IFRS 9 Financial asset classification

IFRS 9 Financial asset classification provides an overview of the financial asset classification requirements under IFRS 9 and the differences with IAS 39, as per below table:

CategoriesConditions to be MetImpact
Amortized CostThe financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows (“business model 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 (“SPPI contractual cash flow characteristics test”). (IFRS 9.4.1.2)

Investments classified as held to maturity under IAS 39 and measured at amortized cost will likely fall into this category.

This category will also contain other debt investments, which are classified as loans and receivables under IAS 39, if it meets the SPPI contractual cash flow characteristics and business model test.

IFRS 9 Financial asset classification

 

Fair Value through Other Comprehensive Income (FVOCI)The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets (business model 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 (“SPPI contractual cash flow characteristics test”).

An entity may, at initial recognition, make an irrevocable election to present in OCI subsequent changes in the fair value of an investment in an equity instrument within the scope of IFRS 9 that is neither held for trading nor contingent consideration recognized by an acquirer in a business combination to which IFRS 3 Business Combinations applies.

(IFRS 9.4.1.2A & IFRS 9.5.7.5-6)

Although debt investments and equity investments that are designated at FVOCI could fall into this category, the measurement for such debt and equity investments are different as demonstrated in the decision tree above.

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification

IFRS 9 – Financial asset classification

IFRS 9 – Financial asset classification

IFRS 9 – Financial asset classification

Fair Value through Profit or Loss (FVTPL)A financial asset shall be measured at FVTPL unless it is measured at amortized cost or at FVOCI.

An entity may, at initial recognition, irrevocably designate a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (“accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases.

(IFRS 9.4.1.4-5)

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification

IFRS 9 Financial asset classification

Derivatives and held for trading investments will fall into this category as under IAS 39. In addition, some loans and receivables and equity investments (which under IAS 39 are measured at amortized cost or classified as available-for-sale and carried at cost or FVOCI respectively), may also fall into this category.

IAS 39 contains two other instances where a FVTPL designation can be made. These designations disappear under IFRS 9 because of the new classification model and further simplifies the financial instrument accounting requirements.

The available-for-sale category under IAS 39 (where changes in fair value are recognized in OCI) was a default category that financial instruments fall into if they do not meet the criteria for classification into the other categories. As can be seen from the table and decision tree above, under IFRS 9, FVOCI is the equivalent category.

 

Note! The criteria for classifying financial assets for measurement are significantly different. Upon implementation of IFRS 9, all financial assets will need to be reassessed for classification based on the objective of the business model the asset is held in and their cash flow characteristics.

New processes and systems will need to be developed to ensure financial assets are allocated to the appropriate measurement category and judgement is exercised consistently throughout the entity.

Entities should ensure that the investment objective is appropriately documented and that there is evidence of approval of the objective to assist in classification and for audit purposes.

IFRS 9 Financial asset classification

FVTPL Designation

IAS 39 allowed an entity to designate certain financial assets as measured at FVTPL. This relates to the following situations:

  • A contract contains one or more embedded derivatives.
  • Designation eliminates, or significantly reduces, an accounting mismatch.
  • A group of financial assets, financial liabilities or both is managed, and its performance is evaluated, on a fair value basis.

IFRS 9 only allows designation when it eliminates or significantly reduces, an accounting mismatch. (IFRS 9.4.1.5)

This is a natural result of the following changes that eliminate the need for the other IAS 39 designation options:

  • Under IFRS 9, embedded derivatives are not separated from a hybrid financial asset; instead, the entire instrument is assessed for classification. IFRS 9 – Financial asset classification
  • A group of financial assets that is managed, and its performance evaluated, on a fair value basis will typically be classified as measured at FVTPL under IFRS 9 because of the business model criteria of the new classification model. (IFRS 9.B4.1.6)

Investments in Private Entities Measured at Cost Under IAS 39

IAS 39 allowed certain equity investments to be measured at cost. Specifically, when:

  • There is no quoted market price in an active market; and IFRS 9 – Financial asset classification
  • The fair value cannot be reliably measured because either: IFRS 9 – Financial asset classification
    • The variability in the range of reasonable fair value estimates is significant; or
    • The probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value. (IAS 39.AG80)

IFRS 9 requires that all investments in equity instruments be measured at fair value.

IFRS 9 mentions that in limited circumstances cost may approximate fair value, for example, when:

  • Insufficient more recent information is available to measure fair value; or
  • There is a wide range of possible fair value measurements and cost represents the best estimate of fair value in the range. (IFRS 9.B5.2.3)

Indicators that cost might not be representative of fair value include, but are not limited to:

  • A significant change in the: IFRS 9 – Financial asset classification
    • Performance of the investee compared with budgets, plans or milestones.
    • Market for the investee’s equity or its products/potential products.
    • Performance of comparable entities, or in the valuations implied by the overall market.
    • Global economy or economic environment in which the investee operates.
  • Changes in expectation that the investee’s technical product milestones will be achieved.
  • Internal matters of the investee such as fraud, commercial disputes, litigation, changes in management or strategy.
  • Evidence from external transactions in the investee’s equity, either by the investee (such as a fresh issue of equity), or by transfers of equity instruments between third parties. (IFRS 9.B5.2.4)

All information about the performance and operations of the investee that becomes available after the date of initial recognition should be considered in determining whether cost might not be representative of fair value.

More instruments are measured at fair value under IFRS 9 compared to IAS 39 because of the exclusion of the limited exception for measuring unquoted equity instruments at cost that existed under IAS 39.


The impact of this change particularly affects unquoted equity investments in start-up companies and companies involved in evaluation and exploration of resources where measurement at cost may be justified as a result of high variability in the range of reasonable fair value estimates and/or the probability of the various estimates are not reasonably accessible.


In accordance with IFRS 9, these investments will be measured at fair value. While it may be fairly easy to justify that cost approximates fair values at inception, it is unlikely to be the case at subsequent reporting periods.

See also: The IFRS Foundation

IFRS 9 Financial asset classification

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