Classification Of Financial Assets – FAQ | IFRS

Classification of financial assets

IFRS 9 presents three principal measurement categories for financial assets:

  • Financial assets valued at amortised cost, Classification of financial assets
  • Financial assets valued at fair value through other comprehensive income,
  • Financial assets valued at fair value through profit or loss. [IFRS 9 4.1, IFRS 9 3.1.1]

A financial asset is classified into a measurement category at inception and is reclassified only in rare circumstances.

The assessment as to how an asset should be classified is made on the basis of both the entity’s business model for managing the financial asset (see the business model tests) and the contractual cash flow characteristics of the financial asset (the SPPI tests, see Solely Payments of Principal and Interest).

In addition, IFRS 9 provides presentation and designation options and other specific guidance for certain financial assets, as follows.

Type of financial asset Classification of financial assets

Implications on classification

Financial assets for which designation as at FVTPL eliminates or significantly reduces an accounting mismatch

May be designated as at FVTPL

Investments in equity instruments that are not held for trading

Option to present changes in fair value in OCI

Certain credit exposures if a credit derivative that is measured at FVTPL is used to manage the credit risk of all, or a part, of the exposure

May be designated as at FVTPL

Financial assets that: Classification of financial assets

  • continue to be recognised in their entirety when a transfer of the financial asset does not qualify for derecognition; or
  • continue to be recognised to the extent of their continuing involvement

Measured under specific guidance carried forward from IAS 39, see below

The existing categories of held-to-maturity, loans and receivables, and available-for-sale. It also removes the exception that allows certain equity investments, and derivatives linked to such investments, to be measured at cost. [IFRS 9 BZC 4.55, IFRS 9 BC5.18] Classification of financial assets

The following diagram provides an overview of the classification of financial assets into the principal measurement categories, along with the presentation and designation options under IFRS 9.

Are the asset’s contractual cash flows solely principal and interest? Note: see the SPPI Test
Business model questions Note: see business model test
FVTPL Note: Certain credit exposures can also be designated as at FVTPL if a credit derivative that is measured at FVTPL is used to manage the credit risk of all, or a part, of the exposure.
FVCOI (debt instruments) and Amortised cost Note: Subject to an entity’s irrevocable option to designate such a financial asset as at FVTPL on initial recognition if, and only if, such designation eliminates or significantly reduces a measurement or recognition inconsistency.

Measured under specific guidance carried forward from IAS 39

Transfers that do not qualify for derecognition[IFRS 9 3.2.15]

When an entity transferred an asset, but has retained substantially all the risks and rewards, the asset is not derecognised. Instead, any proceeds received are recognised as a financial liability. In subsequent periods, an entity recognises income on the transferred asset and expense incurred on the financial liability as if they were separate financial instruments. Classification of financial assets

Note that this is not the same as continuing involvement in transferred assets covered below.

Continuing involvement in transferred assets – associated liabilities measurement [IFRS 9 3.2 17]

When an entity continues to recognise an asset to the extent of its continuing involvement, the entity also recognises an associated liability. Despite the other measurement requirements in IFRS 9, the transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the entity has retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is:

  1. the amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortised cost, or
  2. equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone basis, if the transferred asset is measured at fair value.

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