IFRS 9 financial instruments explained

Every company has financial instruments: cash, receivables, loans, investments, borrowings, perhaps derivatives. IFRS 9 decides where they sit and how they are measured, and its expected credit loss model affects every company with trade receivables, not just banks. This guide gives the overview before the detailed guides.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

IFRS 9 Financial Instruments sets the rules for recognising and measuring financial assets and liabilities. It has three parts: classification and measurement, which places each financial asset at amortised cost, fair value through other comprehensive income or fair value through profit or loss; impairment, which requires expected credit losses to be provided for; and hedge accounting. It has applied since 1 January 2018, replacing most of IAS 39.

At a glance

Applies from
1 January 2018
Replaced
Most of IAS 39
Part 1
Classification and measurement
Part 2
Expected credit losses
Part 3
Hedge accounting
Affects
Every company, not only banks
IFRS 9 financial instruments explainedApplies from: 1 January 2018; Replaced: Most of IAS 39; Part 1: Classification and measurement; Part 2: Expected credit losses; Part 3: Hedge accounting; Affects: Every company, not only banks.KEY FACTS AT A GLANCEIFRS 9 financial instruments explainedApplies from1 January 2018ReplacedMost of IAS 39Part 1Classification andmeasurementPart 2Expected credit lossesPart 3Hedge accountingAffectsEvery company, not onlybanksChecked against official sourcesTax BakersIFRS 9 financial instruments explainedApplies from: 1 January 2018; Replaced: Most of IAS 39; Part 1: Classification and measurement; Part 2: Expected credit losses; Part 3: Hedge accounting; Affects: Every company, not only banks.KEY FACTS AT A GLANCEIFRS 9 financial instrumentsexplainedApplies from1 January 2018ReplacedMost of IAS 39Part 1Classification and measurementPart 2Expected credit lossesPart 3Hedge accountingAffectsEvery company, not only banksChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What are the three parts of IFRS 9?

IFRS 9 in three partsIFRS 9 in three parts1Classificationand measurementWhich category,and how measured2ImpairmentExpected creditlosses3HedgeaccountingLinking hedgesto the hedged risk
Classification and measurement, impairment and hedge accounting work together.

How are financial assets classified?

Debt instruments, such as loans, bonds and receivables, are classified by two tests: the company's business model for managing them and whether their contractual cash flows are solely payments of principal and interest (the SPPI test).

CategoryWhen it appliesExample
Amortised costHeld to collect cash flows, and SPPITrade receivables, a bank's loan book
Fair value through OCIHeld to collect and sell, and SPPIA liquidity portfolio of bonds
Fair value through profit or lossEverything else, including trading and instruments failing SPPIDerivatives, trading securities, convertible bonds held

Equity investments are at fair value through profit or loss, unless the company irrevocably elects, for an investment not held for trading, to present fair value changes in other comprehensive income, with no recycling to profit on sale. See classification and measurement.

What about financial liabilities?

Most are measured at amortised cost using the effective interest method: loans, bonds issued, trade payables. Derivatives and trading liabilities are at fair value through profit or loss. If a company designates a liability at fair value through profit or loss, the part of the fair value change caused by changes in its own credit risk goes to other comprehensive income, so a company does not report a gain because its own credit has worsened.

What is the expected credit loss model?

IAS 39 recognised a loss only once there was evidence that it had been incurred. IFRS 9 requires a provision for losses expected in the future, from the day an asset is recognised. For most loans the provision starts at 12-month expected losses and moves to lifetime expected losses if credit risk increases significantly. For trade receivables without a significant financing component, companies always provide for lifetime losses, usually with a provision matrix.

A worked example: a company's receivables

A distributor has trade receivables of CU 500,000. Using its history of defaults, adjusted for the current economic outlook, it expects to lose 1% of current balances, 5% of balances 31 to 90 days overdue and 40% of those more than 90 days overdue.

AgeingBalance (CU)Loss rateExpected loss (CU)
Current400,0001%4,000
31 to 90 days overdue80,0005%4,000
Over 90 days overdue20,00040%8,000
Total500,00016,000

The loss allowance is CU 16,000, even though no customer has yet defaulted.

What changed in hedge accounting?

IFRS 9 aligns hedge accounting more closely with how companies manage risk. It removed the 80 to 125 per cent effectiveness test of IAS 39, allows more hedged items, such as risk components of non-financial items, and requires more disclosure. Companies could choose to keep IAS 39's hedge accounting rules, and some, especially banks with macro hedges, still do.

What else does IFRS 9 cover?

When financial assets and liabilities are recognised and derecognised, including factoring and securitisations; how to account for modified loans; embedded derivatives in financial liabilities and non-financial contracts; and financial guarantee contracts.

Key terms

TermMeaning
Amortised costInitial amount, less repayments, plus or minus interest calculated with the effective interest method, less the loss allowance
Effective interest rateThe rate that discounts expected cash flows exactly to the asset's initial carrying amount
SPPISolely payments of principal and interest, the cash flow test for amortised cost and FVOCI
Loss allowanceThe provision for expected credit losses, deducted from the asset
RecyclingMoving gains or losses from other comprehensive income to profit or loss when an asset is sold

How does US GAAP compare?

US GAAP has separate rules for debt securities, equity investments and loans, and its CECL model, under ASC 326, requires lifetime expected losses from day one for all assets in its scope (see IFRS 9 vs CECL). See IFRS vs US GAAP: the key differences.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Questions people ask

What is IFRS 9?

The IFRS standard on financial instruments, covering classification and measurement, expected credit losses and hedge accounting, effective from 1 January 2018.

What are the IFRS 9 categories for financial assets?

Amortised cost, fair value through other comprehensive income, and fair value through profit or loss.

Does IFRS 9 affect companies that are not banks?

Yes. Every company with receivables must provide for expected credit losses.

What did IFRS 9 replace?

Most of IAS 39 Financial Instruments: Recognition and Measurement.

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.

More in IFRS 9

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