1. Classification of Financial Assets
IFRS 9 (Financial Instruments) applies a dual-test approach to classify financial assets into three subsequent measurement categories. The classification depends on the entity’s Business Model for managing the assets and the contractual cash flow characteristics of the asset (the SPPI Test: Solely Payments of Principal and Interest).
Amortized Cost
  • Criteria: The asset is held within a business model whose objective is to hold assets to collect contractual cash flows, AND the contractual terms give rise to cash flows that are SPPI.
  • Example: Standard corporate bank loans, trade receivables, commercial bonds held to maturity.

Fair Value Through Other Comprehensive Income (FVOCI)
  • Criteria: The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, AND the contractual terms pass the SPPI test.
  • Example: Debt securities held for strategic liquidity purposes.

Fair Value Through Profit or Loss (FVTPL)
  • Criteria: Residual default category. Assets that do not meet the criteria for amortized cost or FVOCI.
  • Example: Equity investments held for active trading, derivatives.

2. Classification of Financial Liabilities
Most financial liabilities are classified and subsequently measured at amortized cost using the effective interest method. Financial liabilities held for trading (including derivative liabilities) are measured subsequently at FVTPL.
3. The Expected Credit Loss (ECL) Impairment Model
IFRS 9 enforces a forward-looking Expected Credit Loss (ECL) model for tracking impairments on financial assets measured at amortized cost or FVOCI. Unlike old historical incurred-loss frameworks, entities must recognize expected credit losses and changes in those losses at each reporting date to reflect changes in credit risk since initial recognition, even before an actual default event occurs.
 
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