PFRS 9

Objective
Establish principles for the financial reporting of financial assets and financial liabilities that will present
relevant and useful information to users of financial statements for their assessment of the amounts,
timing and uncertainty of an entitys future cash flows.

Scope
PFRS 9 shall be applied by all entities to all types of financial instruments except:

Interests in subsidiaries, associates and joint ventures

Rights and obligations under leases
Employers rights and obligations under employee benefit plans
Financial instruments issued by the entity that meet the definition of an equity instrument in
PAS 32
Insurance contract
Forward contract under business combinations
Loan commitments
Financial instruments, contracts and obligations under share-based payment
Reimbursements classified as provisions
Rights and obligations rising from revenue from contracts with customers

Definitions
12-month expected
credit losses

The portion of lifetime expected credit losses that represent the expected
credit losses that result from default events on a financial instrument that are
possible within the 12 months after the reporting date.

Amortized cost of a
financial asset or
financial liability

The amount at which the financial asset or financial liability is measured at initial
recognition minus the principal repayments, plus or minus the cumulative
amortisation using the effective interest method of any difference between
that initial amount and the maturity amount and, for financial assets, adjusted for
any loss allowance.

Derecognition

The removal of a previously recognised financial asset or financial liability from

an entitys statement of financial position.

Derivative

A financial instrument or other contract within the scope of PFRS 9 with all three
of the following characteristics.

a. its value changes in response to the change in a specified interest rate,

financial instrument price, commodity price, foreign exchange rate, index
of prices or rates, credit rating or credit index, or other variable, provided
in the case of a non-financial variable that the variable is not specific to a
party to the contract (sometimes called the underlying).

b. it requires no initial net investment or an initial net investment that is

smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors.
c.

it is settled at a future date.

Dividends

Distributions of profits to holders of equity instruments in proportion to their

holdings of a particular class of capital.

Effective interest
method

The method that is used in the calculation of the amortised cost of a financial
asset or a financial liability and in the allocation and recognition of the interest
revenue or interest expense in profit or loss over the relevant period.

Effective interest rate

The rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial asset or financial liability to the gross
carrying amount of a financial asset or to the amortised cost of a financial
liability.

Reclassification date

The first day of the first reporting period following the change in business model
that results in an entity reclassifying financial assets.

Solely payments of
principal and interest
(SPPI)

Returns consistent with a basic lending arrangement, interest may include

return not only for the time value of money and credit risk but also for other
components such as a return for liquidity risk, amounts to cover expenses and a
profit margin.

Transaction costs

Incremental costs that is directly attributable to the acquisition, issue or disposal

of a financial asset or financial liability. An incremental cost is one that would not
have been incurred if the entity had not acquired, issued or disposed of the
financial instrument.

INITIAL RECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

When the entity becomes party to the contractual provisions of the instrument.

INITIAL MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

At fair value, plus for those financial assets and liabilities not classified at fair value through profit or
loss, directly attributable transaction costs.

Fair value - is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date

Directly attributable transaction costs - incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability.
In other words transaction cost would immediately be recognized as an expense if the financial asset or
liability is classified at fair value through profit or loss.
SUBSEQUENT CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS

Debt instruments shall be classified at Amortized Cost (AC), Fair Value through Other
Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL).
Equity instruments shall be classified at Fair Value through Other Comprehensive Income
(FVOCI) or Fair Value through Profit or Loss (FVPL).
DEBT INSTRUMENTS
Financial Assets at Amortized Cost

Requisites for
Classification

The asset is held to collect its contractual cash flows and

The assets contractual cash flows represent solely payments of principal and
interest

Profit or Loss
Implications

Effective interest income

Impairments losses and reversal gains
Gain or loss on derecognition

Statement of
financial position

Measured at amortized cost

Classified as a non current asset unless maturity is within 12 months after the
end of the reporting period

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for
Classification

The objective of the business model is achieved both by collecting contractual

cash flows and selling financial assets; and
The assets contractual cash flows represent SPPI.

Profit or Loss
Implications

Effective interest (income)

Impairments losses and reversal gains
Gain or loss on derecognition including reclassification adjustments (PAS 1)

OCI

Changes in fair value due to subsequent measurement

Statement of
Financial
Position

Measured at fair value after amortization for the effective interest

Cumulative gain or loss on fair value in Equity
Since PFRS 5 excludes the scope for financial assets, FVOCI are non current

asset unless maturity is within 12 months after the end of the reporting period
Note that both amortization is applied under the effective interest method before applying the FV
measurement requirement for the FVOCI classification
Financial Assets at Fair Value Through Profit Or Loss
Requisites for
Classification

This is a residual category if none of the two previously mentioned (AC and
FVOCI) business models apply or if any of the two business model apply but the
contractual cash flows are NOT SPPI for example if interest will include a profit
participation.
If the two requisites for the AC and FVOCI category are met but the entity
elects to measure debt instruments at FVPL to eliminate an accounting
mismatch because financial liabilities are measured at FVPL.

Profit or Loss
Implications

Nominal interest (income)

Direct transaction cost incurred on acquisition
Gain or loss on changes in fair value on subsequent measurement
Gain or loss on derecognition

Statement of
Financial
Position

Measured at fair value

Under the assumption the Financial asset is held for trading, FVPL shall be
classified as a current asset (PAS 1)
EQUITY INSTRUMENTS
Financial Assets at Fair Value Through Profit Or Loss

Requisites for
Classification

Both held for Trading or Non Trading

Profit or Loss
Implications

Dividends
Direct transaction cost incurred on acquisition
Gain or loss on changes in fair value on subsequent measurement
Gain or loss on derecognition

Statement of
Financial Position

Measured at fair value

Under the assumption the Financial asset is held for trading, FVPL shall be
classified as a current asset (PAS 1)

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for
Classification

An irrevocable election to present in OCI an investment in equity instruments

that is not held for trading

Profit or Loss
Implications

Dividends

OCI

Changes in fair value due to subsequent measurement

Gain or loss on derecognition and may be transferred within Equity (Retained
Earnings)

Statement of
Financial Position

Measured at fair value

Cumulative gain or loss on fair value in Equity
Non trading investments are classified under the non current assets section of
the statement of financial position

Note that PFRS 9 has eliminated the impairment loss category for equity instruments

RECLASSIFICATIONS OF DEBT INSTRUMENTS

Original category

Amortized cost

New category

FVPL

Accounting impact

Fair value is measured at

reclassification date.
Difference from carrying
amount should be recognized
in profit or loss.

Amortized Cost

Fair value at the

reclassification date becomes
its new gross carrying amount

FVOCI

Fair value is measured at

reclassification date.
Difference from amortized cost
should be recognized in OCI.
Effective interest rate is not
adjusted as a result of the
reclassification.

FVOCI

Amortized cost

Fair value at the

reclassification date becomes
its new amortized cost carrying
amount. Cumulative gain or
loss in OCI is adjusted against
the fair value of the financial
asset at reclassification date.

FVPL

FVOCI

Fair value at reclassification

date becomes its new carrying
amount.

FVPL

Fair value at reclassification

date becomes carrying
amount. Cumulative gain or
loss on OCI is reclassified to
profit or loss at reclassification
date

FVPL

Amortized cost

FVOCI

IMPAIRMENT OF FINANCIAL ASSETS

Scope
A single set of an impairment model will be applied to:
a. Financial assets measured at amortised cost including trade receivables
b. Financial assets measured at fair value through OCI
c. Loan commitments and financial guarantees contracts where losses are currently accounted for
under IAS 37 Provisions, Contingent Liabilities and Contingent Assets
d. Lease receivables
The impairment model follows a three-stage approach based on changes in expected credit losses of a
financial instrument that determine

a. The recognition of impairment, and

b. The recognition of interest revenue
THREE STAGE APPROACH TO IMPAIRMENT
Stage 1 Applied at initial recognition and subsequent measurement when there is no significant
increase in credit risk

a. As soon as a financial instrument is originated or purchased, 12-month expected credit losses are
recognised in profit or loss and a loss allowance is established.
b. Entities continue to recognise 12 month expected losses that are updated at each reporting date
c. Effective interest is based on the gross carrying amount rather than the carrying amount net of
allowance for impairment.
Stage 2 Applied at subsequent measurement when there is a significant increase in credit risk.
a. If the credit risk increases significantly and the resulting credit quality is not considered to be low
credit risk, full lifetime expected credit losses are recognised.
b. Lifetime expected credit losses are only recognised if the credit risk increases significantly from
when the entity originates or purchases the financial instrument.
c. Effective interest is based on the gross carrying amount rather than the carrying amount net of
allowance for impairment.
Stage 3 Applied at subsequent measurement when there is credit impairment

a. If the credit risk of a financial asset increases to the point that it is considered credit-impaired,
interest revenue is calculated based on the net amortised cost
b. Financial assets in this stage will generally be individually assessed.
c. Lifetime expected credit losses are still recognized on the financial assets.

MEASUREMENT OF CREDIT LOSSES

Credit losses are the present value of all cash shortfalls. Expected credit losses are an estimate of credit
losses over the life of the financial instrument.
Factors in measuring credit losses:
a. The probability-weighted outcome: expected credit losses should represent neither a best or
worst-case scenario. Rather, the estimate should reflect the possibility that a credit loss occurs
and the possibility that no credit loss occurs.
b. The time value of money: expected credit losses should be discounted to the reporting date.
c. Reasonable and supportable information that is available without undue cost or effort.
FINANCIAL LIABILITIES
Classification

Subsequent Measurement

Amortized Cost

Amortized cost using the effective interest method of

amortization

FVPL for financial liabilities that are:

a. Held for trading
b. Derivative financial liabilities
c. Designated at initial recognition at
FV

At fair value with all gains and losses recognized in

profit or loss

Financial guarantee contracts and

Commitments to provide a loan at a
below market interest rate

Higher amount between the amount determined in

accordance with IAS 37 and the amount initially
recognized minus cumulative amortization recognized.

Financial liabilities resulting from

the transfer of a financial asset

Amortized cost of the rights and obligations retained of

the fair value of the rights and obligations retained by
the entity when measured on a stand alone basis.

DERECOGNITION
FINANCIAL LIABILITIES
a. A financial liability is derecognised only when extinguished
b. An exchange between an existing borrower and lender of debt instruments with substantially
different terms or substantial modification of the terms of an existing financial liability of part
thereof is accounted for as an extinguishment
c. The difference between the carrying amount of a financial liability extinguished or transferred to a
3rd party and the consideration paid is recognized in profit or loss.
FINANCIAL ASSETS
The following criteria should be met in order for an entity to derecognize a financial asset:
a. The rights to the cash flows from the asset has expired.
b. The entity has transferred its rights to receive the cash flows from the asset and transferred
substantially all the risk and rewards.
c. If the entity does not retain control of the asset
The recognition for the gains and losses from derecognition will depend if the financial asset is a debt
instrument or equity instrument and its classification as AC, FVOCI or FVPL.