1. Classification of Financial Liabilities
Financial liabilities (such as bonds issued, trade payables, and bank loans) are classified and measured subsequently at amortized cost, except for financial liabilities measured at FVTPL (such as derivative liabilities or short-selling obligations)
.
2. The Own Credit Risk Presentation Solution
When an entity elects to measure a financial liability at fair value under the Fair Value Option, shifts in the entity’s own credit standing cause changes in the liability’s valuation:
  • If an entity’s credit rating downgrades, the market value of its outstanding debt decreases. Under older standards, this drop created an artificial gain in the entity’s income statement.
  • Modern Separation Rules: To prevent this, both IFRS 9 and US GAAP mandate that the portion of the fair value change caused by shifts in the entity’s own credit risk must be presented in Other Comprehensive Income (OCI), rather than net income. The remaining portion of the fair value change is reported in profit or loss. 

 
PreviousNext