IFRS 9 Financial Instruments is the IFRS standard for financial assets and liabilities. It has three parts: classification and measurement, impairment under the expected credit loss model, and hedge accounting. It replaced most of IAS 39 and has applied to annual periods beginning on or after 1 January 2018. The IASB's latest significant amendments, on classification and measurement, are effective for periods beginning on or after 1 January 2026.
Who applies IFRS 9 in the UK
IFRS 9 applies to any entity reporting under UK-adopted international accounting standards. Under section 403 of the Companies Act 2006, that includes every parent company whose securities are traded on a UK regulated market, for its group accounts. Many subsidiaries of IFRS groups also report under IFRS.
UK GAAP reporters can opt in. FRS 102 paragraph 11.2 offers an accounting policy choice between three options: Sections 11 and 12 in full, the recognition and measurement provisions of IAS 39, or those of IFRS 9, each with FRS 102's own disclosure requirements. A subsidiary that has to produce IFRS 9 numbers for its parent's consolidation can therefore use the same measurement in its own statutory accounts.
Classifying financial assets
When a financial asset is first recognised, it is measured at fair value, adjusted for transaction costs unless it is held at fair value through profit or loss. Trade receivables without a significant financing component are measured at their transaction price. The asset is then classified into one of three categories, based on two tests: the business model for managing the asset, and whether its contractual cash flows are solely payments of principal and interest on the principal outstanding (the SPPI test).
- Amortised cost. The asset is held to collect contractual cash flows, and those cash flows pass the SPPI test;
- Fair value through other comprehensive income (FVOCI). The asset is held in a business model whose objective is achieved by both collecting cash flows and selling, and the cash flows pass the SPPI test;
- Fair value through profit or loss (FVTPL). Everything else, including any debt instrument that fails the SPPI test.
Two elections change this. For equity investments that are not held for trading, an entity can irrevocably elect, share by share, to present fair value changes in other comprehensive income. Those gains and losses are never recycled to profit or loss, even on disposal, although dividends still go through profit or loss. Separately, an entity can designate an asset at FVTPL on initial recognition if that removes or significantly reduces an accounting mismatch. Assets are reclassified only when the business model itself changes.
Worked example
A UK trading group reporting under IFRS holds four kinds of financial asset:
- Trade receivables. Held to collect, with simple payment terms, so they are measured at amortised cost with an expected credit loss allowance;
- A treasury bond portfolio. Managed both to collect coupons and to sell when liquidity is needed, with plain interest terms, so it is measured at FVOCI. Gains and losses are recycled to profit or loss on sale;
- A 5% stake in an unlisted supplier. FVTPL by default. If the group wants to keep the volatility out of profit, it can make the irrevocable FVOCI election at initial recognition, accepting that gains will never reach profit or loss;
- A convertible loan note. The return is linked to the value of the issuer's equity, so it fails the SPPI test and the whole instrument is measured at FVTPL. The conversion option is not split out.
Financial liabilities
Most financial liabilities are measured at amortised cost. The exceptions include liabilities held at fair value through profit or loss (including derivative liabilities) and financial guarantee contracts, which are measured at the higher of the expected credit loss allowance and the amount initially recognised less any income recognised. Where a liability is designated at FVTPL, the part of the fair value change caused by the entity's own credit risk goes to other comprehensive income, not profit or loss, unless that would create or enlarge an accounting mismatch. This stops a company booking a gain because its own creditworthiness has deteriorated.
Impairment: expected credit losses
IFRS 9 recognises credit losses before they happen. At each reporting date, the loss allowance equals 12-month expected credit losses if credit risk has not increased significantly since initial recognition, and lifetime expected credit losses if it has. Trade receivables and contract assets without a significant financing component always use lifetime losses. In practice this is the simplified approach most corporates apply through a provision matrix. Our separate guide to expected credit loss under IFRS 9 covers the three stages and the provision matrix in detail.
Hedge accounting
The hedge accounting chapter was added in November 2013. Its stated objective is to show in the financial statements the effect of an entity's risk management activities. A hedging relationship qualifies only if it meets three effectiveness requirements: there is an economic relationship between the hedged item and the hedging instrument, credit risk does not dominate the resulting value changes, and the hedge ratio reflects the quantities actually used.
On first applying IFRS 9, an entity could choose to keep IAS 39's hedge accounting requirements for all its hedging relationships. That is why IAS 39 has not been withdrawn: it survives mainly for its hedge accounting requirements.
Recent amendments
In May 2024 the IASB issued amendments to the classification and measurement requirements, which it made effective for annual periods beginning on or after 1 January 2026, with earlier application permitted. They cover:
- Electronic payments. When financial liabilities settled through an electronic payment system can be derecognised;
- SPPI assessment. How to assess the contractual cash flow characteristics of financial assets for the SPPI test;
- Disclosures. Related changes to IFRS 7.
In December 2024 the IASB also amended IFRS 9 for contracts to buy electricity generated from sources that depend on natural conditions. The amendments add own-use guidance and allow a variable hedged item. The May 2024 amendments have been endorsed for use in the UK with the same 1 January 2026 effective date, so a December year-end reporter first applies them in its 2026 accounts. Loan terms and payment cut-off policies should therefore be reviewed now.
Primary sources: IFRS Foundation: IFRS 9 Financial Instruments, the 2024 classification and measurement amendments, the 2016 text of IFRS 9 on legislation.gov.uk, Companies Act 2006 s403 and the FRC: FRS 102. See also our guides to IFRS 15 and IFRS 17.
Acumon advises on IFRS 9 classification, ECL models and hedge documentation, and on the FRS 102 policy choice for subsidiaries of IFRS groups, through our IFRS accounts and financial reporting teams.