Financial Instruments and Fair Value Measurement
IFRS 9 covers classification and measurement, impairment and hedge accounting. Financial assets are classified by the entity's business model and the contractual cash flow characteristics: amortised cost if held to collect and cash flows are solely payments of principal and interest (SPPI); fair value through OCI if held to collect and sell and SPPI; otherwise fair value through profit or loss. Financial liabilities are generally at amortised cost, with fair value option elections. Impairment uses the expected credit loss model, with a 12-month ECL for stage 1 and lifetime ECL for stage 2 and 3. Candidates must also know IFRS 13: fair value is an exit price in an orderly transaction between market participants at the measurement date, using the principal market and the highest and best use for non-financial assets.
Traps
Common traps include the SPPI test (equity instruments fail it; convertible bonds usually fail it), the irrevocable election to present equity investments at FVOCI without recycling, and the treatment of transaction costs (capitalised for amortised cost, expensed for FVTPL). Hedge accounting questions test effectiveness, the three types of hedges (fair value, cash flow, net investment) and the option to use the cost of hedging approach. Fair value questions test the three-level hierarchy (Level 1 quoted prices, Level 2 observable inputs, Level 3 unobservable inputs), the treatment of blocked discounts and control premiums, and the distinction between a principal market and the most advantageous market.
Worked example / rule of thumb
A bond is held within a business model whose objective is to collect contractual cash flows and passes the SPPI test; it is measured at amortised cost using the effective interest method, with transaction costs included in the initial carrying amount. Rule of thumb: business model first, then SPPI; if either fails, fair value through profit or loss is the default.