IFRS 9 – Financial Instruments
Comprehensive Study Guide
Classification · Measurement · Impairment (ECL) · Hedge Accounting · Derecognition — with Real-Life Bangladesh & Global Examples
📋 Table of Contents
Overview & Background
Why IFRS 9 was created, what it covers, and the core definitions every practitioner needs
Business model + SPPI test determines AC, FVOCI or FVTPL.
Forward-looking, probability-weighted expected credit loss from Day 1.
Aligned with risk management; removes 80–125% threshold; adds rebalancing.
▶ IN SCOPE
- Loans, trade receivables, bonds, equity investments
- Financial liabilities — borrowings, debentures, payables
- Derivatives: swaps, FX forwards, options
- Loan commitments & financial guarantee contracts
✖ OUT OF SCOPE
- Subsidiaries/associates/JVs (IAS 27/28)
- Insurance contracts (IFRS 17); Leases (IFRS 16)
- Share-based payments (IFRS 2); IAS 19 obligations
| Term | Definition |
|---|---|
| Financial Asset | Cash; right to receive cash/FA; equity instrument; certain derivatives |
| Financial Liability | Obligation to deliver cash/FA under unfavourable conditions |
| Derivative | Value changes with underlying; little/no initial investment; future settlement |
| EIR | Rate discounting all future cash flows to gross carrying amount |
| ECL | Probability-weighted credit loss estimate (present value of shortfalls) |
| Fair Value | Selling price in an orderly transaction (per IFRS 13) |
Dutch-Bangla Bank Ltd (DBBL) holds BDT 5,000 crore in SME loans. Under IAS 39, losses were recognised only after default. Under IFRS 9 (Bangladesh Bank BRPD Circular), DBBL must now estimate 12-month ECL on Day 1 for all performing loans — directly impacting capital adequacy ratios and requiring new internal credit models.
Classification of Financial Assets
The two-step framework: Business Model Test → SPPI Test → Category
• Hold to Collect (HTC): Hold & receive contractual cash flows; sales are incidental.
• HTC & Sell: Both collecting cash flows and selling are integral.
• Other / Trading: Managed on FV basis → FVTPL.
Do cash flows represent Solely Payments of Principal and Interest?
• Passes: Fixed/floating rate instruments with basic lending features.
• Fails: Leverage, equity-linked returns, convertibility features.
| Category | Business Model | SPPI? | Initial | Subsequent | Gains / Losses |
|---|---|---|---|---|---|
| Amortised Cost | Hold to Collect | ✅ | FV + TC | Amortised cost (EIR) | Interest → P&L via EIR |
| FVOCI (Debt) | HTC & Sell | ✅ | FV + TC | Fair Value | Interest (EIR) → P&L; FV → OCI (recyclable) |
| FVOCI (Equity) | Irrevocable election | N/A | FV + TC | Fair Value | Dividends → P&L; FV → OCI (NOT recyclable) |
| FVTPL | Trading / Other / FVO | ❌ or N/A | FV (TC expensed) | Fair Value | All changes → P&L |
IBBL originates a BDT 10 crore 5-year term loan to a garment exporter at 9% p.a. Business model: hold and collect instalments — no secondary sales planned. Cash flows are principal + mark-up only → SPPI passes.
Result → Amortised Cost. Interest income via EIR; ECL provision at each reporting date.
ICB holds Bangladesh Government T-bills. Policy: earn coupon income but sell when liquidity needed → HTC & Sell. T-bill cash flows are pure principal + interest → SPPI passes.
Result → FVOCI (Debt). Coupon to P&L via EIR; mark-to-market gains/losses to OCI; recycled to P&L on sale.
Brac Bank's treasury actively trades USD/BDT FX forwards and interest rate swaps for short-term profit. Managed on daily P&L basis → "Other" business model.
Result → FVTPL. All FV changes (gains/losses) in P&L daily; transaction costs expensed immediately.
A group holds 3% equity stake in a supplier for long-term relationship (not for trading). FVOCI election made irrevocably at inception.
Dividends received → P&L. Share price movements → OCI permanently. On disposal, cumulative OCI gain/loss transferred to retained earnings — NOT recycled to P&L.
| Instrument | Key Feature | SPPI | Reason |
|---|---|---|---|
| Bangladesh Govt T-bill | Fixed coupon | ✅ Pass | Pure principal + interest |
| Floating rate KIBOR loan | KIBOR + 200bps | ✅ Pass | TVM + credit risk compensation |
| Convertible bond | Holder converts to shares | ❌ Fail | Equity conversion — non-SPPI return |
| Profit-sharing loan | Interest = % of borrower profit | ❌ Fail | Equity-like return — not basic lending |
| Loan with early repayment at par | Prepayment at par | ✅ Pass | Prepayment is principal — SPPI consistent |
| Leveraged inverse floater | Rate = 20% − 2×LIBOR | ❌ Fail | Leverage + inverse relationship |
Classification of Financial Liabilities
Most liabilities follow amortised cost; exceptions include trading and FVO liabilities
| Category | Examples | Measurement |
|---|---|---|
| Amortised Cost | Bank loans, debentures, trade payables | EIR method — default treatment |
| FVTPL — Trading | Short bond positions, written derivatives | Fair value; all changes → P&L |
| FVTPL — FVO | Liabilities to eliminate mismatch | Fair value; own credit risk → OCI |
| Financial Guarantee | Parent guarantee for subsidiary loan | Higher of ECL provision or amortised premium |
When Barclays' credit spread widened in 2022, fair value of its own issued bonds fell by GBP 1.6 billion. Under IFRS 9, this gain sits in OCI — not P&L — preventing misleading earnings inflation.
Recognition & Measurement
Initial recognition, the EIR method, reclassification matrix, and the Fair Value Option
- Recognised when entity becomes party to contractual provisions.
- Regular-way purchases: trade date or settlement date (consistent policy per category).
- FVTPL: Fair value only; transaction costs → P&L immediately.
- AC / FVOCI: Fair value plus directly attributable transaction costs.
Prime Bank buys a BDT 100m bond at FV BDT 102m + brokerage BDT 0.5m.
If AC: Initial CA = BDT 102.5m (all costs included).
If FVTPL: Initial CA = BDT 102m; BDT 0.5m expensed immediately to P&L.
Loan face BDT 1,000,000; coupon 10%; EIR 12% (issued at discount BDT 927,904).
Year 1 interest income = 12% × 927,904 = BDT 111,348.
Cash coupon = BDT 100,000. Accretion = BDT 11,348 → CA grows toward par.
| From → To | FV at Reclassification Date | P&L Effect | OCI Effect |
|---|---|---|---|
| AC → FVTPL | Recognised; diff vs CA → P&L | Yes — gain/loss | None |
| AC → FVOCI | Recognised; diff vs CA → OCI | No | Diff in OCI |
| FVTPL → AC | FV = new gross carrying amount | No | None |
| FVTPL → FVOCI | Continue at FV | No | Continues |
| FVOCI → AC | Cumulative OCI adjusted to CA | No | Removed to CA |
| FVOCI → FVTPL | Continue at FV; cumul. OCI → P&L | Yes (recycled) | Removed |
- Liabilities at FVO: own credit risk → OCI (not P&L).
- Most common use: asset–liability matching situations.
MetLife holds bonds to back insurance liabilities whose payouts are linked to investment returns. Designating bonds at FVTPL (FVO) eliminates the accounting mismatch between FV-linked liabilities and AC-measured bond assets — both now move together through P&L.
Impairment — Expected Credit Loss (ECL) Model
From "wait for default" to forward-looking, probability-weighted credit risk recognition from Day 1
| Aspect | IAS 39 | IFRS 9 |
|---|---|---|
| Trigger | Objective evidence of default | Recognised from Day 1 |
| Horizon | Losses already incurred | 12-month or lifetime |
| Timing | "Too little, too late" | Proactive, forward-looking |
| Macro factors | Not required | Mandatory — economic forecasts |
Portfolio EAD = BDT 200 crore; PD (12-month) = 3%; LGD = 50%.
12-month ECL = 3% × 50% × BDT 200 crore = BDT 3 crore
Recognised on Day 1 even if all loans fully performing.
Stage 1 (Jan 2023): BDT 20 crore loan to ABC Apparels Ltd; credit rating BB+. ECL = 12-month = BDT 36 lakh (2% × 45% × 20 crore).
Stage 2 (Jun 2023): ABC's largest buyer cancels contracts; rating drops to B−; 15 days overdue — SICR assessed. Move to Stage 2. ECL switches to Lifetime = BDT 2.2 crore. Significant jump in provision recognised in P&L.
Stage 3 (Dec 2023): ABC misses three EMIs; classified NPL per Bangladesh Bank. Interest now on net CA. Lifetime ECL = BDT 8 crore based on forced-sale collateral recovery analysis.
- Credit rating downgraded significantly (e.g., IG → sub-IG)
- >30 days past due — rebuttable presumption of SICR
- Borrower cash flow deterioration / operating losses
- Forbearance — concessions due to financial difficulty
- Adverse changes in regulatory/market environment
- Disappearance of active market for the instrument
ACI groups receivables by ageing:
0–30 days: 0.5% → BDT 20m × 0.5% = BDT 10 lakh
31–60 days: 2% → BDT 15m × 2% = BDT 30 lakh
61–90 days: 8% → BDT 10m × 8% = BDT 80 lakh
>90 days: 25% → BDT 5m × 25% = BDT 1.25 crore
Total ECL Allowance = BDT 1.95 crore
Rates adjusted +10% for post-COVID distribution channel risks.
Writes off BDT 50 lakh NPL. Six months later, guarantor pays BDT 8 lakh.
Dr. Cash 8L / Cr. Impairment Gain (P&L) 8L. Write-off is NOT reversed.
Hedge Accounting
Aligning accounting with risk management — three types, qualifying criteria, and mechanics
- Formal documentation at inception: risk management objective, strategy, hedging instrument, hedged item, hedged risk, effectiveness assessment method.
- Eligible hedging instrument: Derivative at FVTPL; or non-derivative for FX risk.
- Eligible hedged item: Recognised asset/liability, firm commitment, highly probable forecast transaction, net investment in foreign operation.
- Economic relationship: Hedging instrument and hedged item move in opposite directions due to hedged risk.
- Credit risk does not dominate value changes.
- Hedge ratio reflects actual quantities used in risk management (no intentional imbalance).
| Aspect | IAS 39 | IFRS 9 |
|---|---|---|
| Effectiveness threshold | 80%–125% | No fixed range |
| Test type | Retrospective + prospective | Prospective only |
| Basis | Quantitative | Economic relationship |
| Rebalancing | Not required | Required |
| Voluntary discontinuation | Permitted | Not permitted if criteria still met |
| Type | Hedged Item | Risk | Hedging Instrument | Hedged Item Treatment |
|---|---|---|---|---|
| Fair Value Hedge | Recognised asset/liability or firm commitment | FV changes | FV changes → P&L | CA adjusted for hedged risk → P&L. Net = ineffectiveness only. |
| Cash Flow Hedge | Variable-rate item or highly probable forecast transaction | Cash flow variability | Effective → OCI (CFHR); Ineffective → P&L | OCI recycled → P&L when hedged item affects P&L (or adjusts cost of non-financial item). |
| Net Investment Hedge | Net investment in foreign subsidiary | FX translation | Same as cash flow hedge | OCI recycled → P&L on disposal of foreign operation. |
SCB holds BDT 500 crore fixed-rate bonds (5% coupon, 10-year). Enters pay-fixed, receive-floating IRS to hedge fair value changes from rising rates. This is a fair value hedge. When rates rise and bond FV falls BDT 20 crore, swap gains BDT 19.5 crore. Net P&L = BDT 0.5 crore (ineffectiveness only).
Square expects USD 5m export proceeds in 6 months. Enters USD/BDT forward sale locking rate at BDT 109 — cash flow hedge of highly probable forecast transaction. FX gains/losses on forward → OCI until export revenue recognised → then recycled to P&L, offsetting the FX movement on USD receivable.
Telenor ASA holds net investment in Grameenphone. Raises BDT-denominated debt at group level to hedge BDT/NOK translation risk — net investment hedge. FX gains/losses on BDT debt → OCI alongside translation reserve; recycled to P&L only when Grameenphone is disposed.
Derecognition
When to remove financial assets and liabilities from the statement of financial position
- Contractual rights to cash flows expire? → Derecognise.
- Asset transferred? If No → Continue to recognise.
- Substantially ALL risks & rewards transferred? → Derecognise; gain/loss to P&L.
- Substantially ALL risks & rewards retained? → Do NOT derecognise; treat as collateralised borrowing.
- Neither? → Has control transferred? Yes → Derecognise. No → Continuing involvement approach.
Agrani Bank sells T-bills to Bangladesh Bank under 7-day repo at fixed repurchase price. Agrani retains substantially all risks (price, credit). No derecognition — T-bills remain on balance sheet; cash = short-term borrowing.
- Substantial modification (10% NPV test): PV of new cash flows at original EIR differs by ≥10% from old CA → extinguish old, recognise new at FV; difference → P&L.
- Non-substantial modification: Recalculate CA at PV of new cash flows at original EIR; difference → P&L as modification gain/loss.
Garment company: bank loan CA BDT 52 crore (incl. accrued interest). Lender accepts BDT 44 crore in full settlement. Gain on extinguishment = BDT 8 crore → P&L. Old liability fully derecognised.
| Arrangement | Risk & Reward | Accounting |
|---|---|---|
| Outright sale — no recourse | Substantially all transferred | Derecognise; gain/loss to P&L |
| Sale with full recourse | Retained | No derecognition; proceeds = borrowing |
| Repo (fixed repurchase price) | Retained | Collateralised borrowing |
| Securitisation — retain subordinate tranche | Partial | Continuing involvement approach |
| Factoring — without recourse | Transferred | Derecognise; discount = finance cost |
| Factoring — with recourse | Retained | No derecognition; advance = liability |
RMG exporter sells BDT 10 crore export LC receivables to a factor without recourse. Receives BDT 9.7 crore immediately. Under IFRS 9: receivable derecognised; BDT 0.3 crore discount = finance cost in P&L. Had the sale been with recourse — no derecognition; BDT 9.7 crore = short-term borrowing.
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