Financial Instruments (IFRS 9 and IFRS 7)
IFRS 9 classification and ECL
This domain tests SPPI and business-model classification, amortised cost, FVOCI and FVTPL, expected credit losses, modification and derecognition, and IFRS 7 risk disclosures. A financial asset is at amortised cost only if the business model is to hold to collect contractual cash flows and those cash flows are solely payments of principal and interest. Equity investments are FVTPL unless an irrevocable FVOCI election is made; FVOCI equity gains are not recycled.
- ECL: 12-month ECL initially; lifetime ECL when credit risk increases significantly; simplified approach for trade receivables using a provision matrix.
- ECL is probability-weighted and forward-looking; it does not depend on a past-due event.
- Financial liabilities are at amortised cost unless classified as FVTPL or designated.
- Derecognise when rights expire or the asset is transferred and risks and rewards are substantially transferred.
- IFRS 7: disclose significance, nature and extent of risks, credit risk, liquidity risk, market risk, collateral and transfers.
Worked example
Trade receivables are current 600,000 at 1%, 1-30 days overdue 300,000 at 3%, and over 30 days overdue 100,000 at 10%. The loss allowance is 6,000 + 9,000 + 10,000 = 25,000. Recognise impairment expense of 25,000 and reduce receivables to 975,000. The matrix uses historical loss experience adjusted for forward-looking factors.
Traps
- Concluding that a loan with leverage features passes the SPPI test.
- Recycling FVOCI equity gains through profit or loss.
- Waiting for objective evidence before recognising an ECL.
- Treating a modification as derecognition without assessing whether terms are substantially different.