IFRS 9 - Classification & Measurement (Financial Assets)

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Classification & Measurement - IFRS 9 - Financial Assets

IFRS 9 is an international accounting standard that governs the classification, measurement, and recognition of financial assets and liabilities. The classification and measurement of financial instruments is a crucial part of IFRS 9. This standard introduces a new approach for the classification and measurement of financial assets, with a focus on a company’s business model for managing its financial assets and the contractual cash flow characteristics of those assets.

IFRS 9 classifies financial assets into three categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). Each category has different accounting treatment.

Amortized Cost

Financial assets are classified as amortized cost if the following two conditions are met:

• The financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows.
• The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Amortized cost is calculated using the effective interest rate method. This method recognizes interest income based on the effective interest rate of the financial asset over its expected life. For example, if a company has a loan with a fixed interest rate, it would be classified as an amortized cost asset if it meets the above criteria.

Fair Value through Other Comprehensive Income (FVOCI)

Financial assets are classified as FVOCI if they meet the following conditions:

• The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
• The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Under FVOCI classification, gains and losses are recognized in other comprehensive income (OCI) until the financial asset is sold or impaired. For example, if a company holds a bond with a fixed interest rate and plans to hold it until maturity but also has the option to sell it, it would be classified as an FVOCI asset.

Fair Value through Profit or Loss (FVTPL)

Financial assets that do not meet the above criteria are classified as FVTPL. For example, if a company holds equity securities or derivatives, it would be classified as an FVTPL asset.

Under FVTPL classification, gains and losses are recognized in profit or loss, with no option for recognition in OCI. This category is used for financial assets that are held for trading purposes or that do not meet the criteria for amortized cost or FVOCI classification.

Exceptions to Above Rules?

Yes there are some exceptions to above rules - For details please reach out to experts on this area.

Practical Examples

Let’s consider some practical examples to understand the classification and measurement of financial assets under IFRS 9.

• Example 1: ABC Ltd. is a manufacturing company that has invested in bonds issued by another company, with the intention of holding them until maturity. The bonds provide a fixed interest rate, and the cash flows from the bonds are solely payments of principal and interest. In this case, the bonds would be classified as amortized cost assets, as they meet both the business model and the contractual cash flow criteria for amortized cost classification.
• Example 2: XYZ Ltd. is an investment company that holds equity securities for trading purposes. In this case, the equity securities would be classified as FVTPL assets, as they do not meet the business model or contractual cash flow criteria for amortized cost or FVOCI classification.

Insights For You

The classification and measurement of financial assets is a complex process that requires careful consideration of a company's business model and contractual cash flows. You should always reach out to experts if the process is not simple and there are any complications with assessing business model or contractual cashflow test. This is just a summary, there is a lot of guidance available in IFRS 9 and its interpretation.

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