IFRS 9 - Financial Instruments

1. Classification and Measurement

Under IFRS 9, financial instruments are classified into three main categories based on the entity's business model for managing them and the characteristics of their cash flows:

• Amortized Cost: Financial assets are measured at amortized cost if they are held to collect contractual cash flows that are solely payments of principal and interest on the principal amount outstanding.
• Fair Value through Other Comprehensive Income (FVOCI): This category is applicable for financial assets held both to collect cash flows and for sale. Changes in fair value are recognized in other comprehensive income until the asset is disposed of, at which point cumulative gains or losses are reclassified to profit or loss.
• Fair Value through Profit or Loss (FVTPL): Financial assets that do not meet the criteria for amortized cost or FVOCI are measured at FVTPL, where all changes in fair value are recognized in profit or loss.

2. Expected Credit Losses (ECL)

IFRS 9 introduces a forward-looking approach to recognizing expected credit losses. Entities must assess the credit risk associated with financial assets and recognize ECL at each reporting date. This involves:

• 12-Month ECL: For financial instruments where credit risk has not significantly increased since initial recognition.
• Lifetime ECL: For financial instruments where credit risk has increased significantly, requiring the recognition of expected losses over the entire life of the asset.

3. Hedge Accounting

IFRS 9 provides a more flexible approach to hedge accounting, aligning it more closely with risk management practices. Key aspects include:

• Hedge Relationships: Entities must document their risk management strategy and how hedging relationships are designed to mitigate those risks.
• Hedge Effectiveness: The standard allows for a more qualitative and less stringent effectiveness testing approach compared to IAS 39.

4. Presentation of Financial Instruments

IFRS 9 provides guidance on the presentation of financial instruments in the financial statements:

• Separate Presentation: Financial instruments should be presented as separate line items in the statement of financial position, with clear classification according to their measurement basis.
• Offsetting: IFRS 9 sets out specific criteria for offsetting financial assets and liabilities, requiring entities to disclose the amounts offset in the financial statements.

5. Disclosure Requirements

IFRS 9 emphasizes transparency and requires comprehensive disclosures to provide insights into an entity’s exposure to risks arising from financial instruments:

• Financial Risk Management: Disclose the entity’s strategy for managing risks related to financial instruments, including credit, liquidity, and market risks.
• Classification of Financial Instruments: Details on the classification and measurement of financial assets and liabilities, highlighting significant judgments and assumptions made.
• Fair Value Measurements: For instruments measured at fair value, entities must disclose the valuation techniques and inputs used, categorized by a three-level hierarchy (Level 1, Level 2, Level 3).
• Credit Risk Information: Disclosures on credit quality, including aging analysis and expected credit loss (ECL) assessments.
• Reconciliation of Loss Allowance: A reconciliation showing changes in the loss allowance for expected credit losses over the reporting period.

6. Overall Impact

The implementation of IFRS 9 enhances the quality of financial reporting related to financial instruments. By providing a clear framework for classification, measurement, and disclosure, the standard improves the comparability and transparency of financial statements. It enables stakeholders—including investors, analysts, and regulators—to better understand the financial position and risks of an entity, ultimately supporting informed decision-making and fostering trust in the financial reporting process.