an exposure and a derivative) may be designated as an item in a hedging
relationship and hedged with a further derivative. Synthetic exposures commonly arise when
47
an entity hedges different risks (e.g. commodity risk and foreign currency risk in a forecast
purchase) at different times.
Hedges of risk components. IAS 39 allowed any risk component of a financial item (i.e.
changes in its cash flows or fair value attributable to a specific risk) to be eligible for hedge
accounting, provided it is separately identifiable and reliably measured. On the other hand,
the only eligible component for non-financial items was foreign currency risk. The ED
proposed that an entity may designate as hedged items the risk components of any item (both
financial and non-financial) provided they meet the above mentioned criteria. Despite the
more relaxed requirement, hedge accounting would seldom be available to the specific
practice of managing credit risk exposure with derivatives, because of the notorious difficulty
of identifying and measuring credit risk. In the lead up to this ED, the IASB explored
numerous approaches to accommodate hedges of credit risk using credit derivatives, but none
was considered appropriate due to their complexity [IFRS9.BC6.474-490]. However,
following strong criticism in the feedback to the 2010 ED, the IASB reconsidered the pros
and cons of the approaches and included one in the final hedge accounting model.
Designation of a layer component of the nominal amount. The ED proposed that a layer
component of the nominal amount of an item should be eligible for designation as a hedged
item, unless the contract includes a prepayment option whose fair value is influenced by
changes in the hedged risk. In that case, the risk component would not be separately
identifiable, because the change in value of prepayment option due to the hedged risk would
be included in the hedging relationship.
Hedge effectiveness. IAS 39 allowed hedge accounting only for hedge relationships that were
both prospectively and retrospectively ‘highly effective’, defined as giving rise to offset
within the range of 80-125 percent. Instead of such ‘bright line’, the ED proposed a forward-
looking assessment performed at inception and on an ongoing basis37 and based on the
following hedge effectiveness criteria:
37
I.e. at least at each reporting date or upon a significant change in the circumstances relevant to the
hedging relationship.
48
the hedging relationship will produce an unbiased result and minimize expected hedge
ineffectiveness; and
other than accidental offsetting is expected to originate from such relationship.
As under IAS 39, any observed hedge ineffectiveness would have to be immediately
Rebalancing the hedging relationship. The ED proposed that when the hedging relationship
ceases to meet the hedge effectiveness requirements but the risk management objectives for
that relationship remain the same, the entity should rebalance the relationship and restore
hedge effectiveness. The rebalanced hedging relationship should be accounted for as a
continuation of the existing hedge, rather than as a discontinuation as under IAS 39. The
entity may also attempt to preempt expected hedge ineffectiveness by proactively
rebalancing the hedging relationship.
Discontinuing hedge accounting. Under the proposals, an entity would discontinue hedge
accounting for the hedging relationship (or part thereof) when it no longer meets the
effectiveness criteria (after taking account of any rebalancing). Discontinuation would also
take place when the hedging instrument expires or is sold, exercised, or otherwise terminated,
unless it is simultaneously rolled over. In contrast to IAS 39, an entity would not be permitted
to discontinue voluntarily hedge accounting if no change has occurred in the hedging
relationship nor in the risk management objective.
Accounting for qualifying hedges.

a) Fair value hedges. The ED proposed two changes to fair value hedge accounting.38 First,
the entire gain or loss on the hedging instrument and the hedged item would be presented
in OCI, with any hedge ineffectiveness being immediately transferred to profit or loss;
under IAS 39 all amounts are instead recognized in profit or loss. Secondly, the change
in fair value of the hedged item due to changes in the hedged risk would be presented as
a separate line item next to hedged item in the statement of financial position. Under IAS
38
The IASB dropped these proposals from the final hedge accounting model, retaining all IAS 39
mechanics for fair value hedge accounting in IFRS 9.
49
39, the hedge adjustment is instead recorded as part of the carrying value of the hedged
item, potentially resulting in a mix of amortized cost and fair value.
b) Cash flow hedges. The ED retains the ‘lower of’ test of IAS 39, meaning that the amount
of the hedging instrument’s cumulative fair value change that can be deferred in equity
(the effective part) is the lower of:
the cumulative gain or loss of hedging instrument since inception of the hedge, and
the cumulative change in the fair value (present value) of the hedged item since
inception.
The only proposed aspect of cash flow hedge accounting different from IAS 39 regarded
the so-called ‘basis adjustment’, which under IAS 39 was a choice rather than a
requirement. Under the proposal, when a forecast transaction in a cash flow hedge leads
to the recognition of a non-financial asset or liability or a firm commitment, the entity
would have to apply a basis adjustment. That is, the amount accumulated in the cash
flow hedge reserve would be reclassified as part of the recognized non-financial item.
IAS 39 instead let an accounting choice to proceed with basis adjustment or retain the
accumulated gain or loss in equity and only reclassify to profit or loss when the hedged
item affects profit or loss.
c) Hedges of net investments in a foreign operation. The ED did not propose any changes
to the accounting of the so-called ‘net investment hedges’, except for changes to the
general model that would also affect them.
Accounting for the time value of options. When, as it is generally the case, an entity
recognizes as a hedging instrument the intrinsic value of an option but not its time value
component, IAS 39 required to measure the latter as at FVTPL, contributing to volatility in
earnings. However, from a risk management perspective an option’s time value (usually
equal to the initial premium) is usually regarded as a ‘cost of hedging’, i.e. the cost to obtain
protection against changes of prices or rates. In order to align hedge accounting with risk
management practices, the IASB proposed that the undesignated time value of an option
should be accounted for in profit or loss on a cost basis rather than on a fair value basis, thus
reducing volatility. The ED proposed to account for the time value in two steps:
50
1. The entity would first defer in OCI (over the life of the hedge) the change in fair value
of the time value component to the extent that it relates to the hedged item. This amount
would be determined with reference to a hypothetical option that matches the terms of
the hedged item.
2. Secondly, the entity would recycle the accumulated amounts from equity (OCI) to profit
or loss, with a specific procedure depending on the nature of the hedged item. For
transaction related hedged items (e.g. a forecast transaction), the cumulative change in
fair value deferred in OCI would be recognized in profit or loss at the same time as that
of the hedged item.39 For time-period related hedged items (e.g. an inventory over a
period of time), the cumulative change deferred in OCI would be amortized to profit or
loss on a rational basis over the term of the hedging relationship.
Hedging groups of items. Entities often analyze risk on a portfolio basis in order to take
advantage of naturally offsetting risk positions. IAS 39 restricted the application of hedge
accounting for groups of items and net positions in various ways.40 To better align accounting
with management practices, the ED proposed that groups of items (e.g. a group of assets) and
a net risk exposure (e.g. the net of assets and liabilities, or net forecast transactions) may be
eligible as a hedged item when:
the individual items of the group (or components of items) are eligible hedge items
themselves;
the items are managed together for risk management purposes; and
for cash flow hedge accounting only, any offsetting cash flows affect profit or loss in
the same period. This restriction was aimed at avoiding the accounting anomaly of a
39
But if the hedged item gives rise to the recognition of a non-financial asset or liability or a firm
commitment, the amount from OCI would be reclassified as part of the carrying amount of the hedged
item. This amount would be recognized in profit or loss at the same time as the hedged item affects profit
or loss in accordance with the normal accounting for hedge items.
40
A net position arising from a number of naturally offsetting hedged items was not eligible as a further
hedged item. Furthermore, groups of items were eligible only if all individual items had similar risk
characteristics and share the risk exposure designated as being hedged, with the fair value change
attributable to the hedged risk for each item having to be approximately proportional to the overall change
in the fair value of the group for the hedged risk.
51
net gain or loss on a single hedging instrument being grossed up and recognized in
different periods.41
Hedges of contracts to buy or sell non-financial items. Under IAS 39, contracts to buy or sell
a non-financial item that can be settled net in cash were subject to derivative accounting (and
hence measured at FVTPL). However, thanks to the so-called ‘own use’ scope exception,
such contracts were excluded from the scope of IAS 39 when they were held (since inception
and on a continuous basis) for the purpose of the receipt or delivery of the non-financial item
in accordance with the entity’s expected purchase, sale or usage requirements. In this case,
they were treated as normal sales or purchase contracts, and thus not recognized. The IASB
noted that this accounting treatment could lead to an accounting mismatch if an entity entered
into a derivative contract to hedge changes in the fair value or cash flows of contract subject
to the own use exception (e.g. a commodity supply contract). To address this problem, the
ED proposed to require measuring at fair value contracts that would otherwise be subject to
the scope exception if such accounting is in line with the entity’s business model and how it
actually manages those contracts (i.e. on a fair value basis). However, feedback on the ED
showed concerns about potential unintended consequences of this requirement.
Consequently, the final hedge accounting model dealt with the issue by allowing the use of
the fair value option.
2.13. Jan. 2011 - Supplement to ED/2009/12 Financial Instruments: Impairment
This Supplementary Document (SD) focused on developing a model for open portfolios of
financial assets measured at amortized cost (i.e. portfolios to which financial assets are added
and removed during on a regular basis), seeing that this was an operationally complex area.
Beware that the requirements in the final impairment model bear no resemblance to those
proposed in this SD.
41
Following criticism, the third restriction was not included in the final version of the general hedge
accounting model.
52
Very briefly, the SD proposed a revised impairment model with a two-tier loss allowance,
where financial assets managed in an open portfolio would be placed in two groups according
to their credit characteristics. In a so-called ‘good book’ group, the impairment model would
recognize the higher of a time-proportional amount of remaining lifetime expected credit
losses (the time proportionate allowance, TPA) or all expected credit losses for the
foreseeable future (the ‘floor’ amount, being a minimum of twelve months unless the
remaining expected life is shorter). For the ‘bad book’, the model would recognize the full
amount of remaining lifetime expected credit losses. Financial assets or groups of financial
assets would be included and transferred between the two groups in accordance with the
entity’s internal risk management, i.e. depending on whether the management objective
changes from receiving the regular payments from the debtor (good book) to just attempting
recovery under highly uncertain collectability.
Respondents did not strongly support the proposals in the SD [IFRS9.BC5.100]. A first
concern was the dual calculation (i.e. the ‘higher of’ test) for determining the allowance for
financial assets in the good book: such calculation was seen as operationally difficult,
conceptually weak, and confusing for users. Many also thought that some methods of
calculating the impairment allowance and the criteria for transferring assets between the two
books had not been explained clearly.
2.14. Nov. 2012 – ED/2012/4 Classification and Measurement: Limited Amendments to

IFRS 9
The proposals of this ED were introduced unchanged in the final version of IFRS 9 in July
2014. The ED proposed the introduction of a FVTOCI measurement category for financial
assets containing cash flows that are solely payments of principal and interests (the SPPI
criterion) and are held in a business model in which assets are managed both to collect
contractual cash flows and for sale (‘hold to collect and sell’). Interest revenue, foreign
currency gains or losses, and impairment losses would be recognized in profit or loss. All
other gains or losses would be instead accumulated in OCI, from which they would
53
eventually be reclassified to profit or loss upon derecognition or earlier in the case of

reclassifications. The FVTPL option would still be available on the usual terms, i.e. if such
designation eliminates or significantly reduces an accounting mismatch.
The FVTOCI category would thus provide the same information in profit or loss as when the
items are measured at amortized cost, but the asset would be reported at its fair value in the
statement of financial position. From another angle, the new category would provide the same
measurement outcome as the available-for-sale category for debt instruments in IAS 39, the
only differences arising from the new impairment requirements.
Requirements would be added for the reclassification of financial assets between

measurement categories, which previously was limited to debt instruments held at amortized
cost and FVTPL. When a financial asset is reclassified from amortized cost to FVTOCI, the
entity shall measure it at its fair value at the reclassification date, with any difference from
the amortized cost being recognized in OCI and no adjustment to the effective interest rate.
If the reclassification flows from FVTOCI to amortized cost, the asset is reclassified at its
fair value, adjusted with any accumulated gain or loss in OCI, and again with no adjustment
to the effective interest rate. If the asset is reclassified out of FVTPL to FVTOCI, its current
fair value becomes the new carrying amount. The same happens when an asset is reclassified
from FVTOCI to FVTPL, with any amount accumulated in OCI being reclassified to profit
or loss.
According to the proposal, sales of financial assets in the FVTOCI category would be
consistent with the objective of collecting contractual cash flows as long as such sales are
infrequent (even if significant) or insignificant in amount (even if frequent). Sales would also
be consistent with such business model if they are made close to maturity and the proceeds
amount approximately to the remaining contractual cash flows. If instead sales were both
frequent and significant in value, an assessment would be needed to determine whether such
sales are consistent with the objective of collecting contractual cash flows.42
42
With the removal of the tainting provision of IAS 39, sales of financial assets measured at amortized
cost category can be consistent with such category as long as they are both occasional and non-significant
54
Following the publication of the classification and measurement chapters of IFRS 9, the
IASB was demanded to give guidance on how to apply the contractual cash flow
characteristics test to debt instruments with an altered economic relationship between
principal and consideration for the time value and credit risk. This notably occurs in
instruments that contain an interest rate mismatch feature, i.e. an interest rate that is reset at
a frequency that does not match the tenor of the interest rate. This ED proposed to require an
entity to assess individually the assets with these features in order to determine whether the
contractual cash flows meet the SPPI criterion. The results of the assessment may be clear
with little or no analysis (e.g. if the contractual payments are indexed to variable not related
to time value of money or credit risk). In other cases, the entity should consider the cash
flows (benchmark cash flows) on a contract of the same credit quality and with the same
contractual terms but without the interest mismatch feature (the comparable instrument may
be real or hypothetical). If the asset under assessment results having cash flows that are more
than insignificantly different from the benchmark cash flows, then it does not meet the SPPI
criterion, and the entity could only measure it at FVTPL.
The ED also proposed clarifications for contractually linked instruments (tranches). First,
even if one such instrument is prepayable contingent on a specific event occurring in the
underlying pool of instruments, the ED suggests that its cash flows would still qualify for the
contractual cash flow characteristics test if they substantially represent unpaid amounts of
principal and interest. Secondly, even if the underlying pool includes instruments that are
collateralized by assets that do not meet the SPPI criterion, the contractually linked
instrument itself may still meet such criterion.
in amount. Note that the relative provisions for the FVTOCI measurement category discussed above are
broader (e.g. non-significant sales can be frequent).
55
2.15. Feb. 2013 – ED/2013/2 Novation of Derivatives and Continuation of Hedge

Accounting
This ED came as a response to the wave of legislative changes prompted by the G20 across
many jurisdictions. The common thread was to improve transparency and regulatory
oversight of OTC derivatives by requiring entities to clear all standardized OTC derivatives
contracts through a central counterparty (CCP) interposed between the original
counterparties. Under the proposals of the 2010 Hedge Accounting ED (and IAS 39), entities
would be required to discontinue hedge accounting if the hedging instrument was an OTC
derivative being novated to a CCP (unless this was contemplated in the original hedging
strategy), because the novation involves the termination of the original instrument. The IASB
believed that discontinuing such existing hedging relationships would not provide useful
information, seeing that the imposed legislation would not modify the economic relationship
of the hedge. This ED proposed that the novation of a derivative instrument to a CCP should
not entail the discontinuation of hedge accounting when the following conditions are met:
the novation is required by law or regulation;
the CCP becomes the new counterparty to each of the original parties; and
the changes in terms of the derivative are limited to those strictly necessary to validate
the novation. For instance, adjustment of collateral arrangements and of the charges
levied by the CCP would be allowed, while changes to the maturity date or contractual
cash flows would not.
The vast majority of respondents agreed with the proposed revisions [IFRS9.BC6.344].
Many suggested widening the scope of the exception to novation not required by law or
regulation. The IASB later confirmed that voluntary novation to a CCP should not be granted
the relief, unless done in anticipation of regulatory changes. Other respondents believed that
relief should be allowed not only to novation directly to a CCP, but also in the common case
of ‘indirect clearing’ to the CCP through one of its clearing members. This argument
convinced the IASB, who eventually allowed relief in such instances.
56
2.16. Mar. 2013 – ED/2013/3 Financial Instruments: Expected Credit Losses
The Expected Credit Losses ED built on and superseded the two previous proposals for a
forward-looking impairment model (the 2009 Amortized Cost and Impairment ED and its
2011 Supplementary Document), which focused on the impairment of financial assets
measured at amortized cost and open portfolios of such assets. Many of the requirements
proposed in this ED flowed into the final IFRS 9. The ED proposed a comprehensive
impairment model that would be applied to all items subject to impairment accounting,
meaning to:
financial assets measured at amortized cost or mandatorily measured at FVTOCI.
Loan commitments with an obligation to extend credit (unless measured at FVTPL).
Financial guarantee contracts to which IFRS 9 is applied (unless measured at
FVTPL).
Lease receivables within the scope of IAS 17 Leases.
Contract assets within the scope of ED/2010/6 Revenue from Contracts with
Customers.43
Under the proposals, an entity would recognize expected credit losses as a loss allowance
(for financial assets) or as a provision (for commitments to extend credit) with one of the
following approaches:
at an amount equal to 12-month expected credit losses (i.e. potential losses from a
default occurring in the next 12-months); or
at an amount equal to lifetime expected credit losses (i.e. potential losses from a
default occurring during the remaining life of the instrument).
An entity would be required to apply the latter to financial assets that have deteriorated
significantly in credit quality since initial recognition, purchased or originated credit-
impaired financial assets, and contract assets (e.g. trade receivable) that do not constitute a
financing transaction. An entity could also elect to apply such approach to trade receivables
43
By the time the impairment model was finalized in July 2014, the Revenue Recognition ED had been
finalized into the new IFRS 15 Revenue from Contracts with Customers.
57
that do constitute a financing transaction as well as to lease receivable. The first approach
would be applied to all other financial instruments.
Expected credit losses consist of the average of possible credit loss from default (even if
unlikely) weighted by the respective probabilities of occurrence and incorporating the time
value of money, informed by data that is available to the entity without undue cost or effort,
including past events, current conditions, and forecasts.
In order to reflect the time value of money, expected credit losses would be discounted to the
reporting date using a reasonable rate determined at initial recognition between the risk-free
rate and the asset’s effective interest rate or, in the case of a credit-impaired financial asset,
using its credit-adjusted effective interest rate.44 The effective interest rate is the rate that
discounts the expected cash flows back to the amortized cost at initial recognition (hence it
reflects expected cash flows that ignore expected credit losses), while the credit-adjusted
effective interest rate is calculated including expected credit losses.
Significant increase in credit risk. Under the proposals, an entity must recognize lifetime
expected credit losses on an item that has significantly increased in credit risk since initial
recognition. Nonetheless, if that item’s credit risk is still low at the reporting date, the entity
shall continue to measure only 12-month expected credit losses. Credit risk is low when there
is a low risk of default in the near term but adverse change in long-term circumstances may,
but not necessarily will, reduce the borrower’s ability to meet its contractual cash flows.45
Furthermore, for items other than purchased or originated credit-impaired instruments, the
entity can revert back to measuring 12-month expected credit losses if the significant increase
in credit risk has reversed in a subsequent reporting period. In addition, the ED includes a
rebuttable presumption that the credit risk has significantly increased when contractual
payments are more than 30 days past due.
44
The possibility to use any reasonable discount rate between the risk free rate and the asset’s effective
interest rate would not be included in the final impairment model in IFRS 9. Instead, IFRS 9 requires using
the asset’s effective interest rate or an approximation thereof.
45
The ED suggests that ‘investment grade’ rating may be an indicator of low credit risk.
58
Purchased or originated credit-impaired financial assets are those assets that have objective
evidence of impairment on initial recognition.46 Under the proposals, an entity would record
favorable changes in the credit risk of such assets as impairment gains even when the
resulting expected cash flows exceed those estimated at initial recognition.
Presentation of interest revenue. The ED proposed that for accounting purposes interest
revenue would be calculated differently depending on the impairment approach applied to
the asset. In the case of a financial asset that is credit-impaired when purchased or originated,
interest revenue is calculated by applying the credit-adjusted effective interest rate to the
amortized cost balance at initial recognition. For an instrument that is not credit-impaired
when purchased or originated and for which there is no objective evidence of impairment at
the reporting date, interest revenue is calculated by applying the effective interest rate to the
gross carrying amount (the ‘gross method’). If instead for such instrument there is objective
evidence of impairment, the effective interest rate is applied to the amortized cost balance
(the ‘net method’).47 If following a period of using the net method there is an improvement
of credit quality objectively related to the event which triggered the net method, the
calculation of interest revenue reverts to the gross method.
Disclosure. The proposals also included extensive disclosure requirements to be added to

IFRS 7 Financial Instruments: Disclosures, ensuring that an entity provide information about
its risk management practices and credit exposures.
2.17. Jun. 2013 - Novation of Derivatives and Continuation of Hedge Accounting

(Amendments to IAS 39)
Building on the knowledge of the ED issued earlier in the year and the feedback received,
the IASB issued an amendment to IAS 39, also applying to the relative chapter of IFRS 9
46
Such evidence includes information about significant financial difficulty of the issuer or borrower,
purchase of the asset at a deep discount, a breach of contract, fading of active market for that asset, etc.
47
Note that which of these interest rate methods (net or gross) is applied depends simply on the existence
of objective evidence of impairment (i.e. a deterioration in credit risk), whereas the divide between the
two impairment measurements (12-month or lifetime expected credit losses) is the existence of a
significant deterioration in credit risk.
59
proposed in the 2010 Hedge Accounting ED. The amendment stated that hedge accounting
should not be discontinued when the derivative hedging instrument is novated to one or more
clearing counterparties (CCP), who can be a central counterparty (sometimes called a
‘clearing organization’ or ‘clearing agent’), or one or more entities acting as indirect
counterparties to the central counterparty. The following conditions must be satisfied:
the instrument is novated in consequence of laws or regulations, or the introduction
of laws and regulations; and
the changes in terms of the derivative are limited to those strictly necessary for the
novation to occur.
The changes from the relative ED relate to when the novation is exempted from
discontinuation (i.e. not only when it is required by law or regulation, but also in anticipation
thereof), and with whom it can be undertaken (i.e. not only directly with a CCP, but also
indirectly).
2.18. Nov. 2013 - IFRS 9 (2013) General Hedge Accounting
The IASB finalized the third part of the project by issuing the chapter on hedge accounting,
as a matter of fact before the second part on impairment had been completed. Until the
finalization of the separate project on macro hedge accounting, which is still pending, entities
that apply IFRS 9 (both early adopters and not) are given an accounting policy choice as to
whether to apply the hedge accounting model of IAS 39 or IFRS 9.
Leaving the details of the general hedge accounting model to the next chapter, an outline of
its main aspects is briefly presented. The model maintains the three types of hedge accounting
in IAS 39 (cash flow, fair value, and net investment hedges), but the eligibility criteria for
both hedging instruments and hedging items have been broadened. The effectiveness test has
been transformed into a principle-based assessment. Other areas that underwent changes are
the accounting of forward contracts and derivative options. In general, the new model reflects
more closely risk management practices by allowing more judgment, and this greater
flexibility is counterbalanced by enhanced disclosure requirements.
60
Many of the hedge accounting requirements proposed in the 2010 ED transitioned unchanged
into the finalized version. The main modifications to the previous proposals involved the
following topics.
Accounting for the forward elements of derivatives. Feedback on the 2010 Hedge Accounting
ED convinced the IASB to extend the accounting treatment for the time value of options to
the accounting of the forward component of a derivative contract when only the spot element
of such contract is designated as the hedging instrument [IFRS9.BC6.414].48 Under IAS 39,
the changes in fair value of the undesignated forward element had to be recognized in profit
or loss on a fair value basis, thus giving rise to volatility. The IASB decided to provide an
alternative treatment similar to that for the time value of options, i.e. to allow the forward
element to be amortized, with the difference that here it is a choice rather than a
requirement.49
Note that depending on the type of forward contract, the forward element can have different
meanings. In a forward exchange contract, the so-called ‘forward points’ (i.e. the difference
of basis points between the spot rate and the forward rate) represent the interest differential
between the two currencies. In a forward interest rate agreement, the forward element reflects
the term structure of interest rates. In a commodity forward contract, the forward element
reflects the so-called ‘cost of carry’ (storage costs and the like) [IFRS9.BC6.416].
Hedging groups and net positions. All the relative amendments to IAS 39 proposed in the
2010 Hedge Accounting ED were adopted in the final hedge accounting model, short of the
restriction specific to cash flow hedge accounting. The proposed requirement (i.e. that hedge
accounting be available only if all offsetting cash flows affect profit or loss in the same
period) was criticized by many for not representing risk management practices. The IASB
48
It may be appropriate to designate only the spot element when the forward contract is used to hedge an
existing asset, for example inventory, which is exposed to changes in the spot price but not to forward rate
risk.
49
The reason for this difference is that options are typically used to hedge transactions that do not have a
time value component, whereas forward contracts are used to hedge items that typically have a
corresponding forward element. Hence, in the latter cases an entity may well desire to designate the
forward contract in its entirety (the so-called ‘forward rate method’). [IFRS0.BC6.418]
61
agreed to lift this requirement from the final model, but limited the use of cash flow hedges
of net positions to foreign currency risk.
Equity investments designated as at FVTOCI. The proposal to prohibit equity investments

designated as at FVTOCI from being elected as hedged items received criticism by
respondents. The IASB agreed that such restriction would not reflect actual risk management
practices and decided not to include it in the general hedge accounting model. Given that all
changes in fair value for these equity investments are permanently recognized in OCI, IFRS
9 requires that any hedge ineffectiveness be recognized in OCI too, with no reclassification
in profit or loss (this represent the only case where hedge ineffectiveness is allowed out of
profit or loss). Therefore, for such hedges both effective and ineffective fair value changes
are recognized in OCI.
Fair value hedge accounting. Due to lack of support, the proposals relative to fair value
hedging made in the 2010 Hedge Accounting ED (related to the presentation in OCI of the
effective portion of the hedge) were excluded from the final model, thus retaining the
requirement of IAS 39 to present all changes in profit or loss.
Hedging the credit risk component. Following feedback on the Hedge Accounting ED, the
IASB reconsidered the problems arising from not allowing hedge accounting for hedges of
credit risk components, on the basis that they would not meet the eligibility requirements
proposed in said ED. To solve such issue the IASB discussed several alternatives, and settled
on the one that allows entities to elect fair value accounting for the hedged credit exposure
[IFRS9.BC6.499-545]. The final hedge accounting model permits an entity to elect FVTPL
accounting for a credit exposure (for instance on loans, bonds, or loan commitments,
otherwise measured at amortized cost) that is hedged with a credit derivative (e.g. a credit
default swap) if certain qualifying criteria are met.50 An entity can elect the FVTPL option
for the entire nominal amount or for a component of nominal amounts, at inception or
50
The criteria are the following. 1) The name of the credit exposure matches the reference entity of the
credit derivative (‘name matching’); index-based credit default swaps do not meet this criterion. 2) The
seniority of the financial instrument matches that of the instruments that can be delivered in accordance
with the credit derivative.
62
subsequently; in the latter case, the difference between the carrying amount and fair value is
Hedging contracts to buy or sell a non-financial item. The final hedge accounting model
allows entities to use the fair value option also for contracts that meet the ‘own use’ scope
exception, if doing so eliminates or significantly reduces an accounting mismatch. This is
different from how the 2010 Hedge Accounting ED had proposed to solve the issue, i.e. by
requiring entities to measure such contracts at fair value if that reflected their risk
management practices.
2.19. Jul. 2014 - IFRS 9 (2014) Introduction of FVTOVI measurement and expected credit
losses model
The IASB issued the final version of IFRS 9 containing amendments to the measurement of
financial instruments and a new impairment model. The effective date is set on 1 January
2018, with early application allowed. Previous versions of IFRS 9 are superseded and may
no longer be early-adopted after 1 January 2015.
All content of the 2012 Limited Amendments ED was included unchanged in the final
Standard. The same is true for the 2013 Expected Credit Losses ED, except for a minor
change requiring that expected credit losses be discounted to the reporting date using the
asset’s effective interest rate or an approximation thereof instead of a reasonable rate between
the risk-free rate and the asset’s effective interest rate. The details will be discussed in the
next chapter.
63
Chapter III – The complete IFRS 9
The following paragraphs explain the requirements of the complete IFRS 9 Financial
Instruments, as issued in July 2014. References to the first chapter of this work are used
where the requirements of IAS 39 have been carried to the new Standard unchanged.
3.1. Effective date and transition
The Standard is effective for annual periods beginning on or after 1 January 2018, with early
application permitted. Early adopters shall apply all of the Standard’s requirements at the
same time; however, exceptions to this rule allow an entity to:
early-adopt only the own-credit requirements for financial liabilities;
early-adopt IFRS 9 but continue to apply the hedge accounting requirements from
IAS 39;
continue to apply a previous version of IFRS 9 if it has been early-adopted before 1
January 2015.
In practice, the possibility of early adoption is going to depend on local jurisdiction, for
instance, entities in the EU will have to wait for the final EU endorsement, which involves
deliberations by EFRAG, Accounting Regulatory Committee (ARC), EU Parliament and EU
Council. The final EU endorsement is expected to arrive in early 2016 (Il Sole 24 Ore, Sep.
2015).
In accordance with the transition requirements in IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors, entities shall apply IFRS 9 retrospectively, meaning that
64
the new requirements apply to existing items, transactions, and other events as if they had
always been applied.
Although the effective date is 1 January 2018, the transition date depends on whether the
entity opts to restate the comparatives in financial statements (i.e. the data that show the
results from the previous year). If in fact an entity decides to restate comparatives, it will
have to show financial information for 2017, so that will be the actual year of transition. It is
thought that most entities who make extensive use of financial instruments are unlikely to
engage in early application of the Standard [DEA.A2.168], although that will also depend on
what the market and competitors will do. Early application will be probably used by non-
financial entities eager to simplify hedge accounting practices.
3.2. Objective and scope
The objective of IFRS 9 is to establish principles for reporting of financial assets and financial
liabilities that will present relevant information and useful information to users of financial
statements for the assessment of the amounts, timing and uncertainty of an entity’s future
cash flows [IFRS9.1.1].
All financial instruments under the scope of IAS 39 (see Chp I - para 1.2) are also under the
scope of IFRS 9. In addition, the following provisions expand the scope of IFRS 9:
contracts to buy or sell non-financial items that can be settled net in cash (or another
financial instrument, or by exchanging financial instruments) and that were entered
into and continue to be held for the purpose of actual receipt or delivery of a non-
financial item (in accordance with the entity’s expected purchase, sale, or usage
requirements) may be irrevocably designated as measured at FVTPL [IFRS9.2.4].51
Such fair value option is available only at inception and only if it eliminates or
significantly reduces an accounting mismatch [IFRS9.2.5].
51
Such contracts were outside the scope of IAS 39 due to the so-called ‘own use’ exemption.
65
The impairment requirements of IFRS 9 apply to all loan commitments, even those
that are otherwise outside the scope of IFRS 9 [IFRS9.2.1].
The impairment requirements of IFRS 9 apply to rights and obligations within the
scope of newly-issued IFRS 15 Revenue from Contracts with Customers that are
financial instruments (‘contract assets’), when IFRS 15 so requires [IFRS9.2.1].
3.3. Recognition and derecognition
The recognition and derecognition requirements of IAS 39 are carried forward to IFRS 9
unchanged (see Chp I - para 1.3). However, IFRS 9 adds the following indications:
a write-off of a financial asset or portion thereof constitutes a derecognition event.
An entity shall directly reduce the gross carrying amount of a financial asset when it
has no reasonable expectation of recovering a financial asset or part thereof.
[IFRS9.5.5.4]
A renegotiation or modification of the terms of a financial asset in some
circumstances may lead to the derecognition of the existing financial asset and the
recognition of a new financial asset [IFRS9.B.5.5.25]. Substantial modification of a
distressed asset is given an example of a modification resulting in derecognition,
whereas the modification of the gross carrying amount of a loan by less than 30% is
an example of modification not resulting in derecognition. When the renegotiation or
modification does not result in the derecognition of the financial asset, the entity shall
recalculate the asset’s gross carrying amount and recognize a modification gain or
loss in profit or loss [IFRS9.5.4.3,5.5.12].
3.4. Classification and measurement
The requirements for the classification and subsequent measurement of financial assets (and
hence also the reclassification rules) are radically different from the corresponding
requirements in IAS 39. On the other hand, requirements for the initial measurement of
financial instruments, the subsequent treatment of financial liabilities, and the treatment of
66
embedded derivatives have been largely transposed to IFRS 9 with few (yet not insignificant)
modifications.
3.4.1. Initial measurement of financial instruments
The requirements for the initial measurement of financial instruments under IFRS 9 are the
same as under IAS 39 (see Chp I - para 1.4.1). The only novelty in IFRS 9 is that an entity
shall measure trade receivables at their transaction price (as defined in IFRS 15) if they do
not contain a significant financing component, or if the entity applies the ‘practical expedient’
in accordance with IFRS 15 [IFRS9.5.1.3].
3.4.2. Classification and subsequent measurement of financial assets
Financial assets within the scope of IFRS 9 are classified on the basis of both the entity’s
business model for managing the financial assets and their contractual cash flow
characteristics [IFRS9.4.1.1]. The three main measurement categories are:
a) amortized cost. A financial asset is subsequently measured at amortized cost if both
the following conditions are met [IFRS9.4.1.2]:
the financial asset is held within a business model whose objective is to hold
financial assets in order to collect contractual cash flows (‘hold to collect’);
the contractual terms of the financial asset give rise on specific dates to cash
flows that are solely payments of principal and interest on the principal
amount outstanding (the ‘SPPI’ criterion).
Financial assets measured at amortized cost are subject to impairment [IFRS9.5.2.2].
A gain or loss on financial assets measured at amortized cost shall be recognized when
the asset is derecognized, reclassified, or is subject to amortization or impairment
[IFRS9.5.7.2].
b) Fair value through other comprehensive income (FVTOCI). A financial asset is
subsequently measured at FVTOCI if both the following conditions are met
[IFRS9.4.1.2A]:
67
the financial asset is held within a business model whose objective is achieved
by both collecting contractual cash flows and selling financial assets (‘hold to
collect and sell’);
the SPPI criterion is met.
Gains and losses on assets in this category shall be recognized in OCI, except for
those arising for impairment or foreign exchange fluctuations, until the asset is
derecognized or reclassified. At that point, the cumulative gain or loss previously
recognized in OCI is reclassified to profit or loss as a reclassification adjustment
[IFRS9.5.7.10].
In addition, an entity may make at initial recognition an irrevocable election to
measure at FVTOCI an investment in an equity instrument otherwise measured at
FVTPL, provided that such instrument is neither held for trading nor contingent
consideration of an acquirer in a business combination to which IFRS 3 applies
[IFRS9.5.7.5]. Gains and losses on that instrument are presented in OCI; such
amounts may subsequently be transferred within equity, but never to profit or loss
[IFRS9.5.7.1,B5.7.1]. However, dividends on an equity instrument elected at
FVTOCI are recognized in profit or loss [IFRS9.5.7.6]. The general rule is that
dividends are recognized in profit or loss when all the following conditions are met:
1) the entity’s right to receive the payment is established, 2) it is probable that such
economic benefits will flow to the entity, and 3) their amount can be established
reliably [IFRS9.5.7.1A].
Financial assets measured at FVTOCI are subject to impairment [IFRS9.5.2.2].
c) Fair value through profit or loss (FVTPL). Any financial asset that is not measured
at amortized cost or FVTOCI shall be measured at FVTPL [IFRS9.4.1.4].
Additionally, in spite of previous requirements, an entity may irrevocably designate
any financial asset as measured at FVTPL under the fair value option, if doing so
eliminates or significantly reduces an accounting mismatch that would otherwise
arise from measuring assets or liabilities, or recognizing the gains and losses on them,
68
on different bases [IFRS9.4.1.5].52 An example of accounting mismatch is when an

asset and a liability that the entity considers related (i.e. whose risks give rise to
opposite changes in fair value) would be measured at amortized cost and at FVTPL,
respectively. In that case, the fair value option may be used to provide a common
measurement basis when, for instance, hedge accounting happens to not be available
[IFRS9.B4.1.29,B4.1.30].
Gains and losses on such assets are presented in profit or loss [IFRS9.5.7.1].
For financial assets that are initially recognized using settlement date accounting, any change
in fair value of the asset to be received during the period between the trade date and the
settlement date is not recognized for assets measured at amortized cost. For assets measured
at fair value, however, the change in fair value shall be recognized in profit or loss or in OCI.
[IFRS9.5.7.4]
Guidance on the business model criterion. An entity’s business model is not determined by
management’s intentions for an individual instrument, but rather by how groups of financial
assets are managed together to achieve a particular business objective [IFRS9.B4.1.2]. In
other words, the business model refers to how the entity in practice manages (and not merely
asserts to manage) groups or portfolios of financial assets in order to generate cash flows, i.e.
by collecting contractual cash flows, selling the assets, or both. Classification need not be
determined at the reporting entity level, and thus a single entity may use multiple business
models across its organization. The assessment of the business model is based on scenarios
that the entity reasonably expects to occur, thus not necessarily considering ‘worst case’ or
‘stress case’ scenarios [IFRS9.B4.1.2a]. The fact that the actual realization of the cash flows
differs from the entity’s expectations (as characterized in its business model) does not give
rise to a prior period error in the entity’s financial statements nor does it necessarily trigger
52
NB: under IAS 39 an entity can use the fair value option for financial assets when doing so provides
more useful information, because either i) it eliminates or significantly reduces an accounting mismatch,
or ii) a group of financial assets or liabilities or both is managed and its performance is evaluated on a fair
value basis in accordance with a documented risk management or investment strategy via which key
management personnel is informed. However, in IFRS 9, point ii) and the reference to ‘more useful
information’ are not present for financial assets, although they have been maintained in the fair value
option for financial liabilities.
69
any change to the classification of the remaining financial assets held in that business model
(like the ‘tainting provision’ under IAS 39) [IFRS9.B4.1.2a]. In particular, sales can be
consistent with a ‘hold to collect’ business model if they are infrequent (even if significant
in value) or insignificant in value both individually and in aggregate (even if frequent). If
those sales are both frequent and significant, the entity must assess their consistency with the
business model. In any case, the entity will take account of such events and all other relevant
information when it assesses the business model for new financial assets [IFRS9.B4.1.3b].
Guidance on the SPPI criterion: the principal is the fair value of a financial asset at initial
recognition, minus any principal repayments. Interest is the consideration for the time value
of money, credit risk, other lending risks (e.g. liquidity risk) and costs (e.g. administrative
costs) associated with holding the financial asset for a particular period of time, and it can
also include a profit margin. [IFRS9.4.1.3,B4.1.7]
Interest revenue is normally calculated by applying the effective interest rate53 to the gross
carrying amount54 (before deducting the provision) of the financial asset [IFRS9.5.4.1].
There are two exceptions:
for purchased or originated credit-impaired financial assets, the entity shall apply the
credit-adjusted effective interest rate55 to the amortized cost of the financial asset
since initial recognition.
For financial assets that have become credit-impaired after initial recognition, the
entity shall apply the effective interest rate to the amortized cost (i.e. the net amount)
of the financial asset in subsequent reporting periods. In this second case only, if the
credit risk on the financial asset improves (and the improvement can be related
objectively to an event occurring after the credit-impairment event) so that the
53
I.e. the rate that exactly discounts the estimated future cash flows through the expected life of a financial
asset or financial liability (considering all contractual terms, transaction costs, and all other premiums or
discounts, but not the expected credit losses) to the gross carrying amount of the financial asset or to the
amortized cost of the financial liability. [IFRS9.A]
54
I.e. the amortized cost of a financial asset, before adjusting for any loss allowance. [IFRS9.A]
55
I.e. the rate that exactly discounts the estimated future cash flows through the financial asset’s expected
life (considering all contractual terms, transaction costs, and all other premiums or discounts, as well as
expected credit losses) to the amortized cost of the asset. [IFRS9.A]
70
instrument is no longer credit-impaired, the entity shall return to measuring the

interest rate on the basis of the asset’s gross carrying amount [IFRS9.5.4.2].
3.4.3. Classification and subsequent measurement of financial liabilities
The classification and subsequent measurement requirements for financial liabilities under
IFRS 9 are almost identical to those in IAS 39 (see Chp I - para 1.4.3), with some minor
modification to adjust for changes in other requirements or Standards [IFRS9.4.2.2]:
there is no reference to derivative liabilities that are linked to and must be settled by
delivery of an equity instrument with no quoted market price (which under IAS 39
shall be measured at cost), given that such measurement category has been removed.
References to IAS 18 Revenue are instead made to the new IFRS 15 Revenue.
References to IAS 37 Provisions, Contingent Liabilities and Contingent Assets are
instead made to the new impairment section within IFRS 9.
The sole important modification relates to the fair value option for financial liabilities. The
eligibility conditions for the election remain the same, i.e. it is permitted when it results in
more useful information either:
because it eliminates an accounting mismatch that would otherwise arise; or
because a group of financial liabilities or a mixed group financial assets and financial
liabilities is managed and its performance is evaluated on a fair value basis in
accordance with a documented risk management or investment strategy via which
key management personnel is informed.
On the other hand, the way in which under IFRS 9 an entity shall present a gain or loss on
financial liabilities designated under the fair value option is new [IFRS9.5.5.7]:
the amount of change in fair value that is attributable to changes in credit risk of that
liability shall be presented in OCI. Such amounts may subsequently be transferred
within equity, but never to profit or loss [IFRS9.B5.7.9].
The remaining amount of change in the liability’s fair value shall be presented in
profit or loss.
71
However, if measuring the changes in a liability’s credit risk through OCI would create or
enlarge an accounting mismatch in profit or loss, an entity shall instead present all changes
in that liability’s fair value (including those arising from changes in credit risk) in profit or
loss [IFRS9.5.7.7,5.7.8]. Such assessment is made at initial recognition and cannot be
revised. For practical purposes, the entity need not enter into all of the assets and liabilities
giving rise to the mismatch at exactly the same time; a reasonable delay is permitted as long
as any remaining transaction is expected to occur [IFRS9.B5.7.7].
Despite the above requirements, all gains and losses on loan commitments and financial
guarantee contracts that are designated under the fair value option shall be presented solely
in profit or loss [IFRS9.5.7.9].
Guidance on credit risk. Credit risk, as defined in IFRS 7, is the risk that one party to a
financial instrument will cause a financial loss for the other party by failing to discharge an
obligation. It does not necessarily relate to the creditworthiness of the issuer of the liability;
for instance, a collateralized liability has lower credit risk than a non-collateralized one from
the same issuer [IFRS9.B5.7.13]. Similarly, credit risk is not the same as the performance
risk on a specific asset(s) related to the liability (e.g. when the contractual amount due on a
liability is determined on the basis of the performance of specific assets). In fact, asset-
specific performance risk is simply the risk that a specific asset or group of assets related to
a liability will perform poorly, but this need not influence the entity’s behavior on a particular
obligation (i.e. credit risk). The link between the asset(s) and the liability is established
contractually, and the entity’s ability to discharge its obligations is not influenced by events
contingent to such asset(s) [IFRS9.B5.7.14,B5.7.15].
The amount of change in the fair value of a financial liability that is attributable to changes
in its credit risk (which corresponds to the amount of change that is not attributable to changes
in market conditions that give rise to market risk) is determined either
[IFRS9.B5.7.16,B5.7.17,B5.7.19]:
using an internal rate of return calculation, when market risk for that liability is
significantly influenced only by benchmark interest rates; or
72
using an alternative method expected to represent more faithfully the change in credit
risk, when market risk for that liability is influenced also by the price of financial
instruments of other entities, commodity prices, foreign exchange rates, or indexes of
prices or rates.
3.4.4. Embedded derivatives
Hybrid contracts hosted by a financial asset within the scope of IFRS 9 shall always be
measured in their entirety according to the appropriate measurement requirements (rather
than possibly being bifurcated as under IAS 39) [IFRS9.4.3.2]. Conversely, if the host
contract is a financial asset outside the scope of IFRS 9 (e.g. insurance contract, lease
receivable), a financial liability (e.g. debt securities, loans) or a non-financial asset (e.g.
forward purchase contracts for goods and services), then the entity shall assess whether the
embedded feature requires separation. That assessment is similar to that of IAS 39, that is,
bifurcation must take place if all the following conditions are met [IFRS9.4.3.3]:
a) the economic characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host contract;56
b) a separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative; and
c) the hybrid instrument is not measured at fair value with changes in fair value
recognized in profit or loss (i.e. a derivative that is embedded in a financial liability
at fair value through profit or loss is not separated)57.
If an embedded derivative is separated, the host contract shall be accounted for in accordance
with the appropriate Standards [IFRS9.4.3.4].
Notwithstanding the above requirements, if a contract contains one or more embedded

derivatives and the host is not an asset within the scope of IFRS 9, an entity may designate
the entire hybrid contract as at FVTPL, unless [IFRS9.4.3.5]:
56
See the Application Guidance on IAS 39 para. AG30 and AG33 for many examples of when such
condition is or is not met.
57
Note that condition c) no longer refers to a derivative embedded in a financial asset at FVTPL, given
that such financial asset would be within the scope of IFRS 9.
73
the embedded derivative(s) does not significantly modify the cash flows that
otherwise would be required by the contract, or
it is clear with little or no analysis that separation of the embedded derivative is
prohibited (e.g. by law).
Furthermore, if the entity is unable to measure the embedded derivative separately either at
acquisition or at the end of a subsequent reporting period, it shall designate the entire hybrid
contract as at FVTPL [IFRS9.4.3.6].
3.4.5. Reclassifications
Under IFRS 9, financial assets shall be reclassified only if the objective of the entity’s
business model for managing those financial assets changes [IFRS9.4.4.1]. Reclassifications
only apply prospectively, and any previously recognized gains, losses or interest are not
restated [IFRS9.5.6.1]. An entity shall report reclassification events as follows:
a) if a financial asset is reclassified out of the amortized cost category and into the
FVTPL category, its fair value is measured at the reclassification date and the
difference between the previous amortized cost and the fair value shall be recognized
in profit or loss [IFRS9.5.6.2].
b) If a financial asset is reclassified out of the FVTPL category and into the amortized
cost category, its fair value at the reclassification date becomes its new gross carrying
amount. The effective interest rate is determined on the basis of the fair value at the
reclassification date [IFRS9.5.6.3,B5.6.2].
c) If a financial asset is reclassified out of the amortized cost category and into the
FVTOCI category, its fair value is measured at the reclassification date and the
difference between the previous amortized cost and the fair value shall be recognized
in OCI. The effective interest rate and the measurement of expected credit losses are
not adjusted as a result of the reclassification. [IFRS9.5.6.4]
d) If a financial asset is reclassified out of the FVTOCI category and into amortized cost
the category, its new carrying amount is the fair value at the reclassification date plus
or minus the cumulative gain or loss previously recognized in OCI (resulting in the
asset being measured as if it had always belonged to the amortized cost category).
74
This adjustment does not affect profit or loss and therefore is not a reclassification
adjustment. The effective interest rate and the measurement of expected credit losses
are not adjusted as a result of the reclassification. [IFRS9.5.6.5]
e) If a financial asset is reclassified out of the FVTPL category and into the FVTOCI
category, it continues to be measured at fair value. The effective interest rate is
determined based on the fair value at the reclassification date. [IFRS9.5.6.6,B5.6.2]
f) If a financial asset is reclassified out of the FVTOCI category and into the FVTPL
category, it continues to be measured at fair value. The cumulative gain or loss
previously recognized in OCI is reclassified to profit or loss as a reclassification
adjustment. [IFRS9.5.6.7]
Consistently with its decision to retain most of the requirements from IAS 39 for the
measurement of financial liabilities, the IASB decided to retain also the prohibition to
reclassify financial liability between amortized cost and fair value [IFRS9.4.4.2,BC4.121].
3.5. Impairment
IFRS 9 introduces a single general impairment model that applies to all assets subject to
impairment. Only two special cases depart from the general impairment model, namely
purchased or originated credit-impaired assets and the group composed of trade receivables,
contract assets and lease receivables. The Standard requires entities to recognize impairment
losses on all financial assets from the moment of initial recognition; this is very different
from IAS 39, under which impairment losses were recognized only after the loss event had
occurred.
3.5.1. General approach
Under the general impairment approach, an entity shall recognize a loss allowance for
expected credit losses on [IFRS9.5.5.1]:
a) financial assets measured at amortized cost;
b) financial assets measured at FVTOCI;
75
c) lease receivables within the scope of IAS 17;

d) contract assets within the scope of IFRS 15;
e) financial guarantees contracts that are within the scope of IFRS 9 and not measured
at FVTPL;
f) loan commitments (even outside the scope of IFRS 9) that are measured at FVTPL.
Equity investments, on the other hand, are no longer subject to impairment, because they are
measured at either FVTOCI (with no reclassification of any fair value gains or losses to profit
or losses) or FVTPL. The IAS 39 requirement for equity investments to be impaired if there
is a significant and prolonged decline in their fair value below cost had in fact proved difficult
to apply (KPMG, Dec. 2009).
At the reporting date, an entity shall assess whether the credit risk on an instrument has
increased significantly since initial recognition and behave as follows:
if lifetime credit risk (i.e. the likelihood or risk of a default occurring [IFRS9.B5.5.7])
has not increased significantly since initial recognition, the entity shall measure for
that instrument a loss allowance at an amount equal to 12-month expected credit
losses [IFRS9.5.5.5], which are the portion of lifetime expected credit losses on the
financial instrument that will result if a default occurs in the 12 months after the
reporting date, weighted by the probability of that default occurring. Thus, 12-month
expected credit losses are neither the losses on only the financial instruments expected
to default within the next 12 months, nor the amount of cash shortfalls that are
predicted over the next 12 months [IFRS9.B5.5.43].
On the other hand, if the credit risk on the instrument did increase significantly since
initial recognition, the entity shall measure the loss allowance at an amount equal to
lifetime expected credit losses [IFRS9.5.5.3]. At a subsequent reporting date, the
measurement of lifetime expected losses shall be discontinued and the 12-month
measurement resumed if the entity determines that the increase in credit risk (if any)
since initial recognition has reverted to non-significant levels [IFRS9.5.5.7].
For loan commitments and financial guarantee contracts, the relevant date for assessing the
increase in credit risk is that when the entity took on the irrevocable commitment
76
[IFRS9.5.5.6]. For these two kinds of items, what is being assessed is, respectively, the
changes in the risk of a default occurring on the loan toward which the entity is committed,
and the changes in the risk that the guaranteed debtor will default [IFRS9.5.5.8].
As a simplifying provision, the Standard allows an entity to assume that the credit risk has
not increased significantly if the credit risk is considered low at the reporting date
[IFRS9.5.5.10]. On the other hand, a rebuttable presumption that credit risk has increased
significantly since initial recognition shall operate when contractual payments are more than
30 days past due [IFRS9.5.5.11].
At each reporting date, the amount of the change in expected credit losses (whether measured
at 12-month or over the instrument’s lifetime) shall be recognized in profit or loss as an
impairment loss or gain [IFRS9.5.5.8].
3.5.2 Determining significant increases in credit risk
The entity shall assess whether the instrument’s lifetime credit risk has increased
significantly since initial recognition by considering reasonable and supportable information
about past events, current condition and forecasts of future economic conditions that is
available without undue cost or effort [IFRS9.5.5.9,B5.5.49]. When evidence of significant
increases in credit risk is not available at the individual instrument level, it may be
appropriate to perform the assessment on a collective basis (e.g. on a group or sub-group of
financial instruments) to ensure that any significant increase in credit risk does not go
undetected [IFRS9.5.5.4,B5.5.1]. For the purpose of the assessment, the entity shall look at
the change in the overall risk of a default occurring rather that the change in the amount of
expected credit losses. It follows that the significance of the change in credit risk depends on
the level of credit risk at initial recognition: the same increase in credit risk in absolute terms
will be more significant for an item with a lower initial credit risk compared to one with a
higher initial credit risk [IFRS9.B5.5.9]. The definition of default should be the one used by
the entity for internal credit risk management purposes for the relevant financial instrument,
although there is a rebuttable presumption that default has occurred when payments are 90
days past due [IFRS9.5.5.9,B5.5.37].
77
The change in credit risk over the next 12 months may be in some circumstances a reasonable
proxy for the change in the instrument’s lifetime credit risk. Instances in which such proxy
may not be appropriate include when:
recorded default patterns for similar instruments have been concentrated at a specific
point during the instrument’s expected life that is beyond the 12-month horizon.
The financial instrument has significant payment obligations only beyond the 12-
month horizon.
Changes in relevant credit-related factors (e.g. macroeconomic changes) have an
impact on the instrument’s credit risk beyond 12 months [IFRS9.B5.5.13,B5.5.14].
It should finally be noted that, all other things being equal, the longer the instrument’s
expected life (i.e. the longer an entity expects to hold a financial instrument) the more risk
there is of a default occurring over its expected life [IFRS9.B5.5.10]. Hence, as an
instruments approaches maturity, its overall credit risk should diminish in absolute terms; if
it does not, that may actually indicate an increase in credit risk since initial recognition
[IFRS9.B5.5.11].
3.5.3. 1st special case: purchased or originated credit-impaired assets
For assets that are credit-impaired at initial recognition, an entity shall always measure the
loss allowance at an amount equal to lifetime expected credit losses [IFRS9.5.5.13]. At each
reporting date, the amount of the change in lifetime expected credit losses shall be recognized
in profit or loss as an impairment loss or gain. Favorable changes in lifetime expected credit
losses can fall below the amount of expected credit losses that was recognized initially
[IFRS9.5.5.14].
3.5.4. 2nd special case: trade receivables, contract assets and lease receivables
According to the so-called ‘simplified approach,’ an entity shall always measure the loss
allowance at an amount equal to lifetime expected credit losses for [IFRS9.5.5.15]:
a) trade receivables or contract assets that result from transactions that are within the
scope of IFRS 15 and that:
78
do not contain a significant financing component, or when the entity uses a

practical expedient in accordance with IFRS 15 (e.g. the calculation of
expected credit losses on trade receivables using a provision matrix
[IFRS9.B5.5.35]); or
contain a significant financing component, if the entity chooses as its
accounting policy to measure the loss allowance at an amount equal to lifetime
expected credit losses. That accounting policy shall be applied to all such trade
receivables or contract assets but may be applied separately to trade
receivables and contract assets.
b) Lease receivables, if the entity chooses as its accounting policy to measure the loss
allowance at an amount equal to lifetime expected credit losses. Such accounting
policy may be applied separately to finance and operating lease receivables.
3.5.5. Guidance on expected credit losses
Expected credit losses are a probability-weighted estimate amount of cash shortfalls on the
financial instrument, calculated by using a range of possible outcomes and taking account of
the time value of money [IFRS9.5.5.17]. A credit loss on a financial asset is the present value
of the difference between the cash flows contractually due to the entity and those expected
to be actually received [IFRS9.B5.5.29]. For a loan commitment, a credit loss is the present
value of the difference between the contractual cash flows that would be contractually due to
the entity if the holder of the loan commitment draws down the loan and those expected to
be actually received [IFRS9.B5.5.30]. For a financial guarantee contract, a credit loss is the
expected payments to reimburse the holder in case it incurs in a loss, less any amounts the
entity expects to receive from the holder’s debtor or any other party [IFRS9.B5.5.32].
Expected credit losses shall be discounted to the reporting date, typically using the effective
interest rate determined at initial recognition or an approximation thereof [IFRS9.B5.5.44].
However, expected losses shall be discounted differently in the following cases:
a) for financial instruments with a variable interest rate, using the current (i.e. re-
estimated) effective interest rate [IFRS9.B5.5.44].
79
b) For purchased or originated credit-impaired financial assets, using the credit-

adjusted interest rate determined at initial recognition [IFRS9.B5.5.45].
c) For lease receivables, using the same discount rate used according with IAS 17
[IFRS9.B5.5.46].
d) For loan commitments, using the effective interest rate, or approximation thereof,
that would be applied on recognition of the asset [IFRS9.B5.5.47].
e) For financial guarantee contracts or loan commitments for which the effective
interest rate cannot be determined, using the discount rate that reflects the current
market assessment of the time value of money and the risks specific to those cash
flows, but only if and to the extent that the risks are taken into account by adjusting
the discount rate instead of the cash flows being discounted [IFRS9.B5.5.48].
The estimate of expected cash shortfalls shall reflect the cash flows expected from collateral
and other credit enhancements (if any) that are part of the contractual terms and are not
recognized separately by the entity [IFRS9.B5.5.55].
The entity shall use reasonable and supportable information about past events, current
conditions and forecasts of future economic conditions that is available without undue cost
or effort. The range of possible outcomes does not include every possible scenario, but should
always include at least one scenario in which a credit loss occurs (even if it is highly unlikely)
and one in which no credit loss occurs. [IFRS9.5.5.18,B5.5.28]
3.5.6. Modifications
A modification or renegotiation of a financial asset’s cash flows can lead to the derecognition
of the existing financial asset and the recognition of a new one. The initial loss allowance for
the new asset shall usually be measured at an amount equal to 12-month expected credit
losses; in some unusual circumstances there may be evidence that the modified financial asset
is credit-impaired at initial recognition, requiring lifetime expected credit losses to be
measured. This might occur, for example, when the substantial modification involved a
distressed financial asset. [IFRS9.B5.5.26]
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3.6. Hedge accounting
IFRS 9 maintains the overall structure and several requirements from IAS 39, despite
generally allowing hedge accounting under more circumstances. Unlike IAS 39, IFRS 9
explicitly states the objective of hedge accounting: it should represent in financial statements
the effect of an entity’s risk management activities that use financial instruments to manage
exposures arising from particular risks that could affect profit or loss, or OCI (in the case of
investments in equity instruments that the entity elected as measured at FVTOCI). Allowing
insight into the purpose and effect of actual risk management activities is therefore the main
goal of these requirements [IFRS9.6.1.1]. Hedge accounting remains an accounting choice
as under IAS 39.
3.6.1. Types of hedging relationships
IFRS 9 largely maintains unaltered the possible types of hedging relationships from IAS 39
(see Chp I – para 1.6.3) [IFRS9.6.5.2]:
a) fair value hedge, which offsets an exposure to changes in fair value of a recognized
asset or liability or an unrecognized firm commitment, or a component of any such
item58, that is attributable to a particular risk that could affect profit or loss (or OCI,
when the hedged item is an equity instrument elected at FVTOCI [IFRS9.6.5.3]).
b) Cash flow hedge, which offsets an exposure to variability in cash flows that 1) is
attributable to a specific risk of a recognized asset or liability or a highly probably
forecast transaction (or an identified portion of those items) and 2) could affect profit
or loss.
c) Hedge of a net investment in a foreign operation, as defined in IAS 21.
As under IAS 39, a hedge of the foreign currency risk of a firm commitment may be
accounted for as either cash flow hedge or a fair value hedge [IFRS9.6.5.4].
58
IAS 39 allowed components only for assets.
81
3.6.2. Hedging instruments
Derivatives measured at FVTPL can normally be designated as hedging instruments, except

for some written options (for the same reasons presented in IAS 39, see Chp I – para 1.6.1)
[IFRS9.6.2.1]. Embedded derivatives cannot be designated as separate hedging instrument if
they are not accounted for separately from the host contract [IFRS9.N6.2.1].
A non-derivative financial asset measured at FVTPL (i.e. a cash instrument) may also be
designated as a hedging instrument.59 For a hedge of foreign currency risk, the foreign
currency component of a non-derivative financial asset may be designated as a hedging
instrument unless it is an investment in an equity instrument that has been elected as at
FVTOCI. [IFRS9.6.2.2]
A non-derivative financial liability measured at FVTPL (i.e. a cash instrument) may be

designated as a hedging instrument unless it is a financial liability elected under the fair value
option (for which changes in fair value attributable to changes credit risk are presented in
OCI). For a hedge of foreign currency risk, the foreign currency component of a non-
derivative financial liability may be designated as a hedging instrument. [IFRS9.6.2.2]
The designation of items relating to parties internal to the entity (internal derivatives) as
hedging instruments is regulated in the same way as under IAS 39 (see Chp I – para 1.6.1)
[IFRS9.6.2.3].
A derivative instrument that combines a written option and a purchased option (e.g. an
interest rate collar) may be designated as a hedging instrument provided it is not, in effect, a
net written option (unless it is designated as an offset to a purchased option, including one
that is embedded in another financial instrument) [IFRS9.6.2.6,B6.2.4]. In addition, an entity
may jointly designate as the hedging instrument any combination of derivatives and non-
derivatives, or proportion of such items, provided they are not, in combination, a net written
option (unless they are designated as an offset to a purchased option) [IFRS9.6.2.5,6.2.6].
59
Under IAS 39, non-derivative financial assets or liabilities could be designated as hedging instruments
only in hedges of foreign currency risk.
82
An entity normally designates a hedging instrument in its entirety in a hedging relationship.

Exceptions are permitted when the entity separates [IFRS9.6.2.4]:
a) the intrinsic value and time value of an option contract and designates as the hedging
instrument only the intrinsic value, treating the time value as a ‘cost of hedging’;
b) the forward element and the spot element of a forward contract and designates as the
hedging instrument only the spot element;
c) the foreign currency basis spread, excluding it from the designation of a financial
instrument as the hedging instrument. Foreign currency basis spread are found in
cross-currency swaps and can be considered a charge to convert one currency into
another; or
d) when it designates as the hedging instrument only a proportion of the entire
instrument, such as 50% of its nominal amount. Designating only changes in fair
value relating to a portion of the instrument’s life is not permitted.
The way in which an entity accounts for the time value of options depends on whether the
hedged item is transaction related or time-period related [IFRS9.6.5.15]:
for transaction related hedged item, the change in the option’s time value shall be
recognized in OCI to the extent that it is effective (i.e. it relates to the hedged item)
and shall be accumulated in a separate component of equity. The cumulative amount
in equity shall be subsequently accounted for in the same way as the cumulative
amount in the cash flow hedge reserve (see para 3.6.6).
For time-period related hedged item, the change in the option’s time value shall be
recognized in OCI to the extent that it is effective and shall be accumulated in a
separate component of equity. That amount shall be amortized to profit or loss as a
reclassification adjustment on a systematic and rational basis over the period during
which the hedge adjustment for the option’s intrinsic value could affect profit or loss
(or OCI, when the hedged item is an equity instrument elected at FVTOCI).
The separate accounting of the forward element of forward contracts and of foreign currency
basis spreads is similar to that relating to the time value of options [IFRS9.6.5.16].
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3.6.3. Hedged items
A hedged item can be a recognized asset or liability, an unrecognized firm commitment, a

forecast transaction or a net investment in a foreign operation. It can be a single item or a
group of items, or a component of such item or group of items [IFRS9.6.3.1]. The hedged
item must be reliably measurable, and if it is a forecast transaction it must also be highly
probable [IFRS9.6.3.2,6.3.3]. In addition, an item or group of items and a derivative can be
viewed as an aggregated exposure that may be designed as a hedged item; a forecast
transaction of such aggregated exposure may also be designed as a hedged item
[IFRS9.6.3.4]. As for hedging instruments, the designation of items relating to parties
internal to the entity as hedged items is regulated in the same way as under IAS 39 (see Chp
I – para 1.6.2) [IFRS9.6.3.5,6.3.6].
A firm commitment to acquire a business combination cannot be a hedged item except for
foreign currency risk, because the other risks cannot be specifically identified and measured
since they are general business risks [IFRS9.B6.3.1]. An equity method investment cannot
be a hedged item in a fair value hedge because the equity method recognizes in profit or loss
the investor’s share of the associate’s profit or loss, rather than changes in the investment’s
fair value. The same applies to an investment in a consolidated subsidiary [IFRS9.B6.3.2].
An entity may designate as the hedged item in a hedging relationship an item (or group of
items) in its entirety or one of the following components [IFRS9.6.3.7]:
only changes in the item’s cash flows or fair value attributable to a specific risk or
risks (i.e. a risk component), including changes above or below a specified price or
other variable (i.e. a one-sided risk), provided that such risk component is separately
identifiable and reliably measurable. This is now possible also for non-financial
items, whereas under IAS 39 only their foreign currency risk can be separately
designated as the hedged item.
One or more selected contractual cash flows.
A component of a nominal amount that is either a proportion of an entire item (e.g.
50% of the contractual cash flows of a loan) or a layer component (e.g. a bottom
layer) [IFRS9.B6.3.16].
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For the designation of a group of items (including one that constitutes a net position) as the
hedged item to be possible, all the following conditions must be met [IFRS9.6.6.1]:
a) it consists of items (including components of items) that are individually eligible as
hedged items;
b) the items in the group are managed as a group (or as a net position) for actual risk
management purposes and not just to achieve a particular accounting outcome; and
c) in the case of a cash flow hedge of a group of items whose variabilities in cash flows
are not expected to be approximately proportional to the overall variability in cash
flows of the group, so that offsetting positions arise, it can only be a hedge of foreign
currency risk and the designation of that net position specifies the reporting period in
which the forecast transactions are expected to affect profit or loss, as well as their
nature and volume.
For the designation of a component of nominal amount as the hedged item to be possible, it
must be consistent with the entity’s risk management objective [IFRS9.6.6.2]. A layer
component of a group of items is eligible only if:
a) it is separately identifiable and reliably measurable;
b) the risk management objective is to hedge that layer component;
c) the items in the overall group are all exposed to the same risk, so that the measurement
of the hedged layer is not significantly affected by which particular item from the
overall group form part of the hedged layer;
d) for a hedge of existing items, the entity must be able to identify and track the overall
group of items from which the hedged layer is defined; and
e) any items in the group that contain prepayment options meet the requirements from
components of a nominal amount.
IFRS 9 lifts the absolute ban in IAS 39 about separately designating as the hedged item a
non-contractually specified inflation component of a financial instrument. Instead of the ban,
the Standard places a rebuttable presumption that unless the inflation component is
contractually specified, it cannot be designated as the hedged item [IFRS9.B6.3.13]. The
assumption may be rebutted when there is a market for similar instruments with sufficient
85
volume, term structure and liquidity that allows constructing a term-structure of zero coupon
real interest rates, which in turn allows measuring the inflation component of the instrument
[IFRS9.B6.3.14].
3.6.4. Qualifying criteria for hedge accounting
A hedging relationship qualifies for hedge accounting under IFRS 9 if all the following
criteria are met [IFRS9.6.4.1]:
a) the hedging relationship consists only of eligible hedging instruments and eligible
hedged items.
b) At the inception of the hedge, there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for
undertaking the hedge.60
c) The hedge must meet the hedge effectiveness requirements. The level of hedge
effectiveness is the extent to which changes in the fair value or cash flows of the
hedging instrument offset the changes of the hedged item; hedge ineffectiveness is
the reverse [IFRS9.B6.4.1]. The effectiveness requirements for hedge accounting,
which must be assessed at inception of the relationship and on an ongoing basis (i.e.
at each reporting date or upon a significant change in circumstances, if earlier)
[IFRS9.B6.4.12], are the following:
there is an economic relationship between the hedged item and the hedging
instrument, meaning that they have values that usually move in the opposite
direction because of the same, hedged risk [IFRS9.B6.4.4]. Occasional
movements in the same direction can be consistent with the existence of an
economic relationship [IFRS9.B6.4.6].
The effect of credit risk does not dominate the value changes that result from
that economic relationship. In fact, even if there is a an economic relationship
between the hedged item and the hedging instrument, the level of offset might
60
The documentation shall include identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s
effectiveness.
86
become erratic if the relevance of credit risk on any of those items is far
greater than risk being hedged [IFRS9.B6.4.7].
The hedge ratio of the hedging relationship is the same as that resulting from
the quantity of the hedged item actually hedged and the quantity of the
hedging instrument actually used for hedging purposes. However, that
designation shall not reflect an imbalance between the weightings of the
hedged item and the hedging instrument that would create hedge
ineffectiveness that could result in an accounting outcome inconsistent with
the purpose of hedge accounting.
Rebalancing. If a hedging relationship ceases to meet the effectiveness requirement related

to the hedge ratio, but the risk management objective for that designated hedging relationship
remains the same, the entity shall adjust the hedge ratio so that it meets the qualifying criteria
again [IFRS9.6.4.5]. It can do so by increasing the weighting of the hedged item or of the
hedging instrument via modifications of their relative volumes [IFRS9.B6.5.16].
3.6.5. Accounting for fair value hedges
A qualifying fair value hedge shall be accounted for as follows [IFRS9.6.4.8].

The gain or loss on the hedging instrument shall be recognized in profit or loss (or
OCI, when the hedged item is an equity instrument elected at FVTOCI).
The hedging gain or loss on the hedged item shall adjust the carrying amount of the
hedged item (if applicable) and be recognized in profit or loss. If the hedged item is
a financial asset (or a component thereof) measured at FVTOCI, those gain or loss
shall be recognized in profit or loss. If the hedged item is an equity instrument elected
at FVTOCI, the gain or loss shall remain in OCI. Finally, if the hedged item is an
unrecognized firm commitment (or a component thereof), the cumulative change in
its fair value is recognized as an asset or liability with a corresponding gain or loss
Any adjustment arising in the second case above shall be amortized to profit or loss if the
hedged item is a financial instrument measured at amortized cost [IFRS9.6.4.10].
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3.6.6. Accounting for cash flow hedges
A qualifying cash flow hedge shall be accounted for as follows [IFRS9.6.4.11].

a) The separate component of equity associated with the hedged item (cash flow hedge
reserve) is adjusted to the lower of 1) the cumulative gain or loss on the hedging
instrument from inception of the hedge, and 2) the present value of the cumulative
change in the hedged expected future cash flows.
b) The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge (i.e. the portion that is offset by the change in the cash flow hedge
reserve) shall be recognized in OCI.
c) Any remaining gain or loss on the hedging instrument (or any amount required to
balance the cash flow hedge reserve) is hedge ineffectiveness and shall be recognized
in profit or loss.
The amount accumulated in the cash flow hedge reserve shall be accounted for as follows
[IFRS9.6.4.11].
If the hedged forecast subsequently results in the recognition of a non-financial asset
or a non-financial liability, or it becomes a firm commitment to which fair value
hedge accounting is applied, the entity shall remove the accumulated amount from
the cash flow hedge reserve and include it directly in the initial cost or other carrying
amount of the asset or liability. This is not considered a reclassification adjustment,
and hence it does not affect OCI.
For all other cash flow hedges, the cumulative amount shall be reclassified to profit
or loss as a reclassification adjustment in the same period(s) during which the hedged
expected cash flows affect profit or loss. However, if that amount is a loss which is
not expected to be recovery entirely in future periods, the entity shall immediately
reclassify the amount that is not expected to be recovered into profit or loss as a
reclassification adjustment.
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3.6.7. Accounting for hedges of a net investment in a foreign operation
These type of hedges, including hedges of a monetary item accounted for as part of the net
investment, shall be accounted for similarly to cash flow hedges. The portion of the gain or
loss on the hedging instrument that is determined to be an effective hedge shall be recognized
in OCI, and the ineffective portion shall be recognized in profit or loss [IFRS9.6.5.13].
3.6.8. Discontinuation of hedge accounting
An entity shall discontinue hedge accounting prospectively only when the qualifying criteria
are no longer met (after taking into account any rebalancing, if applicable) by a hedging
relationship in its entirety or a portion of it [IFRS9.6.4.6]. This includes instances when the
hedging instrument is sold, terminated or exercised. However, the rollover or replacement of
a hedging instrument does not lead to the discontinuation of hedge accounting if such
operation is part of the entity’s documented risk management objective. In addition, there is
no expiration or termination of the hedging instrument if both following conditions are met:
as a consequence of laws or regulations or their forthcoming introduction, the parties
to the hedging instrument agree to interpose between them one or more of clearing
counterparties, i.e. a central counterparty (CCP, or ‘clearing agency’) or another
entity (e.g. a clearing member of the CCP), provided the CCP is the ultimate clearing
party.
Changes to the hedging instrument are limited to those strictly necessary to effect the
replacement of the counterparty, such as changes in collateral requirements, rights to
offset receivables and payables balances, and charges levied.61
When hedge accounting is discontinued for a cash flow hedge, the entity shall account for
the amount that has been accumulated in the cash flow hedge reserve as follows
[IFRS9.6.5.12].
If the (previously) hedged future cash flows are still expected to occur, that amount
shall remain in the cash flow hedge reserve until the future cash flows occur or until
the entity expects not to be able to recover the loss in future periods. When the future
61
Note that the entity is not allowed to simply revoke hedge accounting as was possible under IAS 39.
89
cash flows occur, the amount accumulated in the cash flow hedge reserve shall be
accounted for as described in para 3.6.6.
If the (previously) hedged future cash flows are no longer expected to occur, that
amount shall be immediately reclassified to profit or loss as a reclassification
adjustment.
On the total or partial disposal of a hedged net investment in a foreign operation, the
cumulative gain or loss on the hedging instrument relating to the effective portion of the
hedge shall be reclassified from OCI to profit or loss as a reclassification adjustment
[IFRS9.6.5.14].
90
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Chapter IV – IFRS 9: a change for the better?
4.1. Technical assessment of IFRS 9
A study of EFRAG assessed that IFRS 9 meets the technical criteria for EU endorsement62
for the adoption of international reporting Standards: “the information resulting from the
application of IFRS 9 is appropriate both for making economic decisions and assessing the
stewardship of managers” [DEA.A2.3]. IFRS 9 overall respects the true and fair view
criterion across all areas,63 leads to prudent accounting, and satisfies all technical criteria,
including relevance, reliability, comparability, and understandability [DEA.A2.4].
More specifically, with respect to relevance,64 EFRAG concluded that IFRS 9 overall leads
to the provision of relevant information and generally endorsed the trade-offs made by the
IASB between relevance and simplicity or reliability [DEA.A2.117]; nonetheless, EFRAG
pointed out some parts where, in their opinion, IFRS 9 could have been better Standard. For
instance:
instruments for which under certain conditions (e.g. insolvency of the debtor)
payments do not have to be made and no interest accrues on the deferred amount are
not considered by IFRS 9 as satisfying the SPPI criterion. Some subordinated
instruments may present such additional feature, but subordination alone does not
preclude amortized cost measurement. EFRAG suggested that measuring those
instruments at amortized cost would provide more relevant information, given that
they are generally seen as basic lending agreements, at least until the conditions
62
As set out in the Regulation (EC) No 1606/2002.
63
A set out in Art. 4(3) of Council Directive 2013/34/EU.
64
Information is relevant when it helps users to make economic decisions.
92
referred to above occur, thence making fair value measurement more relevant
[DEA.A2.14(b)].
Under IFRS 9, modifications of contractual cash flows always lead to the recognition
of any modification gain or loss in profit or loss, even when the terms are modified
due to commercial reasons rather than credit deterioration. EFRAG believes that in
some cases relevance could be enhanced by not recognizing modification gain or loss
for commercial renegotiations, as this could be considered as accounting for an
opportunity loss [DEA.A2.17,19].
IFRS 9 offers the possibility to present changes in the fair value of equity instruments
in OCI unless the instrument is held for trading. Under the election, gains and losses
(including impairment) never enter profit or loss, except for dividends. According to
EFRAG, this unique accounting treatment may limit the relevance of information
provided, especially if such gains and losses would be viewed as indicative of the
performance of the investor and useful for assessing stewardship, as may be the case
for long-term investors [DEA.A2.36,37].
It is important to highlight that the expected credit losses model clearly leans toward
over-impairment in most circumstances, although EFRAG endorses such innovation
as providing relevant information to users [DEA.A2.59].
With respect to reliability,65 EFRAG assesses IFRS 9 as providing reliable information and
improving disclosure requirements [DEA.A2.136]. Still, EFRAG highlights some
circumstances requiring a high degree of judgment by the entity, thus possibly weakening
the reliability of information. In particular:
the classification of financial assets, which is based on the assessment of the business
model for those assets and their cash flow characteristics, will often be unambiguous.
However, in some cases the implementation of the SPPI criterion will require
judgment to ensure that the proper measurement category (amortized cost or
FVTOCI) is identified. This is the case where contractual provisions have the
65
Information is reliable when it is free from material error and bias, it faithfully represents what is being
described, and it is complete within the bounds of materiality.
93
potential to change the timing and/or amount of the contractual cash flows, even
though the Standard does provide substantial guidance on the matter.
Entities will have to use judgment to determine whether there has been a substantial
increase in credit losses, i.e. the trigger event for the recognition of lifetime credit
losses. Such assessment will also be influenced by what information is available to
the entity without undue cost or effort.
Although IFRS 9 states that the business model is based on facts, it also acknowledges
that judgment is needed to assess the reasons, frequency, timing and significance of
sales activity. Despite the guidance in IFRS 9 stating, among other things, that
changes in business models are expected to be very rare, some authors argued that
the ‘business model’ concept is too ambiguous and hence leaves too much judgment
in the hands of preparers (Page, Oct. 2012).
With regard to comparability,66 EFRAG affirmed that IFRS 9 on the whole will improve the
comparability of information and endorsed the trade-offs made by the IASB between
comparability and simplicity [DEA.A2.170]. Nonetheless, the considerations relative to
reliability may affect the comparability of information as well. In addition, given that IFRS
9 maintains the previous derecognition requirements, it remains unclear exactly when the
modification of financial assets leads to their derecognition; this fact could lead to different
entities making different assessments [DEA.A2.146]. Furthermore, an entity’s freedom to
choose whether to apply hedge accounting, even when all the eligibility criteria would be
met, may impair comparability across entities. As entities begin to implement the Standard,
a level of consensus will likely emerge as to the range of acceptable interpretations and
implementations, possibly within particular industries and geographic areas (Yin Toa, Oct.
2014). In the banking industry particularly, supervisors and auditors are expected to play a
crucial role in influencing the interpretation of the new rules (Deloitte, Sep. 2015).
66
The concept of comparability implies that similar items and events should be accounted for in a
consistent way through time and by different entities, and unlike items and events should be accounted for
differently.
94
Finally, EFRAG affirms that IFRS 9 fully satisfies the principles of understandability67 and
prudence [DEA.A2.184,191].
4.2. Extent of the improvements over IAS 39
Overall, IFRS 9 seems to be a significant improvement over IAS 39 [DEA.A3.52].
The new classification and measurement requirements of IFRS 9 may be considered on the
whole as an improvement over the approach of IAS 39, but not necessarily in all areas. For
instance, some criticize IFRS 9 for not allowing the business model to influence the
measurement of financial assets other than basic lending instruments, although this is
mitigated by the option to elect some equity instruments as at FVTOCI [DEA.A3.11]. In turn,
such option is also criticized, because it does not allow the entity to recycle gains and losses
from equity to profit or loss, thus possibly preventing the correct representation of the
objective of long-term investors [DEA.A3.12].
On the other hand, IFRS 9 does resolve the ‘own credit’ issue for financial liabilities under
the fair value option, by requiring to present fair value changes due to changes in credit risk
into OCI. Among other positive effects, this change has been shown to improve the ability
of non-professional investors to acquire information related to credit risk and to correctly
evaluate overall firm performance (Lachmann et al., 2015).
The accounting for basic lending agreements has arguably improved too, because:
a) the approach is based on the entity’s business model increases the relevance of
information as it reflects more closely actual asset management practices.
b) The business model should be based on facts, hence the approach is less based on
management intent.
c) The provision of information is set at a higher level of aggregation than an
instrument-by-instrument basis.
67
Financial information should be readily understandable by users with a reasonable knowledge of
business, economic activity and accounting and the willingness to study the information with reasonable
diligence.
95
Considering that under IFRS 9 all instruments other than basic lending agreements are
measured at FVTPL, there is a single impairment model that applies to instruments measured
at amortized cost and at FVTOCI. This will significantly reduce complexity in comparison
with IAS 39, under which different impairment requirements and guidance apply to different
measurement categories.
The use of unbiased, probability-weighted estimates to determine expected credit losses
under IFRS 9 is arguably superior to the method in IAS 39 (which required the determination
of the most likely outcome) and improves the reliability of the impairment amount calculated.
Naturally, another reason why the ‘expected loss’ impairment model is seen as an
improvement (first and foremost by regulators) is that it addresses the criticism of IAS 39 for
recognizing impairment losses ‘too little, too late’.
On the other hand, it is clear that “estimating impairment is an art rather than a science”
(KPMG, Sep. 2014), involving difficult judgments about when and to what extent contractual
cash flows will be actually received, and IFRS 9 exponentially expands the scope of those
judgments. In particular, judgment will be required to apply the concept of ‘significant
increases’ in credit risk and of ‘default’, as well as to determine where lies the limit of
reasonable and supportable information available to the entity without undue cost or effort.
Lastly, it is interesting to note the discrepancy between the accounting outcome of the new
impairment requirements and how the economics of market valuation should work (at least
according to some form of Efficient Market Hypothesis). In principle, the fair value of a
financial asset being recognized should reflect the estimate of all future cash flows on the
asset (i.e. lifetime expected credit losses should be priced in the asset), yet in practice the
expected loss model will almost always result in additional expected losses at initial
recognition. According to EFRAG, such discrepancy may be due to a systematic mispricing
of credit risk by the market, which the new impairment model might help reduce by making
lenders more mindful of the actual credit risk being undertaken [DEA.A3.87,88].
With respect to hedge accounting, IFRS 9 basically relaxes the requirements of IAS 39. This
is recognized as allowing entities to portray actual risk management practices more faithfully,
96
which is the stated goal of the new general hedge accounting model. Such goal is achieved
by improving three areas:
a) the effectiveness requirements are less strict and rule-based and more principle-based.
Under IAS 39, in fact, in order to apply hedge accounting an entity has to demonstrate
that the hedging relationship is effective, i.e. that the level of offset is within the 80-
120% range both prospectively and retrospectively. In this way, until the end of the
financial year, the entity is uncertain about the eligibility for hedge accounting. With
IFRS 9, the main effectiveness requirement is the existence of an economic
relationship between the hedged item and the hedging instrument.
b) The range of eligible hedged items is expanded to include risk components of non-
financial items, aggregated exposures, net positions, layer components.
c) The range of eligible hedging instruments is also expended, for instance by not
limiting the use of non-derivative financial instruments at FVTPL to hedges of
foreign currency risk.
The practice of rebalancing is also novel and will require judgment to establish when it is
appropriate. All things considered, new possibilities emerge for risk management, including
the following:
a) non-financial items under IAS 39 may be designated as hedged items either in their
entirety or for foreign currency risk, whereas under IFRS 9 any of their risk
components (e.g. the crude oil component of jet fuel) may be designated, if such
component is separately identifiable and reliably measurable.
b) Cash instruments (i.e. non-derivative financial assets and liabilities) under IAS 39
may only be designated as hedging instruments in hedges of foreign currency risk,
whereas under IFRS 9 they can be designated in any hedging relationship.
c) Aggregated exposures (i.e. combination of a derivative and a non-derivative
exposure) under IAS 39 may not be designated as hedged items, whereas IFRS 9 they
may. The same is true for net positions (e.g. the net of all fixed rate assets and fixed
rate liabilities with similar maturities).
d) Under IFRS 9, it is possible to separate the foreign currency basis spread of a hedging
instrument and exclude it from the designation in the hedging relationship.
97
4.3. Costs for preparers and users
Preparers of financial statement will incur in significant one-off costs at initial application
and ongoing costs for subsequent compliance, for instance when they develop and later
implement the following functions:
a) analysis of business models and contractual cash flows.
b) Processes and systems for the classification and measurement of financial
instruments.
c) Processes and systems for collecting data, tracking credit risk and calculating
expected credit losses.
d) Processes and systems for tracking hedging relationship for rebalancing purposes,
implementing qualitative hedge effectiveness assessments.
e) Internal coordination between finance, credit, risk, and IT functions.
f) Disclosures related to transition, classification, impairment and hedge accounting.
g) Training for personnel and other new procedures.
Users are likely to incur in significant costs only at initial in relation to understanding the
effects of IFRS 9. Subsequent costs related to interpreting the accounting decisions made by
preparers may also be incurred, but should not to be significant.
4.4. Impact on banks
Banks are very much under pressure to adopt IFRS 9 within the mandatory timeframe, as
initial implementation time is estimated at around three years (Deloitte, Jun. 2014). A recent
survey of more than 30 large European financial institutions found that almost half risk
missing the 1 January 2018 deadline, some with a significant delay (Accountancy Live, Jul.
2015).
Banks and other financial institutions that must comply with the Basel requirements may find
that the new classification and measurement requirements affect differently the calculations
of capital resources and capital requirements (KPMG, Dec. 2013). In addition, the new
98
measurement requirements may change the level of volatility in profit or loss and equity,
which in turn may impact key performance indicators (KPIs) (KPMG, Dec. 2013).
The major source of concern from the banks’ perspective is certainly the new impairment
model. The new rules are expected to “have a massive impact on the way banks account for
credit losses on their loan portfolios. Provisions for bad debts will be bigger and are likely to
be more volatile” (KPMG, Jul. 2014). In particular, the initial application of the new
requirements may have a large negative impact on the equity of banks and possibly insurers
and other financial services entities given the crucial role of credit risk for such businesses
(KPMG, Sep. 2014). Covenants and banks’ regulatory capital may be affected, and the
overall impact on KPIs is expected to be significant; stress testing outcomes may also be
negatively affected. According to Deloitte’s Global IFRS Banking Surveys, an increasing
number of global banks anticipate that IFRS 9 loss provisions will be higher than the
regulatory loss provisions calculated under Basel rules.68 More importantly, over half of the
banks surveyed believe that the expected loss approach will increase their provisions of up
to 50% across all loan asset classes.69
Volatility is also likely to increase for the following reasons:
credit losses will be recognized since initial recognition for all financial assets within
the scope of the impairment model.
The data employed in predictions (e.g. ratings, credit spreads and economic forecasts)
may be volatile.
Moving from a 12-month to a lifetime expected credit loss measurement may result
in a large change of the loss allowance.
In general, variability will increase more for entities with longer-term portfolios because of
the higher lifetime expected credit losses which will be recognized or reversed in relation to
the conditions in the economy [DEA.A3.92]
68
Up from about 70% of the 54 global banks in the Jun. 2014 Deloitte survey to 85% of 59 global banks
in the Sep. 2015 Deloitte survey.
69
According to both the 2014 and 2015 Deloitte surveys.
99
An increasing number of banks deem likely that the accounting changes will set off a
feedback loop impacting the pricing of financial products via changes in the cost of capital.70
Similarly, some industry pundits speculate that the amount of lending could also to be
negatively affected by the new rules (Thomas, Jul. 2015). With regard to European banks,
EFRAG noted that the immediate recognition of credit losses is already required for
regulatory purposes and hence the impact on their pricing strategies or lending appetite
should be limited [DEA.A3.86]. However, EFRAG acknowledged that banks might become
more averse to providing loans with longer maturities (especially in times of financial
turmoil) because expected losses will generally be higher for exposures with longer
maturities [DEA.A3.90].
4.5. Impact on insurers
The IASB is currently developing a new insurance contracts Standard to replace the current
IFRS 4. Although the new insurance Standard is expected to be issued in 2016 (hence before
IFRS 9 becomes effective) insurers would not be able to implement IFRS 9 and
simultaneously early-adopt the insurance Standard [DEA.A3.101]. EFRAG and other parties
noted that such timing mismatch could significantly reduce the quality of information in
financial reports by creating accounting mismatches, and therefore recommended that IFRS
9 adoption be delayed for insurers [DEA.A3.102,107]. In a recent press release, the IASB
affirmed to be leaning toward giving insurance companies the option to defer IFRS 9
adoption until 2021 (IASB, Sep. 2015).
Given the pending decisions, predictions of the impact of IFRS 9 on insurers can be made
only to a very limited extent. One consideration is that for insurers, equity instruments
measured at FVTPL may result in profit or loss variability not reflecting their business model
because the insurance liabilities backed by these assets are measured either at cost (based on
the existing IFRS 4) or possibly at FVTOCI with the changes eventually reclassified in profit
or loss (based on the proposals of the new insurance contracts Standard) [DEAA3.80].
70
Up from about 9% of global banks in the 2011 Deloitte survey to 56% of those in the Sep. 2015 survey.
100
Insurers are unlikely to avail themselves of the FVTOCI option for equity investments
because under such election any gains or losses are never reclassified to profit or loss. For
this reason, the IASB has been asked to allow such reclassification [DEAA3.81]. Overall,
however, EFRAG believes that insurers’ investment behavior is unlikely to be significantly
affected by IFRS 9, as the importance of investment decisions should outweigh any
accounting concerns [DEAA3.82].
4.6. Conclusions
Overall, the requirements of IFRS 9 have been welcomed by users and preparers of financial
statements, and by regulators. A cross-country event study found a positive abnormal market
reaction in the EU to announcements (between July 2009 and December 2012) showing
increased likelihood of the replacement of IAS 39 with IFRS 9 (Ginesti&Onali, 2014). These
findings seem to corroborate the optimistic outlook expressed by EFRAG, who regards IFRS
9 as an improvement over IAS 39 and as conducive to the European public good
[DEA.A3.52]. The EU Accounting Regulatory Committee is currently assessing the
Standard, and then it will be the turn of the European Parliament and Council.
Based on the extensive literature regarding the serious shortcomings of IAS 39 and the likely
net benefits of IFRS 9, it is reasonable to believe that the accounting for financial instruments
has finally found, not without some complications, a new equilibrium which will, among
other things, simplify the task of preparers in many areas, re-establish prudence in
impairment accounting, and bring higher quality information to users of financial statements.
Bibliography
Institutional sources
EFRAG (May 2015). “Draft Endorsement Advice for IFRS 9 (DEA).”
FASB. Technical Agenda http://www.fasb.org/Technical-Agenda. Accessed: 20/09/2015.
IASB (Mar. 2008). “DP Reducing Complexity in Reporting Financial Instruments.”
IASB (Mar. 2009). “ED/2009/3 Derecognition: Proposed Amendments to IAS 39 and IFRS
7.”
IASB (Jun. 2009). “DP/2009/2 Credit Risk in Liability Management.”
IASB (Jul. 2009). “ED/2009/7 Financial Instruments: Classification and Measurement.”
IASB (Nov. 2009). “ED/2009/12 Financial Instruments: Amortized Cost and Impairment.”
IASB (May 2010). “ED/2010/4 Fair Value Option for Financial Liabilities.”
IASB (Dec. 2010). “ED/2010/13 Financial Instruments: Hedge Accounting.”
IASB (Jan. 2011). “Supplement to ED/2009/12 Financial Instruments: Impairment.”
IASB (Nov. 2012). “ED/2012/4 Classification and Measurement: Limited Amendments to

IFRS 9.”
IASB (Feb. 2013). “ED/2013/2 Novation of Derivatives and Continuation of Hedge

Accounting.”
IASB (Mar. 2013). “ED/2013/3 Financial Instruments: Expected Credit Losses.”
IASB (Jun. 2013). “Amendments to IAS39: Novation of Derivatives and Continuation of

Hedge Accounting.”
IASB (Jul. 2014). “IFRS 9 Financial Instruments.”

IASB (Sep, 2015). “IASB to consult on temporary measures relating to the effective dates
for IFRS 9 and the new insurance contracts Standard.” Press release.
Professional sources
Deloitte (Apr. 2009a). “G20: Implications for IFRSs.” IAS Plus Update.
Deloitte (Apr. 2009b). “New derecognition model proposed for financial instruments.” IAS
Plus Update.
Deloitte (Jun. 2009). “IASB seeks views on the role of credit risk in liability measurement.”
IAS Plus Update.
Deloitte (Jul. 2009). “Exposure draft proposes new classification and measurement guidance
for financial instruments.” IAS Plus Update.
Deloitte (Nov. 2009a). “IFRS 9 Financial Instruments.” IAS Plus Update.
Deloitte (Nov. 2009b). “Financial Instruments: Amortised Cost and Impairment.” IAS Plus
Update.
Deloitte (May 2010). “IASB issues proposals on the fair value option for financial liabilities.”
IAS Plus Newsletter.
Deloitte (Oct. 2010). “IASB amends disclosures about transfers of financial assets.” IFRS in
Focus.
Deloitte (Nov. 2010). “IASB issues revisions to IFRS 9 for financial liability accounting.”
IFRS in Focus.
Deloitte (Dec. 2010). “IASB issues exposure draft on hedge accounting.” IFRS in Focus.
Deloitte (Feb. 2011). “IASB and FASB issue joint proposal on impairment of financial
assets.” IFRS in Focus.
Deloitte (Aug. 2011). “IASB proposes to defer the mandatory effective date of IFRS 9.” IFRS
in Focus.
Deloitte (Dec. 2011). “IASB defers the mandatory effective date and adds disclosure
requirements.” IFRS in Focus.
Deloitte (Dec. 2012). “IASB issues proposals for limited amendments to IFRS 9.” IFRS in
Focus.
Deloitte (Mar. 2013a). “IASB publishes exposure draft on novation of derivatives.” IFRS in
Focus.
Deloitte (Mar. 2013b). “Expected Credit Losses – Exposure Draft.” IFRS in Focus.
Deloitte (Jul. 2013). “IASB publishes an amendment to IAS 39 on novation of derivatives.”

IFRS in Focus.
Deloitte (Nov. 2013a). “Hedge accounting reforms: A closer reflection on risk management.”
IFRS in Focus.
Deloitte (Nov. 2013b). “A new general hedge accounting model in IFRS 9.” Robert Bruce
Interviews.
Deloitte (Jul. 2014). “IASB finalizes IFRS 9 which changes the classification and
measurement of financial assets and introduces expected credit loss impairment model.”
IFRS in Focus.
Deloitte (Jun. 2014). “Fourth Global IFRS Banking Survey.”
Deloitte (Jul. 2014a). “IFRS 9 Financial Instruments.” Robert Bruce Interviews.
Deloitte (Jul. 2014b). “Impact of IFRS 9 on the banking industry.” Robert Bruce Interviews.
Deloitte (Sep. 2015). “Fifth Global IFRS Banking Survey.”
KPMG (Dec. 2009). “IFRS 9 Financial Instruments.” First Impressions.
KPMG (Dec. 2010). “Additions to IFRS 9 Financial Instruments.” First Impressions.
KPMG (Dec. 2013). “IFRS 9 (2013) – Hedge accounting and transition.” First Impressions.
KPMG (Jul. 2014). “Financial Instruments – the complete standard.” In the Headlines.
KPMG (Sep. 2014). “IFRS 9 Financial Instruments.” First Impressions.
EY (May 2015). “Classification of financial instruments under IFRS 9.”
Journal and newspaper articles
Ginesti, G. e Onali, E (2014). “Pre-adoption market reaction to IFRS 9: A cross-country

event-study.” Journal of Accounting and Public Policy 33. Elsevier.
Lachmann et al. (2015). “Fair value accounting for liabilities: Presentation format of credit
risk changes and individual information processing.” Accounting, Organizations and Society
41. Elsevier.
Page, Michael (Oct. 2012). “Business models as a basis for regulation of financial reporting.”
Journal of Management and Governance. Springer.
Thomas, Paul (Jul. 2015). “New accounting rules to hit lending.” Money Marketing Issue
1496.
Yin Toa, Lee (Oct. 2014). “Challenges of regulations: What the finalised IFRS 9 means to
insurers.” Asia Insurance Review.
“Banks fail to plan for IFRS 9 deadline.” Accountancy Live Vol. 155 Issue 1463, Jul. 2015.
“Contabilità: Sì dell’EFRAG che chiede approfondimenti sul settore assicurativo. Via libera
al nuovo principio Ifrs 9.” Il Sole 24 Ore 17 Sep. 2015.

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Master’s Degree programme – Second Cycle

IFRS 9 “Financial Instruments”

Background, Development and Expected Impact

1. Chapter I - The starting point: IAS 39 1

1.3. Recognition and derecognition 3

1.3.1. Initial recognition 3

1.3.2. Derecognition of financial assets 4

1.3.3. Derecognition of financial liabilities 7

1.4. Classification and measurement 7

1.4.1. Initial measurement of financial instruments 7

1.4.2. Subsequent measurement of financial assets 8

1.4.3. Subsequent measurement of financial liabilities 12

1.4.4. Embedded derivatives 14

1.5.1. Impairment of financial assets at amortized cost 19

1.5.2. Impairment of financial assets at cost 20

1.5.3. Impairment of available-for-sale financial assets 20

1.6. Hedge accounting 21

1.6.1. Types of hedging relationships 21

1.6.2. Hedging instruments 22

1.6.3. Hedged items 23

1.6.4. Qualifying criteria for hedge accounting 25

1.6.5. Accounting for fair value hedges 26

1.6.6. Accounting for cash flow hedges 27

1.6.7. Accounting for hedges of a net investment in a foreign operation 29

2. Chapter II - The development of IFRS 9 31

2.2. Lack of convergence with US GAAPs 32

2.3. Pros and cons of the incremental approach 33

2.4. Mar. 2008 – DP Reducing Complexity in Reporting Financial Instruments 34

2.6. Jun. 2009 – DP/2009/2 Credit Risk in Liability Management 36

2.7. Jul. 2009 – ED/2009/7 Financial Instruments: Classification and Measurement 38

2.12. Dec. 2010 – ED/2010/13 Financial Instruments: Hedge Accounting 45

2.13. Jan. 2011 – Supplement to ED/2009/12 Financial Instruments: Impairment 51

2.16. Mar. 2013 – ED/2013/3 Financial Instruments: Expected Credit Losses 56

2.18. Nov. 2013 – IFRS 9 (2013) General Hedge Accounting 59

2.19. Jul. 2014 – IFRS 9 (2014) FVTOCI Category and Impairment 62

3. Chapter III - The complete IFRS 9 63

3.1. Effective date and transition 63

3.2. Objective and scope 64

3.3. Recognition and derecognition 65

3.4. Classification and measurement 65

3.4.1. Initial measurement of financial instruments 66

3.4.2. Classification and subsequent measurement of financial assets 66

3.4.3. Classification and subsequent measurement of financial liabilities 70

3.4.4. Embedded derivatives 72

3.5.1. General approach 74

3.5.2. Determining significant increases in credit risk 76

3.5.3. 1st special case: purchased or originated credit-impaired financial assets 77

3.5.5. Guidance on expected credit losses 78

3.6. Hedge accounting 80

3.6.1. Types of hedging relationships 80

3.6.2. Hedging instruments 81

3.6.4. Qualifying criteria for hedge accounting 85

3.6.5. Accounting for fair value hedges 86

3.6.6. Accounting for cash flow hedges 87

3.6.7. Accounting for hedges of a net investment in a foreign operation 88

3.6.8. Discontinuation of hedge accounting 88

4. Chapter IV - IFRS 9: a change for the better? 91

4.1. Technical assessment of IFRS 9 91

4.2. Extent of improvements over IAS 39 94