How should a fixed-rate loan be measured under IFRS 9, how big should its credit loss allowance be and what changes when the bank hedges it? Those three questions catch out students and practitioners alike, because each answer feeds the next.
Why IFRS 9 feels harder than it is
Most IFRS 9 study material treats classification and measurement, expected credit losses and hedge accounting as separate chapters. In practice they sit on the same asset. The measurement basis decides whether an impairment allowance exists at all. The credit risk assessment decides how far ahead that allowance looks. Applying fair value hedge accounting decides whether an amortised-cost loan’s carrying amount reflects rate-driven value changes.
What the lesson works through
- The business model and SPPI tests, and why both must be answered before a measurement category follows.
- The three measurement categories, amortised cost, FVOCI and FVTPL, and the facts that send an asset to each.
- The fair value option, and why an accounting mismatch makes it available without deciding it.
- Stage 1 and stage 2 of the expected credit loss model, and what a significant increase in credit risk actually compares.
- The hedge accounting policy choice between IFRS 9 Chapter 6 and continuing IAS 39 hedge accounting.
- The qualifying criteria a hedging relationship must meet under Chapter 6 and how hedge ineffectiveness is identified.
One loan book, followed all the way through
The lesson follows Kudu Bank’s fixed-rate merchant loans, hedged with an interest rate swap, from classification to the final carrying amount. Along the way three elections come up. Does the bank designate the loans at fair value through profit or loss? Which hedge accounting requirements does it apply? Does it designate the swap as a fair value hedge? For the fair value option and the hedge designation, both directions sit side by side as peers, each followed through to profit or loss and the statement of financial position. Which stage do the loans reach by year end, and where does each amount land? The worked example shows you.
Start the lesson
Preparing for exams or reviewing a loan book? Open IFRS 9 in One Lesson and work the example through yourself.
Questions about this topic
What decides whether a loan is measured at amortised cost under IFRS 9?
The lesson starts from exactly that question. It sets out what IFRS 9 asks of a financial asset before any measurement category follows, then works those questions through a bank's fixed-rate loan book. Where the loans land is left to the worked example.
Is the fair value option automatic once an accounting mismatch exists?
The lesson separates two things that are easy to run together: meeting the condition IFRS 9 sets for designating an asset at fair value through profit or loss, and the entity's decision to designate. It follows a bank's loan book through both directions as peers, so you can see what each does to profit or loss and the statement of financial position.
What must a bank assess when its loans' credit risk changes?
The lesson sets out the assessment IFRS 9 calls for, what it compares, what it leaves out and why its outcome changes how far ahead the loss allowance looks. Which stage the bank's merchant loans reach is left for you to work out in the lesson.
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