.
Overview of IFRS 9
IFRS 9 is an accounting standard issued by the International Accounting Standards
Board (IASB) that provides guidelines on the recognition, classification, measurement,
impairment, and hedge accounting of financial instruments.
🔹 Effective Date: IFRS 9 replaced IAS 39 and became effective on January 1, 2018.
🔹 Objective: To provide a more transparent and forward-looking approach to financial
instrument accounting.
2. Key Concepts in IFRS 9
A. Recognition and Derecognition of Financial Instruments
✔ Recognition – A financial instrument is recognized when a company becomes a party to
the contractual terms of the instrument.
✔ Derecognition – A financial instrument is removed from the balance sheet when:
The rights to cash flows expire.
The asset/liability is transferred to another party.
📌 Example:
A company buys shares of a listed company → Recognize the financial asset.
A company sells bonds it was holding → Derecognize the financial asset.
B. Classification & Measurement of Financial Instruments
IFRS 9 classifies financial assets into three categories:
Category Description Example Accounting Treatment
Fair Value Through Profit Held for trading or Shares in a Gains/losses go to Income
or Loss (FVTPL) short-term gaisns stock market Statement
Fair Value Through Other Long-term Gains/losses go to Other
Comprehensive Income strategic Mutual Funds Comprehensive Income
(FVOCI) investments (OCI)
Debt securities Government Recorded at cost, adjusted
Amortized Cost
held until maturity Bonds for interest
📌 Example:
A company buys government bonds and holds them until maturity → Amortized
Cost.
A company invests in PSX-listed shares for short-term profit → FVTPL.
C. Impairment of Financial Assets (Expected Credit Loss Model - ECL)
IFRS 9 introduced a forward-looking impairment model called Expected Credit
Loss (ECL).
Companies must estimate potential future losses, even if no default has occurred
yet.
✔ 12-Month ECL → Applies if the credit risk is low.
✔ Lifetime ECL → Applies if credit risk has increased significantly.
📌 Example:
A company gives a Rs. 5 million loan to a customer. If the risk of default increases,
it must recognize an impairment loss before the customer actually defaults.
D. Hedge Accounting
Hedge accounting is used when companies use derivatives (e.g., options, futures) to manage
risks like:
✔ Foreign exchange risk
✔ Interest rate risk
✔ Commodity price risk
📌 Example:
A Pakistani exporter hedges against USD/PKR fluctuations by entering into a
forward contract.
3. IFRS 9 vs. IAS 39 (Key Improvements)
Aspect IAS 39 (Old Standard) IFRS 9 (New Standard)
Classification Complex (4 categories) Simplified (3 categories)
Impairment Model Incurred Loss Model (reactive) Expected Credit Loss Model (proactive)
Hedge Accounting Strict rules More flexible
4. IFRS 9 Application in Financial Statements
Financial Statement Impact of IFRS 9
Classification as FVTPL, FVOCI, or Amortized
Balance Sheet
Cost
Income Statement Gains/losses from FVTPL securities reported in net
Financial Statement Impact of IFRS 9
income
Statement of Comprehensive Income
FVOCI securities' unrealized gains/losses recorded
(OCI)
📌 Example:
If a company earns Rs. 100,000 from short-term trading in shares, it is recorded in
the Income Statement.
If a company holds mutual funds long-term, the value changes are recorded in OCI.
5. Conclusion & Key Takeaways
✔ IFRS 9 simplifies financial instrument classification (FVTPL, FVOCI, Amortized Cost).
✔ The Expected Credit Loss (ECL) model improves risk recognition.
✔ Hedge accounting is more flexible, helping businesses manage risks.
✔ Financial instruments must be valued at fair market price in most cases.
