Financial Accounting Concepts

IFRS 9 Financial Instruments | Meaning and Overview

IFRS 9 is a set of international financial reporting standards issued by the International Accounting Standards Board (IASB) that outlines the rules for accounting and reporting of financial instruments.

It was first introduced in 2014 and became effective for annual reporting periods beginning on or after January 1, 2018.

Reasons to Issue IFRS-9

IFRS 9 replaced IAS 39, Financial Instruments: Recognition and Measurement, which had been in place since 1996. The new standard was designed to address a number of shortcomings in IAS 39, including:

Inconsistencies in the classification of financial instruments: IAS 39 used a complex and inconsistent set of criteria to classify financial instruments into different categories. This led to significant differences in the accounting treatment of similar instruments.

Inadequate impairment recognition: IAS 39’s impairment requirements were based on an incurred loss model, which meant that impairment losses were not recognized until they had already occurred. This could lead to a delay in recognizing losses, which could undermine the reliability of financial reporting.

Lack of forward-looking information: IAS 39 did not require companies to provide forward-looking information about their exposure to credit risk. This made it difficult for investors to assess the potential risks associated with a company’s financial instruments.

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 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.

IFRS 9 vs IAS 39

One of the main changes introduced by IFRS 9 is the classification and measurement of financial instruments. Under IAS 39, financial instruments were classified as either held-to-maturity, available-for-sale, or trading. However, IFRS 9 introduces a new classification model based on the business model in which the financial instrument is held and the characteristics of its cash flows.

Another key change introduced by IFRS 9 is the new expected credit loss (ECL) model for the impairment of financial assets. Under IAS 39, financial assets were only impaired when there was objective evidence of impairment. However, under the new ECL model, impairment is recognized based on an expected credit loss, taking into account both historical and forward-looking information.


IFRS 9 has been a significant change to the accounting treatment of financial instruments. It has introduced a number of new concepts and requirements that have had a major impact on the way companies account for their financial instruments. IFRS 9 has also been the subject of much debate and discussion, as some have argued that it is too complex and others have argued that it does not go far enough in addressing the shortcomings of IAS 39.

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