Mastering IFRS 9: Classification and Measurement Made Simple

In today’s dynamic financial landscape, the way organizations classify and measure financial instruments plays a crucial role in determining transparency, accuracy, and trust in financial reporting. IFRS 9 – Financial Instruments was introduced to modernize this process by aligning accounting with the business model and better reflecting how financial assets and liabilities generate value.

Are you truly mastering IFRS 9, or just scratching the surface of financial instrument reporting?

IFRS 9 transforms financial reporting by aligning classification with real business models. Understand the principles, simplify measurement, and bring transparency to your accounts.

This blog provides a simplified, practical understanding of IFRS 9, helping finance professionals, auditors, and business leaders navigate the standard with confidence.

🔍 What is IFRS 9?

IFRS 9 is an international accounting standard that governs the classification, measurement, impairment, and hedge accounting of financial instruments. It replaced IAS 39 to address complexity, inconsistencies, and the need for a forward-looking approach—particularly after the 2008 financial crisis.

The standard applies to all entities that deal with financial instruments such as loans, trade receivables, investments, derivatives, and debt instruments.

📌 Core Pillars of IFRS 9

IFRS 9 has three key components:

• Classification & Measurement
• Impairment (Expected Credit Loss Model)
• Hedge Accounting

This article focuses on the first pillar—Classification and Measurement, which determines how financial assets and liabilities appear on the financial statements.

1️⃣ Classification of Financial Assets under IFRS 9

IFRS 9 introduced a principle-based, business-model-driven approach. Financial assets are classified based on two tests:

A. Business Model Test

This evaluates how the entity manages its financial assets. IFRS 9 defines three business models:

• Hold to Collect (HTC): Assets are held to collect contractual cash flows. Examples: Loans, trade receivables.
• Hold to Collect and Sell (HTCS): Assets held both to collect cash flows and to sell when advantageous. Examples: Fixed-income portfolios, treasury investments.
• Other Business Models: Assets held for trading or managed on a fair-value basis. Examples: Equity trading portfolios.

B. SPPI Test (Solely Payments of Principal and Interest)

This test checks if the asset’s cash flows are solely linked to:

• Principal
• Interest (time value of money, credit risk)

If the cash flow contains leverage, embedded derivatives, or non-basic lending features, it fails SPPI and must be measured at FVTPL.

2️⃣ Measurement Categories of Financial Assets

Once both tests are applied, assets fall into three measurement categories:

1. Amortized Cost (AC)

Applied when:

• Business model = Hold to Collect
• SPPI = Pass

Measurement Approach: Recognized at amortized cost using the effective interest rate (EIR). Impairment is calculated using the Expected Credit Loss (ECL) model.

Examples: Trade receivables, long-term loans, held-to-maturity debt securities

2. Fair Value Through Other Comprehensive Income (FVOCI)

Applied when:

• Business model = Hold to Collect & Sell
• SPPI = Pass

Measurement Approach: Fair value changes go to OCI, interest income and FX gains go to P&L. On disposal, cumulative OCI is recycled to P&L.

Examples: Strategic debt investments, treasury bond portfolios

3. Fair Value Through Profit or Loss (FVTPL)

Default classification when:

• Business model does not qualify for HTC or HTCS
• SPPI test fails

Measurement Approach: All fair value changes go to P&L.

Examples: Equity investments, derivatives, structured notes, trading securities

Entities may also designate an asset at FVTPL to eliminate an accounting mismatch.

3️⃣ Classification of Financial Liabilities

IFRS 9 largely retains IAS 39 principles:

• Most financial liabilities → Amortized Cost
• Exceptions measured at FVTPL: Held for trading or designated at FVTPL to avoid mismatches

Key change under IFRS 9: For liabilities designated at FVTPL, the part of FV change attributable to own credit risk goes to OCI, not P&L.

4️⃣ Examples for Better Clarity

• Trade Receivables: Business model = Collect cash, SPPI = Pass → Amortized Cost
• Debt Investment in Treasury Bonds: Business model = Collect + Sell, SPPI = Pass → FVOCI
• Investment in Equity Shares for Trading: Business model = Trading → FVTPL
• Derivative – Interest Rate Swap: Automatically → FVTPL

5️⃣ Why IFRS 9 Matters: Key Benefits

• Better alignment with how businesses actually manage assets: The business-model approach reflects real-world strategies.
• Clearer identification of risk through fair value measures: More transparent reporting for users.
• Forward-looking approach to risk management: Through ECL impairment and consistent valuation principles.
• Reduced complexity compared to IAS 39: Simplified categories, intuitive classification, and fewer exceptions.

6️⃣ Best Practices for Implementation

• Document business models comprehensively
• Perform SPPI assessments for all debt instruments
• Maintain robust ECL impairment models
• Leverage technology for fair value measurement
• Regularly reassess classifications based on business model changes

Conclusion

IFRS 9 brings clarity, consistency, and modernization to the accounting of financial instruments. By focusing on business models and the nature of cash flows, the standard ensures financial reporting is more reflective of real economic activities.

Mastering IFRS 9 doesn't need to be complex—once the principles of classification and measurement are understood, applying them becomes a natural part of financial reporting.