Financial Accounting

IFRS 9 Financial Instruments | Meaning and Overview

Overview of IFRS 9

IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early application permitted.

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

According to IFRS 9, an organisation must recognise a financial asset or liability in its statement of financial position when it becomes a party to the instrument’s contractual conditions. At the time of initial recognition, an entity values a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability that is not measured at fair value through profit or loss, transaction costs directly attributable to the financial asset’s or liability’s acquisition or issuance.

Financial assets

When an entity first recognises a financial asset, it classifies it based on the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows:

  • Amortised cost—a financial asset is measured at amortised cost if both of the following conditions are met: 
    • the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
    • 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.
  • Fair value through other comprehensive income—financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
  • Fair value through profit or loss—any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss.

When, and only when, an entity changes its business model for managing financial assets it must reclassify all affected financial assets.

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