IFRS 9

Financial Instruments
Overview
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement
of IAS 39 Financial Instruments: Recognition and Measurement. The Standard includes
requirements for recognition and measurement, impairment, derecognition and general
hedge accounting.
The version of IFRS 9 issued in 2014 supersedes all previous versions and is
mandatorily effective for periods beginning on or after 1 January 2018 with early
adoption permitted (subject to local endorsement requirements). For a limited period,
previous versions of IFRS 9 may be adopted early if not already done so provided the
relevant date of initial application is before 1 February 2015.
IFRS 9 does not replace the requirements for portfolio fair value hedge
accounting for interest rate risk (often referred to as the ‘macro hedge accounting’
requirements) since this phase of the project was separated from the IFRS 9 project
due to the longer term nature of the macro hedging project which is currently at the
discussion paper phase of the due process. In April 2014, the IASB published a
Discussion Paper Accounting for Dynamic Risk management: a Portfolio Revaluation
Approach to Macro Hedging. Consequently, the exception in IAS 39 for a fair value
hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities
continues to apply.
Initial measurement of financial instruments
All financial instruments are initially measured at fair value plus or minus, in the case of
a financial asset or financial liability not at fair value through profit or loss, transaction
costs.
Subsequent measurement of financial assets
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two
classifications - those measured at amortised cost and those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised
entirely in profit or loss (fair value through profit or loss, FVTPL), or recognised in other
comprehensive income (fair value through other comprehensive income, FVTOCI).
For debt instruments the FVTOCI classification is mandatory for certain assets unless
the fair value option is elected. Whilst for equity investments, the FVTOCI classification
is an election. Furthermore, the requirements for reclassifying gains or losses
recognised in other comprehensive income are different for debt instruments and equity
investments.
The classification of a financial asset is made at the time it is initially recognised, namely
when the entity becomes a party to the contractual provisions of the instrument. [IFRS
9, paragraph 4.1.1] If certain conditions are met, the classification of an asset may
subsequently need to be reclassified.
Debt instruments
A debt instrument that meets the following two conditions must be measured at
amortised cost (net of any write down for impairment) unless the asset is designated at
FVTPL under the fair value option (see below):
 Business model test: The objective of the entity's business model is to hold the
financial asset to collect the contractual cash flows (rather than to sell the
instrument prior to its contractual maturity to realise its fair value changes).
 Cash flow characteristics test: The contractual terms of the financial asset give
rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
A debt instrument that meets the following two conditions must be measured at FVTOCI
unless the asset is designated at FVTPL under the fair value option (see below):
 Business model test: The financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows and selling
financial assets.
 Cash flow characteristics test: The contractual terms of the financial asset give
rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
All other debt instruments must be measured at fair value through profit or loss
(FVTPL). [IFRS 9, paragraph 4.1.4]
Fair value option
Even if an instrument meets the two requirements to be measured at amortised cost or
FVTOCI, IFRS 9 contains an option to designate, at initial recognition, a financial asset
as measured at FVTPL if doing so eliminates or significantly reduces a measurement or
recognition inconsistency (sometimes referred to as an 'accounting mismatch') that
would otherwise arise from measuring assets or liabilities or recognising the gains and
losses on them on different bases. [IFRS 9, paragraph 4.1.5]
Equity instruments
All equity investments in scope of IFRS 9 are to be measured at fair value in the
statement of financial position, with value changes recognised in profit or loss, except
for those equity investments for which the entity has elected to present value changes in
'other comprehensive income'. There is no 'cost exception' for unquoted equities.
'Other comprehensive income' option
If an equity investment is not held for trading, an entity can make an irrevocable election
at initial recognition to measure it at FVTOCI with only dividend income recognised in
profit or loss. [IFRS 9, paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity investments, IFRS 9 contains guidance
on when cost may be the best estimate of fair value and also when it might not be
representative of fair value.
Subsequent measurement of financial liabilities
IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39.
Two measurement categories continue to exist: FVTPL and amortised cost. Financial
liabilities held for trading are measured at FVTPL, and all other financial liabilities are
measured at amortised cost unless the fair value option is applied. [IFRS 9, paragraph
4.2.1]
Fair value option
IFRS 9 contains an option to designate a financial liability as measured at FVTPL if:
 doing so eliminates or significantly reduces a measurement or recognition
inconsistency (sometimes referred to as an 'accounting mismatch') that would
otherwise arise from measuring assets or liabilities or recognising the gains and
losses on them on different bases, or
 the liability is part or a group of financial liabilities or financial assets and financial
liabilities that is managed and its performance is evaluated on a fair value basis,
in accordance with a documented risk management or investment strategy, and
information about the group is provided internally on that basis to the entity's key
management personnel.
A financial liability which does not meet any of these criteria may still be designated as
measured at FVTPL when it contains one or more embedded derivatives that
sufficiently modify the cash flows of the liability and are not clearly closely related.
IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be
split into the amount of change in fair value attributable to changes in credit risk of the
liability, presented in other comprehensive income, and the remaining amount
presented in profit or loss. The new guidance allows the recognition of the full amount of
change in the fair value in profit or loss only if the presentation of changes in the
liability's credit risk in other comprehensive income would create or enlarge an
accounting mismatch in profit or loss. That determination is made at initial recognition
and is not reassessed.
Amounts presented in other comprehensive income shall not be subsequently
transferred to profit or loss, the entity may only transfer the cumulative gain or loss
within equity.
Derecognition of financial assets
The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to
determine whether the asset under consideration for derecognition is:
 an asset in its entirety or
 specifically identified cash flows from an asset (or a group of similar financial
assets) or
 a fully proportionate (pro rata) share of the cash flows from an asset (or a group
of similar financial assets). or
 a fully proportionate (pro rata) share
 of specifically identified cash flows from a financial asset (or a group of similar
financial assets)
Once the asset under consideration for derecognition has been determined, an
assessment is made as to whether the asset has been transferred, and if so, whether
the transfer of that asset is subsequently eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual rights to
receive the cash flows, or the entity has retained the contractual rights to receive the
cash flows from the asset, but has assumed a contractual obligation to pass those cash
flows on under an arrangement that meets the following three conditions:
 the entity has no obligation to pay amounts to the eventual recipient unless it
collects equivalent amounts on the original asset
 the entity is prohibited from selling or pledging the original asset (other than as
security to the eventual recipient),
 the entity has an obligation to remit those cash flows without material delay
Once an entity has determined that the asset has been transferred, it then determines
whether or not it has transferred substantially all of the risks and rewards of ownership
of the asset. If substantially all the risks and rewards have been transferred, the asset is
derecognised. If substantially all the risks and rewards have been retained,
derecognition of the asset is precluded.
If the entity has neither retained nor transferred substantially all of the risks and rewards
of the asset, then the entity must assess whether it has relinquished control of the asset
or not. If the entity does not control the asset then derecognition is appropriate; however
if the entity has retained control of the asset, then the entity continues to recognise the
asset to the extent to which it has a continuing involvement in the asset.
These various derecognition steps are summarised in the decision tree in paragraph
B3.2.1.
Derecognition of financial liabilities
A financial liability should be removed from the balance sheet when, and only when, it is
extinguished, that is, when the obligation specified in the contract is either discharged or
cancelled or expires. [IFRS 9, paragraph 3.3.1] Where there has been an exchange
between an existing borrower and lender of debt instruments with substantially different
terms, or there has been a substantial modification of the terms of an existing financial
liability, this transaction is accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability. A gain or loss from extinguishment
of the original financial liability is recognised in profit or loss.
Derivatives
All derivatives in scope of IFRS 9, including those linked to unquoted equity
investments, are measured at fair value. Value changes are recognised in profit or loss
unless the entity has elected to apply hedge accounting by designating the derivative as
a hedging instrument in an eligible hedging relationship.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes a non-
derivative host, with the effect that some of the cash flows of the combined instrument
vary in a way similar to a stand-alone derivative. A derivative that is attached to a
financial instrument but is contractually transferable independently of that instrument, or
has a different counterparty, is not an embedded derivative, but a separate financial
instrument. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to
apply only to hosts that are not financial assets within the scope of the Standard.
Consequently, embedded derivatives that under IAS 39 would have been separately
accounted for at FVTPL because they were not closely related to the host financial
asset will no longer be separated. Instead, the contractual cash flows of the financial
asset are assessed in their entirety, and the asset as a whole is measured at FVTPL if
the contractual cash flow characteristics test is not passed (see above).
The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help
preparers identify when an embedded derivative is closely related to a financial liability
host contract or a host contract not within the scope of the Standard (e.g. leasing
contracts, insurance contracts, contracts for the purchase or sale of a non-financial
items).
Reclassification
For financial assets, reclassification is required between FVTPL, FVTOCI and amortised
cost, if and only if the entity's business model objective for its financial assets changes
so its previous model assessment would no longer apply.
If reclassification is appropriate, it must be done prospectively from the reclassification
date which is defined as the first day of the first reporting period following the change in
business model. An entity does not restate any previously recognised gains, losses, or
interest.
IFRS 9 does not allow reclassification:
 for equity investments measured at FVTOCI, or
 where the fair value option has been exercised in any circumstance for a
financial assets or financial liability.
Hedge accounting
The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and
qualification criteria are met, hedge accounting allows an entity to reflect risk
management activities in the financial statements by matching gains or losses on
financial hedging instruments with losses or gains on the risk exposures they hedge.
The hedge accounting model in IFRS 9 is not designed to accommodate hedging of
open, dynamic portfolios. As a result, for a fair value hedge of interest rate risk of a
portfolio of financial assets or liabilities an entity can apply the hedge accounting
requirements in IAS 39 instead of those in IFRS 9.
In addition when an entity first applies IFRS 9, it may choose as its accounting policy
choice to continue to apply the hedge accounting requirements of IAS 39.
Qualifying criteria for hedge accounting
A hedging relationship qualifies for hedge accounting only if all of the following criteria
are met:
1. the hedging relationship consists only of eligible hedging instruments and eligible
hedged items.
2. at the inception of the hedging relationship there is formal designation and
documentation of the hedging relationship and the entity’s risk management
objective and strategy for undertaking the hedge.
3. the hedging relationship meets all of the hedge effectiveness requirements
Hedging instruments
Only contracts with a party external to the reporting entity may be designated as
hedging instruments.
A hedging instrument may be a derivative (except for some written options) or non-
derivative financial instrument measured at FVTPL unless it is a financial liability
designated as at FVTPL for which changes due to credit risk are presented in OCI. For
a hedge of foreign currency risk, the foreign currency risk component of a non-derivative
financial instrument, except equity investments designated as FVTOCI, may be
designated as the hedging instrument.
IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash
flows of a 10 year instrument) of a hedging instrument to be designated as the hedging
instrument. IFRS 9 also allows only the intrinsic value of an option, or the spot element
of a forward to be designated as the hedging instrument.  An entity may also exclude
the foreign currency basis spread from a designated hedging instrument.
IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the
hedging instrument.
Combinations of purchased and written options do not qualify if they amount to a net
written option at the date of designation.
Hedged items
A hedged item can be a recognised asset or liability, an unrecognised firm commitment,
a highly probable forecast transaction or a net investment in a foreign operation and
must be reliably measurable.
An aggregated exposure that is a combination of an eligible hedged item as described
above and a derivative may be designated as a hedged item.
The hedged item must generally be with a party external to the reporting entity,
however, as an exception the foreign currency risk of an intragroup monetary item 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 are not fully eliminated on
consolidation. In addition, the foreign currency risk of a highly probable forecast
intragroup transaction may qualify as a hedged item in consolidated financial
statements provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign currency
risk will affect consolidated profit or loss.
An entity may designate an item in its entirety or a component of an item as the hedged
item. The component may be a risk component that is separately identifiable and
reliably measurable; one or more selected contractual cash flows; or components of a
nominal amount.
A group of items (including net positions is an eligible hedged item only if:
1. it consists of items individually, eligible hedged items;
2. the items in the group are managed together on a group basis for risk
management purposes; and
3. 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:
1. it is a hedge of foreign currency risk; and
 2. 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 [IFRS 9 paragraph 6.6.1]
For a hedge of a net position whose hedged risk affects different line items in the
statement of profit or loss and other comprehensive income, any hedging gains or
losses in that statement are presented in a separate line from those affected by the
hedged items.
Accounting for qualifying hedging relationships
There are three types of hedging relationships:
Fair value hedge: a hedge of the exposure to changes in fair value of a recognised
asset or liability or an unrecognised firm commitment, or a component of any such item,
that is attributable to a particular risk and could affect profit or loss (or OCI in the case of
an equity instrument designated as at FVTOCI). [IFRS 9 paragraphs 6.5.2(a) and 6.5.3]
For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit
or loss (or OCI, if hedging an equity instrument at FVTOCI and the hedging gain or loss
on the hedged item adjusts the carrying amount of the hedged item and is recognised in
profit or loss. However, if the hedged item is an equity instrument at FVTOCI, those
amounts remain in OCI. When a hedged item is an unrecognised firm commitment the
cumulative hedging gain or loss is recognised as an asset or a liability with a
corresponding gain or loss recognised in profit or loss.
If the hedged item is a debt instrument measured at amortised cost or FVTOCI any
hedge adjustment is amortised to profit or loss based on a recalculated effective interest
rate. Amortisation may begin as soon as an adjustment exists and shall begin no later
than when the hedged item ceases to be adjusted for hedging gains and losses.
Cash flow hedge: a hedge of the exposure to variability in cash flows that is
attributable to a particular risk associated with all, or a component of, a recognised
asset or liability (such as all or some future interest payments on variable-rate debt) or a
highly probable forecast transaction, and could affect profit or loss.
For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of
the following (in absolute amounts):
 the cumulative gain or loss on the hedging instrument from inception of the
hedge; and
 the cumulative change in fair value of the hedged item from inception of the
hedge.
The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge is recognised in OCI and any remaining gain or loss is hedge
ineffectiveness that is recognised in profit or loss.
If a hedged forecast transaction subsequently results in the recognition of a non-
financial item or becomes a firm commitment for which fair value hedge accounting is
applied, the amount that has been accumulated in the cash flow hedge reserve is
removed and included directly in the initial cost or other carrying amount of the asset or
the liability. In other cases the amount that has been accumulated in the cash flow
hedge reserve is reclassified to profit or loss in the same period(s) as the hedged cash
flows affect profit or loss.
When an entity discontinues hedge accounting for a cash flow hedge, if the hedged
future cash flows are still expected to occur, the amount that has been accumulated in
the cash flow hedge reserve remains there until the future cash flows occur; if the
hedged future cash flows are no longer expected to occur, that amount is immediately
reclassified to profit or loss.
A hedge of the foreign currency risk of a firm commitment may be accounted for as a
fair value hedge or a cash flow hedge.
Hedge of a net investment in a foreign operation (as defined in IAS 21), including a
hedge of a monetary item that is accounted for as part of the net investment, is
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 is recognised in OCI; and
 the ineffective portion is recognised in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the effective portion of
the hedge is reclassified to profit or loss on the disposal or partial disposal of the foreign
operation.
Hedge effectiveness requirements
In order to qualify for hedge accounting, the hedge relationship must meet the following
effectiveness criteria at the beginning of each hedged period:
 there is an economic relationship between the hedged item and the hedging
instrument;
 the effect of credit risk does not dominate the value changes that result from that
economic relationship; and
 the hedge ratio of the hedging relationship is the same as that actually used in
the economic hedge
Rebalancing and discontinuation
If a hedging relationship ceases to meet the hedge effectiveness requirement relating to
the hedge ratio but the risk management objective for that designated hedging
relationship remains the same, an entity adjusts the hedge ratio of the hedging
relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again.
An entity discontinues hedge accounting prospectively only when the hedging
relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria
(after any rebalancing). This includes instances when the hedging instrument expires or
is sold, terminated or exercised. Discontinuing hedge accounting can either affect a
hedging relationship in its entirety or only a part of it (in which case hedge accounting
continues for the remainder of the hedging relationship).
Time value of options
When an entity separates the intrinsic value and time value of an option contract and
designates as the hedging instrument only the change in intrinsic value of the option, it
recognises some or all of the change in the time value in OCI which is later removed or
reclassified from equity as a single amount or on an amortised basis (depending on the
nature of the hedged item) and ultimately recognised in profit or loss. This reduces profit
or loss volatility compared to recognising the change in value of time value directly in
profit or loss.
Forward points and foreign currency basis spreads
When an entity separates the forward points and the spot element of a forward contract
and designates as the hedging instrument only the change in the value of the spot
element, or when an entity excludes the foreign currency basis spread from a hedge the
entity may recognise the change in value of the excluded portion in OCI to be later
removed or reclassified from equity as a single amount or on an amortised basis 
(depending on the nature of the hedged item) and ultimately recognised in profit or loss.
This reduces profit or loss volatility compared to recognising the change in value of
forward points or currency basis spreads directly in profit or loss.
Credit exposures designated at FVTPL
If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a
financial instrument (credit exposure) it may designate all or a proportion of that
financial instrument as measured at FVTPL if:
 the name of the credit exposure matches the reference entity of the credit
derivative (‘name matching’); and
 the seniority of the financial instrument matches that of the instruments that can
be delivered in accordance with the credit derivative.
An entity may make this designation irrespective of whether the financial instrument that
is managed for credit risk is within the scope of IFRS 9 (for example, it can apply to loan
commitments that are outside the scope of IFRS 9). The entity may designate that
financial instrument at, or subsequent to, initial recognition, or while it is unrecognised
and shall document the designation concurrently.
If designated after initial recognition, any difference in the previous carrying amount and
fair value is recognised immediately in profit or loss
An entity discontinues measuring the financial instrument that gave rise to the credit risk
at FVTPL if the qualifying criteria are no longer met and the instrument is not otherwise
required to be measured at FVTPL. The fair value at discontinuation becomes its new
carrying amount.
Impairment
The impairment model in IFRS 9 is based on the premise of providing for expected
losses.
Scope of Impairment model
IFRS 9 requires that the same impairment model apply to all of the following:
 Financial assets measured at amortised cost;
 Financial assets mandatorily measured at FVTOCI;
 Loan commitments when there is a present obligation to extend credit (except
where these are measured at FVTPL);
o Financial guarantee contracts to which IFRS 9 is applied (except those
measured at FVTPL);
o Lease receivables within the scope of IAS 17 Leases; and
o Contract assets within the scope of IFRS 15 Revenue from Contracts with
Customers (i.e. rights to consideration following transfer of goods or
services).
General approach
With the exception of purchased or originated credit impaired financial assets (see
below), expected credit losses are required to be measured through a loss allowance at
an amount equal to:
 the 12-month expected credit losses (expected credit losses that result from
those default events on the financial instrument that are possible within 12
months after the reporting date); or
 full lifetime expected credit losses (expected credit losses that result from all
possible default events over the life of the financial instrument).
A loss allowance for full lifetime expected credit losses is required for a financial
instrument if the credit risk of that financial instrument has increased significantly since
initial recognition, as well as to contract assets or trade receivables that do not
constitute a financing transaction in accordance with IFRS 15.
Additionally, entities can elect an accounting policy to recognise full lifetime expected
losses for all contract assets and/or all trade receivables that do constitute a financing
transaction in accordance with IFRS 15. The same election is also separately permitted
for lease receivables.
For all other financial instruments, expected credit losses are measured at an amount
equal to the 12-month expected credit losses.
Significant increase in credit risk
With the exception of purchased or originated credit-impaired financial assets (see
below), the loss allowance for financial instruments is measured at an amount equal to
lifetime expected losses if the credit risk of a financial instrument has increased
significantly since initial recognition, unless the credit risk of the financial instrument is
low at the reporting date in which case it can be assumed that credit risk on the financial
instrument has not increased significantly since initial recognition.
The Standard considers credit risk low if there is a low risk of default, the borrower has
a strong capacity to meet its contractual cash flow obligations in the near term and
adverse changes in economic and business conditions in the longer term may, but will
not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow
obligations. The Standard suggests that ‘investment grade’ rating might be an indicator
for a low credit risk.
The assessment of whether there has been a significant increase in credit risk is based
on an increase in the probability of a default occurring since initial recognition. Under
the Standard, an entity may use various approaches to assess whether credit risk has
increased significantly (provided that the approach is consistent with the requirements).
An approach can be consistent with the requirements even if it does not include an
explicit probability of default occurring as an input. The application guidance provides a
list of factors that may assist an entity in making the assessment. Also, whilst in
principle the assessment of whether a loss allowance should be based on lifetime
expected credit losses is to be made on an individual basis, some factors or indicators
might not be available at an instrument level. In this case, the entity should perform the
assessment on appropriate groups or portions of a portfolio of financial instruments.
The requirements also contain a rebuttable presumption that the credit risk has
increased significantly when contractual payments are more than 30 days past due.
IFRS 9 also requires that (other than for purchased or originated credit impaired
financial instruments) if a significant increase in credit risk that had taken place since
initial recognition and has reversed by a subsequent reporting period (i.e., cumulatively
credit risk is not significantly higher than at initial recognition) then the expected credit
losses on the financial instrument revert to being measured based on an amount equal
to the 12-month expected credit losses.
Purchased or originated credit-impaired financial assets
Purchased or originated credit-impaired financial assets are treated differently because
the asset is credit-impaired at initial recognition. For these assets, an entity would
recognise changes in lifetime expected losses since initial recognition as a loss
allowance with any changes recognised in profit or loss. Under the requirements, any
favourable changes for such assets are an impairment gain even if the resulting
expected cash flows of a financial asset exceed the estimated cash flows on initial
recognition.
Credit-impaired financial asset
Under IFRS 9 a financial asset is credit-impaired when one or more events that have
occurred and have a significant impact on the expected future cash flows of the financial
asset. It includes observable data that has come to the attention of the holder of a
financial asset about the following events:
 significant financial difficulty of the issuer or borrower;
 a breach of contract, such as a default or past-due event;
 the lenders for economic or contractual reasons relating to the borrower’s
financial difficulty granted the borrower a concession that would not otherwise be
considered;
 it becoming probable that the borrower will enter bankruptcy or other financial
reorganisation;
 the disappearance of an active market for the financial asset because of financial
difficulties; or
 the purchase or origination of a financial asset at a deep discount that reflects
incurred credit losses.
Basis for estimating expected credit losses
Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and
probability-weighted amount that is determined by evaluating the range of possible
outcomes as well as incorporating the time value of money. Also, the entity should
consider reasonable and supportable information about past events, current conditions
and reasonable and supportable forecasts of future economic conditions when
measuring expected credit losses.
The Standard defines expected credit losses as the weighted average of credit losses
with the respective risks of a default occurring as the weightings. [IFRS 9 Appendix A]
Whilst an entity does not need to consider every possible scenario, it must consider the
risk or probability that a credit loss occurs by considering the possibility that a credit loss
occurs and the possibility that no credit loss occurs, even if the probability of a credit
loss occurring is low.
In particular, for lifetime expected losses, an entity is required to estimate the risk of a
default occurring on the financial instrument during its expected life. 12-month expected
credit losses represent the lifetime cash shortfalls that will result if a default occurs in
the 12 months after the reporting date, weighted by the probability of that default
occurring.
An entity is required to incorporate reasonable and supportable information (i.e., that
which is reasonably available at the reporting date). Information is reasonably available
if obtaining it does not involve undue cost or effort (with information available for
financial reporting purposes qualifying as such).
For applying the model to a loan commitment an entity will consider the risk of a default
occurring under the loan to be advanced, whilst application of the model for financial
guarantee contracts an entity considers the risk of a default occurring of the specified
debtor. 
An entity may use practical expedients when estimating expected credit losses if they
are consistent with the principles in the Standard (for example, expected credit losses
on trade receivables may be calculated using a provision matrix where a fixed provision
rate applies depending on the number of days that a trade receivable is outstanding).
To reflect time value, expected losses should be discounted to the reporting date using
the effective interest rate of the asset (or an approximation thereof) that was determined
at initial recognition. A “credit-adjusted effective interest” rate should be used for
expected credit losses of purchased or originated credit-impaired financial assets.  In
contrast to the “effective interest rate” (calculated using expected cash flows that ignore
expected credit losses), the credit-adjusted effective interest rate reflects expected
credit losses of the financial asset.
Expected credit losses of undrawn loan commitments should be discounted by using
the effective interest rate (or an approximation thereof) that will be applied when
recognising the financial asset resulting from the commitment. If the effective interest
rate of a loan commitment cannot be determined, the discount rate should reflect the
current market assessment of time value of money and the risks that are specific to the
cash flows but only if, and to the extent that, such risks are not taken into account by
adjusting the discount rate. This approach shall also be used to discount expected
credit losses of financial guarantee contracts.
Presentation
Whilst interest revenue is always required to be presented as a separate line item, it is
calculated differently according to the status of the asset with regard to credit
impairment. In the case of a financial asset that is not a purchased or originated credit-
impaired financial asset and for which there is no objective evidence of impairment at
the reporting date, interest revenue is calculated by applying the effective interest rate
method to the gross carrying amount.
In the case of a financial asset that is not a purchased or originated credit-impaired
financial asset but subsequently has become credit-impaired, interest revenue is
calculated by applying the effective interest rate to the amortised cost balance, which
comprises the gross carrying amount adjusted for any loss allowance.
In the case of purchased or originated credit-impaired financial assets, interest revenue
is always recognised by applying the credit-adjusted effective interest rate to the
amortised cost carrying amount. [IFRS 9 paragraph 5.4.1] The credit-adjusted effective
interest rate is the rate that discounts the cash flows expected on initial recognition
(explicitly taking account of expected credit losses as well as contractual terms of the
instrument) back to the amortised cost at initial recognition.
Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including
reversals of impairment losses and impairment gains (in the case of purchased or
originated credit-impaired financial assets), are presented in a separate line item in the
statement of profit or loss and other comprehensive income.
Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures
including adding disclosures about investments in equity instruments designated as at
FVTOCI, disclosures on risk management activities and hedge accounting and
disclosures on credit risk management and impairment.