Financial instruments (IFRS 9)

What IFRS 9 does

IFRS 9 Financial Instruments sets out how to classify and measure financial assets and liabilities, how to account for impairment, and how hedge accounting works. In SBR it often appears inside a larger scenario, such as a loan with unusual terms or an investment in shares.

Classifying financial assets

Two tests decide the category of a debt instrument:

• Business model: is the asset held to collect contractual cash flows, held to collect and sell, or held for some other purpose?
• Cash flow characteristics: are the cash flows solely payments of principal and interest (SPPI)?
• Hold to collect, SPPI met: amortised cost.
• Hold to collect and sell, SPPI met: fair value through other comprehensive income (OCI).
• Any other business model, or SPPI not met: fair value through profit or loss.

Equity investments are measured at fair value through profit or loss, unless the entity makes an irrevocable election, on initial recognition, to present changes in other comprehensive income.

Amortised cost

Interest income is calculated with the effective interest rate, which spreads all fees, premiums and discounts over the instrument's life. In the exam, set out a table: opening balance, effective interest, cash received, closing balance.

Expected credit losses

IFRS 9 recognises credit losses before they happen:

• Stage 1: no significant increase in credit risk. Recognise 12-month expected credit losses.
• Stage 2: credit risk has increased significantly. Recognise lifetime expected credit losses.
• Stage 3: the asset is credit-impaired. Lifetime losses, and interest is calculated on the net carrying amount.

Trade receivables without a significant financing component use the simplified approach: lifetime expected losses from the start.

What SBR examiners look for

Examiners want the reasoning: which business model applies and why, whether the cash flows pass the SPPI test, and the effect on profit or loss compared with other comprehensive income. Always link the treatment to the scenario's facts.

Common mistakes

• Using the coupon rate instead of the effective interest rate.
• Reclassifying equity FVOCI gains to profit or loss on disposal, which IFRS 9 does not allow.
• Waiting for a default before recognising an impairment.