The CA Hub

Financial instruments · IFRS 9

IFRS 9 Financial Instruments

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Status & recent changes
  2. Objective
  3. Scope
  4. Key definitions
  5. Recognition & measurement
  6. Key disclosures
  7. Common exam traps
  8. Worked example
  9. Related standards
  10. Practise MCQs

Status & recent changes

  • Amendments issued in 2024 and effective from 1 January 2026 clarify some classification and derecognition points (for example, assets with ESG-linked features and liabilities settled through electronic payment systems). Check the current text for details.

Objective

Sets the rules for recognising, classifying and measuring financial assets and liabilities, impairment using expected credit losses, derecognition and hedge accounting.

Scope

  • Most financial instruments, excluding interests in subsidiaries, associates and joint ventures, lease rights and obligations (largely), employee benefit plans, insurance contracts, and own equity instruments.

Key definitions

Amortised cost
The amount initially recognised, minus principal repayments, plus or minus cumulative amortisation using the effective interest method, adjusted for any loss allowance.
Effective interest rate
The rate that exactly discounts estimated future cash flows to the gross carrying amount of the asset or the amortised cost of the liability.
SPPI test
Whether contractual cash flows are solely payments of principal and interest on the principal outstanding.
Expected credit losses (ECL)
A probability-weighted estimate of credit losses over the relevant period.

Recognition & measurement

Initial recognition

  • Recognise when the entity becomes party to the contract.
  • Measure at fair value plus transaction costs (transaction costs are expensed for items at FVTPL).
  • Trade receivables without a significant financing component are measured at the transaction price.

Classifying financial assets

  • Debt instruments at amortised cost: held in a business model to collect contractual cash flows, and SPPI is met.
  • Debt instruments at FVOCI: business model is both to collect cash flows and to sell, and SPPI is met; gains are recycled to profit or loss on derecognition.
  • Everything else is at FVTPL.
  • Equity investments are at FVTPL, but an irrevocable election allows FVOCI for equity not held for trading; those gains are never recycled (dividends still go to profit or loss).
  • A fair value option to designate at FVTPL is available to remove an accounting mismatch.
  • Financial assets are reclassified only when the business model changes, prospectively.

Financial liabilities

  • Mostly measured at amortised cost using the effective interest method.
  • Held-for-trading liabilities and derivatives are at FVTPL.
  • For liabilities designated at FVTPL, the change in fair value due to own credit risk generally goes to OCI.
  • Financial liabilities are never reclassified.

Impairment (ECL model)

  • Applies to assets at amortised cost, debt at FVOCI, lease receivables, contract assets and certain loan commitments and guarantees.
  • Stage 1: recognise 12-month ECL; interest on gross carrying amount.
  • Stage 2: significant increase in credit risk since initial recognition → lifetime ECL; interest on gross carrying amount.
  • Stage 3: credit-impaired → lifetime ECL; interest on the net (amortised cost) amount.
  • Simplified approach: always lifetime ECL for trade receivables and contract assets without a significant financing component (a provision matrix is commonly used).

Derecognition and hedging

  • Derecognise a financial asset when the rights to cash flows expire or it is transferred with substantially all risks and rewards.
  • Derecognise a financial liability when it is extinguished (discharged, cancelled or expires).
  • Hedge accounting (fair value, cash flow and net investment hedges) is optional and requires formal designation, documentation and an economic relationship.

Key disclosures

  • Disclosures are mainly in IFRS 7.

Common exam traps

  • Finance cost on a liability uses the effective rate, not the coupon rate.
  • Equity investments cannot be at amortised cost.
  • FVOCI election for equity: no recycling on disposal — unlike FVOCI debt.
  • Under the general ECL approach, a new loan starts with a 12-month ECL allowance even if nothing has gone wrong.

Worked example: Amortised cost of a bond liability

Scenario. An entity issues a bond with a nominal value of $10,000, receiving $9,600 net of costs. The coupon is 5% ($500) paid annually; the effective interest rate is 6%.

  1. Opening amortised cost = $9,600.
  2. Finance cost = 9,600 × 6% = $576 (profit or loss).
  3. Cash paid = $500.
  4. Closing liability = 9,600 + 576 − 500 = $9,676.

Answer: Finance cost $576; liability carried at $9,676 at the end of Year 1.

Practise MCQs on this standard

Test your understanding of IFRS 9 with free chapter-wise MCQs and explanations in these question banks.

CAF-6 Corporate ReportingICAP CAFACCA FR Financial ReportingACCACA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IFRS 9 text on ifrs.org