Classification and measurement under IFRS 9: business model and SPPI

Classification decides whether a financial asset's value changes hit profit, other comprehensive income or neither. Two companies holding the same bond can classify it differently because they manage it differently. This guide explains both tests and works through a bond portfolio.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

IFRS 9 classifies a debt instrument by asking two questions. Are its contractual cash flows solely payments of principal and interest on the principal outstanding (the SPPI test)? And is it held to collect those cash flows, to collect and sell, or for some other purpose (the business model test)? Held-to-collect SPPI assets are at amortised cost, held-to-collect-and-sell SPPI assets at fair value through OCI, and everything else at fair value through profit or loss.

At a glance

Test 1
SPPI: principal and interest only
Test 2
Business model
Hold to collect + SPPI
Amortised cost
Collect and sell + SPPI
FVOCI
Everything else
FVTPL
Equity
FVTPL, or elect FVOCI
Classification and measurement under IFRS 9: business model and SPPITest 1: SPPI: principal and interest only; Test 2: Business model; Hold to collect + SPPI: Amortised cost; Collect and sell + SPPI: FVOCI; Everything else: FVTPL; Equity: FVTPL, or elect FVOCI.KEY FACTS AT A GLANCEClassification and measurement under IFRS 9:business model and SPPITest 1SPPI: principal andinterest onlyTest 2Business modelHold to collect + SPPIAmortised costCollect and sell + SPPIFVOCIEverything elseFVTPLEquityFVTPL, or elect FVOCIChecked against official sourcesTax BakersClassification and measurement under IFRS 9: business model and SPPITest 1: SPPI: principal and interest only; Test 2: Business model; Hold to collect + SPPI: Amortised cost; Collect and sell + SPPI: FVOCI; Everything else: FVTPL; Equity: FVTPL, or elect FVOCI.KEY FACTS AT A GLANCEClassification and measurementunder IFRS 9: business model andSPPITest 1SPPI: principal and interest onlyTest 2Business modelHold to collect + SPPIAmortised costCollect and sell + SPPIFVOCIEverything elseFVTPLEquityFVTPL, or elect FVOCIChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

How is a debt instrument classified?

How is a debt instrument classified?How is a debt instrument classified?Are the cash flows solely paymentsof principal and interest?NoFair value throughprofit or lossYesIs it held only to collect thecontractual cash flows?NoFVOCI if held to collectand sell, else FVTPLYesAmortised cost
Both tests are applied at initial recognition. Equity instruments follow separate rules.

What is the SPPI test?

The contractual cash flows must be consistent with a basic lending arrangement: repayment of principal and interest that compensates for the time value of money, credit risk, other basic lending risks and costs, and a profit margin. Features that introduce exposure to unrelated risks fail the test.

InstrumentSPPI?Why
Fixed-rate bond or loanYesPrincipal and interest only
Floating-rate loan linked to a market rateYesInterest compensates for time value and credit
Bond convertible into the issuer's sharesNoReturns depend on the share price
Loan whose interest depends on the borrower's revenueNoLinked to performance, not lending risk
Trade receivableYesPayment of the invoiced amount

Loans whose interest changes with environmental, social or governance targets need care. Amendments to IFRS 9 issued in 2024, effective from 2026, clarify how to assess such contingent features against the test and add disclosure requirements.

What is the business model test?

It looks at how a group of assets is managed by key management, not at individual intentions. The three business models are:

  • Hold to collect: the aim is to collect contractual cash flows. Some sales are allowed if they are infrequent, insignificant, or made because credit risk has increased.
  • Hold to collect and sell: both collecting and selling are integral, as in a liquidity portfolio that is regularly rebalanced.
  • Other: the assets are managed and evaluated on a fair value basis, or held for trading.

A worked example: one bank, three portfolios

PortfolioHow it is managedClassification
Government bonds bought to match long-term depositsHeld to maturity to collect couponsAmortised cost
Treasury liquidity portfolio of the same bondsCoupons collected, bonds sold regularly to meet liquidity needsFair value through OCI
Trading desk holding the same bondsBought and sold for short-term profitFair value through profit or loss
Convertible bonds held by the investment teamFail SPPI, whatever the business modelFair value through profit or loss

The same bond lands in three different categories because the bank manages each portfolio differently.

What about receivables that are factored?

A company that regularly sells its trade receivables to a factor may not be holding them only to collect. If selling is integral to how it manages the portfolio, the receivables are held to collect and sell, and are measured at fair value through OCI; if all of them are sold soon after invoicing, they may be at fair value through profit or loss. Occasional factoring to manage credit risk is consistent with holding to collect. Whether factored receivables leave the balance sheet is a separate question: see derecognition of financial assets.

How is each category measured?

CategoryBalance sheetProfit or lossOther comprehensive income
Amortised costAmortised cost less loss allowanceInterest (effective interest method), credit lossesNone
FVOCI, debtFair valueInterest, credit losses, exchange differencesOther fair value changes, recycled to profit on sale
FVTPLFair valueAll fair value changesNone
FVOCI, equity electionFair valueDividends onlyAll other changes, never recycled

Can a company choose fair value instead?

Yes, at initial recognition, a company may designate a financial asset at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch, for example where related liabilities are already measured at fair value. The designation is irrevocable.

Can assets be reclassified later?

Only when the business model for managing them changes, which IFRS 9 expects to be very rare, such as when a company buys or closes a business line. Reclassification applies prospectively from the first day of the next reporting period.

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Questions people ask

What are the two tests for classifying financial assets under IFRS 9?

The SPPI test on the contractual cash flows and the business model test on how the assets are managed.

When is a financial asset measured at amortised cost?

When it is held to collect contractual cash flows and those cash flows are solely payments of principal and interest.

How are equity investments classified under IFRS 9?

At fair value through profit or loss, unless the company irrevocably elects fair value through OCI for an investment not held for trading.

Can financial assets be reclassified under IFRS 9?

Only when the business model for managing them changes, which is expected to be very rare.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

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This guide is general information. It is not tax or legal advice for your situation.