Selection

IFRS 9 IE
CONTENTS
from paragraph
IFRS 9 FINANCIAL INSTRUMENTS
ILLUSTRATIVE EXAMPLES
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS IE1
IMPAIRMENT (SECTION 5.5)
ASSESSING SIGNIFICANT INCREASES IN CREDIT RISK SINCE INITIAL
RECOGNITION IE6
Example 1—significant increase in credit risk IE7
Example 2—no significant increase in credit risk IE12
Example 3—highly collateralised financial asset IE18
Example 4—public investment-grade bond IE24
Example 5—responsiveness to changes in credit risk IE29
Example 6—comparison to maximum initial credit risk IE40
Example 7—counterparty assessment of credit risk IE43
RECOGNITION AND MEASUREMENT OF EXPECTED CREDIT LOSSES IE48
Example 8—12-month expected credit loss measurement using an explicit
‘probability of default’ approach IE49
Example 9—12-month expected credit loss measurement based on loss rate
approach IE53
Example 10—revolving credit facilities IE58
Example 11—modification of contractual cash flows IE66
Example 12—provision matrix IE74
Example 13—debt instrument measured at fair value through other
comprehensive income IE78
Example 14—interaction between the fair value through other comprehensive
income measurement category and foreign currency denomination, fair value
hedge accounting and impairment IE82
APPLICATION OF THE IMPAIRMENT REQUIREMENTS ON A REPORTING
DATE
RECLASSIFICATION OF FINANCIAL ASSETS (SECTION 5.6) IE103
Example 15—reclassification of financial assets IE104
HEDGE ACCOUNTING FOR AGGREGATED EXPOSURES IE115
Example 16—combined commodity price risk and foreign currency risk
hedge (cash flow hedge/cash flow hedge combination) IE116
Example 17—combined interest rate risk and foreign currency risk hedge
(fair value hedge/cash flow hedge combination) IE128
Example 18—combined interest rate risk and foreign currency risk hedge
(cash flow hedge/fair value hedge combination) IE138
姝 IFRS Foundation B1121

IFRS 9 IE
IFRS 9 Financial Instruments

Illustrative Examples
These examples accompany, but are not part of, IFRS 9.
Financial liabilities at fair value through profit or loss
IE1 The following example illustrates the calculation that an entity might perform
in accordance with paragraph B5.7.18 of IFRS 9.
IE2 On 1 January 20X1 an entity issues a 10-year bond with a par value of
CU150,00058 and an annual fixed coupon rate of 8 per cent, which is consistent
with market rates for bonds with similar characteristics.
IE3 The entity uses LIBOR as its observable (benchmark) interest rate. At the date of
inception of the bond, LIBOR is 5 per cent. At the end of the first year:
(a) LIBOR has decreased to 4.75 per cent.

(b) the fair value for the bond is CU153,811, consistent with an interest rate
of 7.6 per cent.59
IE4 The entity assumes a flat yield curve, all changes in interest rates result from a
parallel shift in the yield curve, and the changes in LIBOR are the only relevant
changes in market conditions.
IE5 The entity estimates the amount of change in the fair value of the bond that is
not attributable to changes in market conditions that give rise to market risk as
follows:
[paragraph B5.7.18(a)] At the start of the period of a 10-year bond

with a coupon of 8 per cent, the bond’s
First, the entity computes the liability’s
internal rate of return is 8 per cent.
internal rate of return at the start of the
period using the observed market price of Because the observed (benchmark) interest
the liability and the liability’s contractual rate (LIBOR) is 5 per cent, the
cash flows at the start of the period. It instrument-specific component of the
deducts from this rate of return the internal rate of return is 3 per cent.
observed (benchmark) interest rate at the
start of the period, to arrive at an
instrument-specific component of the
internal rate of return.
continued...
58 In this guidance monetary amounts are denominated in ‘currency units’ (CU).

59 This reflects a shift in LIBOR from 5 per cent to 4.75 per cent and a movement of 0.15 per cent
which, in the absence of other relevant changes in market conditions, is assumed to reflect changes
in credit risk of the instrument.
B1122 姝 IFRS Foundation

IFRS 9 IE
...continued
[paragraph B5.7.18(b)]
The contractual cash flows of the
Next, the entity calculates the present instrument at the end of the period are:
value of the cash flows associated with the
● interest: CU12,000(a) per year for
liability using the liability’s contractual
each of years 2–10.
cash flows at the end of the period and a
discount rate equal to the sum of (i) the ● principal: CU150,000 in year 10.
observed (benchmark) interest rate at the The discount rate to be used to calculate
end of the period and (ii) the the present value of the bond is thus
instrument-specific component of the 7.75 per cent, which is the end of period
internal rate of return as determined in LIBOR rate of 4.75 per cent, plus the
accordance with paragraph B5.7.18(a). 3 per cent instrument-specific component.
This gives a present value of CU152,367.(b)
[paragraph B5.7.18(c)] The market price of the liability at the end

of the period is CU153,811.(c)
The difference between the observed
market price of the liability at the end of Thus, the entity presents CU1,444 in other
the period and the amount determined in comprehensive income, which is
accordance with paragraph B5.7.18(b) is the CU153,811 – CU152,367, as the increase in
change in fair value that is not attributable fair value of the bond that is not
to changes in the observed (benchmark) attributable to changes in market
interest rate. This is the amount to be conditions that give rise to market risk.
presented in other comprehensive income
in accordance with paragraph 5.7.7(a).
(a) CU150,000 × 8% = CU12,000.
(b) PV = [CU12,000 × (1 – (1 + 0.0775)-9)/0.0775] + CU150,000 × (1 + 0.0775)-9.
(c) market price = [CU12,000 × (1 – (1 + 0.076)-9)/0.076] + CU150,000 × (1 + 0.076)-9.
Impairment (Section 5.5)

Assessing significant increases in credit risk since initial
recognition
IE6 The following examples illustrate possible ways to assess whether there have
been significant increases in credit risk since initial recognition. For simplicity
of illustration, the following examples only show one aspect of the credit risk
analysis. However, the assessment of whether lifetime expected credit losses
should be recognised is a multifactor and holistic analysis that considers
reasonable and supportable information that is available without undue cost or
effort and that is relevant for the particular financial instrument being assessed.

IFRS 9 IE
Example 1—significant increase in credit risk
IE7 Company Y has a funding structure that includes a senior secured loan facility
with different tranches60. Bank X provides a tranche of that loan facility to
Company Y. At the time of origination of the loan by Bank X, although
Company Y’s leverage was relatively high compared with other issuers with
similar credit risk, it was expected that Company Y would be able to meet the
covenants for the life of the instrument. In addition, the generation of revenue
and cash flow was expected to be stable in Company Y’s industry over the term
of the senior facility. However, there was some business risk related to the
ability to grow gross margins within its existing businesses.
IE8 At initial recognition, because of the considerations outlined in paragraph IE7,

Bank X considers that despite the level of credit risk at initial recognition, the
loan is not an originated credit-impaired loan because it does not meet the
definition of a credit-impaired financial asset in Appendix A of IFRS 9.
IE9 Subsequent to initial recognition, macroeconomic changes have had a negative

effect on total sales volume and Company Y has underperformed on its business
plan for revenue generation and net cash flow generation. Although spending
on inventory has increased, anticipated sales have not materialised. To increase
liquidity, Company Y has drawn down more on a separate revolving credit
facility, thereby increasing its leverage ratio. Consequently, Company Y is now
close to breaching its covenants on the senior secured loan facility with Bank X.
IE10 Bank X makes an overall assessment of the credit risk on the loan to Company Y
at the reporting date by taking into consideration all reasonable and
supportable information that is available without undue cost or effort and that
is relevant for assessing the extent of the increase in credit risk since initial
recognition. This may include factors such as:
(a) Bank X’s expectation that the deterioration in the macroeconomic
environment may continue in the near future, which is expected to have
a further negative impact on Company Y’s ability to generate cash flows
and to deleverage.
(b) Company Y is closer to breaching its covenants, which may result in a

need to restructure the loan or reset the covenants.
(c) Bank X’s assessment that the trading prices for Company Y’s bonds have
decreased and that the credit margin on newly originated loans have
increased reflecting the increase in credit risk, and that these changes
are not explained by changes in the market environment (for example,
benchmark interest rates have remained unchanged). A further
comparison with the pricing of Company Y’s peers shows that reductions
in the price of Company Y’s bonds and increases in credit margin on its
loans have probably been caused by company-specific factors.
60 The security on the loan affects the loss that would be realised if a default occurs, but does not affect
the risk of a default occurring, so it is not considered when determining whether there has been a
significant increase in credit risk since initial recognition as required by paragraph 5.5.3 of IFRS 9.

IFRS 9 IE
(d) Bank X has reassessed its internal risk grading of the loan on the basis of
the information that it has available to reflect the increase in credit risk.
IE11 Bank X determines that there has been a significant increase in credit risk since
initial recognition of the loan in accordance with paragraph 5.5.3 of IFRS 9.
Consequently, Bank X recognises lifetime expected credit losses on its senior
secured loan to Company Y. Even if Bank X has not yet changed the internal risk
grading of the loan it could still reach this conclusion—the absence or presence
of a change in risk grading in itself is not determinative of whether credit risk
has increased significantly since initial recognition.
Example 2—no significant increase in credit risk
IE12 Company C, is the holding company of a group that operates in a cyclical

production industry. Bank B provided a loan to Company C. At that time, the
prospects for the industry were positive, because of expectations of further
increases in global demand. However, input prices were volatile and given the
point in the cycle, a potential decrease in sales was anticipated.
IE13 In addition, in the past Company C has been focused on external growth,
acquiring majority stakes in companies in related sectors. As a result, the group
structure is complex and has been subject to change, making it difficult for
investors to analyse the expected performance of the group and to forecast the
cash that will be available at the holding company level. Even though leverage is
at a level that is considered acceptable by Company C’s creditors at the time that
Bank B originates the loan, its creditors are concerned about Company C’s ability
to refinance its debt because of the short remaining life until the maturity of the
current financing. There is also concern about Company C’s ability to continue
to service interest using the dividends it receives from its operating subsidiaries.
IE14 At the time of the origination of the loan by Bank B, Company C’s leverage was
in line with that of other customers with similar credit risk and based on
projections over the expected life of the loan, the available capacity
(ie headroom) on its coverage ratios before triggering a default event, was high.
Bank B applies its own internal rating methods to determine credit risk and
allocates a specific internal rating score to its loans. Bank B’s internal rating
categories are based on historical, current and forward-looking information and
reflect the credit risk for the tenor of the loans. On initial recognition, Bank B
determines that the loan is subject to considerable credit risk, has speculative
elements and that the uncertainties affecting Company C, including the group’s
uncertain prospects for cash generation, could lead to default. However, Bank B
does not consider the loan to be originated credit-impaired because it does not
meet the definition of a purchased or originated credit-impaired financial asset
in Appendix A of IFRS 9.
IE15 Subsequent to initial recognition, Company C has announced that three of its
five key subsidiaries had a significant reduction in sales volume because of
deteriorated market conditions but sales volumes are expected to improve in
line with the anticipated cycle for the industry in the following months. The
sales of the other two subsidiaries were stable. Company C has also announced a
corporate restructure to streamline its operating subsidiaries. This

IFRS 9 IE
restructuring will increase the flexibility to refinance existing debt and the
ability of the operating subsidiaries to pay dividends to Company C.
IE16 Despite the expected continuing deterioration in market conditions, Bank B

determines, in accordance with paragraph 5.5.3 of IFRS 9, that there has not
been a significant increase in the credit risk on the loan to Company C since
initial recognition. This is demonstrated by factors that include:
(a) Although current sale volumes have fallen, this was as anticipated by
Bank B at initial recognition. Furthermore, sales volumes are expected to
improve, in the following months.
(b) Given the increased flexibility to refinance the existing debt at the
operating subsidiary level and the increased availability of dividends to
Company C, Bank B views the corporate restructure as being credit
enhancing. This is despite some continued concern about the ability to
refinance the existing debt at the holding company level.
(c) Bank B’s credit risk department, which monitors Company C, has
determined that the latest developments are not significant enough to
justify a change in its internal credit risk rating.
IE17 As a consequence, Bank B does not recognise a loss allowance at an amount

equal to lifetime expected credit losses on the loan. However, it updates its
measurement of the 12-month expected credit losses for the increased risk of a
default occurring in the next 12 months and for current expectations of the
credit losses that would arise if a default were to occur.
Example 3—highly collateralised financial asset
IE18 Company H owns real estate assets which are financed by a five-year loan from
Bank Z with a loan-to-value (LTV) ratio of 50 per cent. The loan is secured by a
first-ranking security over the real estate assets. At initial recognition of the
loan, Bank Z does not consider the loan to be originated credit-impaired as
defined in Appendix A of IFRS 9.
IE19 Subsequent to initial recognition, the revenues and operating profits of

Company H have decreased because of an economic recession. Furthermore,
expected increases in regulations have the potential to further negatively affect
revenue and operating profit. These negative effects on Company H’s operations
could be significant and ongoing.
IE20 As a result of these recent events and expected adverse economic conditions,
Company H’s free cash flow is expected to be reduced to the point that the
coverage of scheduled loan payments could become tight. Bank Z estimates that
a further deterioration in cash flows may result in Company H missing a
contractual payment on the loan and becoming past due.
IE21 Recent third party appraisals have indicated a decrease in the value of the real
estate properties, resulting in a current LTV ratio of 70 per cent.
IE22 At the reporting date, the loan to Company H is not considered to have low
credit risk in accordance with paragraph 5.5.10 of IFRS 9. Bank Z therefore
needs to assess whether there has been a significant increase in credit risk since

IFRS 9 IE
initial recognition in accordance with paragraph 5.5.3 of IFRS 9, irrespective of

the value of the collateral it holds. It notes that the loan is subject to
considerable credit risk at the reporting date because even a slight deterioration
in cash flows could result in Company H missing a contractual payment on the
loan. As a result, Bank Z determines that the credit risk (ie the risk of a default
occurring) has increased significantly since initial recognition. Consequently,
Bank Z recognises lifetime expected credit losses on the loan to Company H.
IE23 Although lifetime expected credit losses should be recognised, the measurement
of the expected credit losses will reflect the recovery expected from the collateral
(adjusting for the costs of obtaining and selling the collateral) on the property as
required by paragraph B5.5.55 of IFRS 9 and may result in the expected credit
losses on the loan being very small.
Example 4—public investment-grade bond
IE24 Company A is a large listed national logistics company. The only debt in the
capital structure is a five-year public bond with a restriction on further
borrowing as the only bond covenant. Company A reports quarterly to its
shareholders. Entity B is one of many investors in the bond. Entity B considers
the bond to have low credit risk at initial recognition in accordance with
paragraph 5.5.10 of IFRS 9. This is because the bond has a low risk of default and
Company A is considered to have a strong capacity to meet its obligations in the
near term. Entity B’s expectations for the longer term are that adverse changes
in economic and business conditions may, but will not necessarily, reduce
Company A’s ability to fulfil its obligations on the bond. In addition, at initial
recognition the bond had an internal credit rating that is correlated to a global
external credit rating of investment grade.
IE25 At the reporting date, Entity B’s main credit risk concern is the continuing
pressure on the total volume of sales that has caused Company A’s operating
cash flows to decrease.
IE26 Because Entity B relies only on quarterly public information and does not have
access to private credit risk information (because it is a bond investor), its
assessment of changes in credit risk is tied to public announcements and
information, including updates on credit perspectives in press releases from
rating agencies.
IE27 Entity B applies the low credit risk simplification in paragraph 5.5.10 of IFRS 9.
Accordingly, at the reporting date, Entity B evaluates whether the bond is
considered to have low credit risk using all reasonable and supportable
information that is available without undue cost or effort. In making that
evaluation, Entity B reassesses the internal credit rating of the bond and
concludes that the bond is no longer equivalent to an investment grade rating
because:
(a) The latest quarterly report of Company A revealed a quarter-on-quarter

decline in revenues of 20 per cent and in operating profit by 12 per cent.

IFRS 9 IE
(b) Rating agencies have reacted negatively to a profit warning by

Company A and put the credit rating under review for possible
downgrade from investment grade to non-investment grade. However, at
the reporting date the external credit risk rating was unchanged.
(c) The bond price has also declined significantly, which has resulted in a
higher yield to maturity. Entity B assesses that the bond prices have been
declining as a result of increases in Company A’s credit risk. This is
because the market environment has not changed (for example,
benchmark interest rates, liquidity etc are unchanged) and comparison
with the bond prices of peers shows that the reductions are probably
company specific (instead of being, for example, changes in benchmark
interest rates that are not indicative of company-specific credit risk).
IE28 While Company A currently has the capacity to meet its commitments, the large
uncertainties arising from its exposure to adverse business and economic
conditions have increased the risk of a default occurring on the bond. As a
result of the factors described in paragraph IE27, Entity B determines that the
bond does not have low credit risk at the reporting date. As a result, Entity B
needs to determine whether the increase in credit risk since initial recognition
has been significant. On the basis of its assessment, Company B determines that
the credit risk has increased significantly since initial recognition and that a loss
allowance at an amount equal to lifetime expected credit losses should be
recognised in accordance with paragraph 5.5.3 of IFRS 9.
Example 5—responsiveness to changes in credit risk
IE29 Bank ABC provides mortgages to finance residential real estate in three different
regions. The mortgage loans are originated across a wide range of LTV criteria
and a wide range of income groups. As part of the mortgage application process,
customers are required to provide information such as the industry within
which the customer is employed and the post code of the property that serves as
collateral on the mortgage.
IE30 Bank ABC sets its acceptance criteria based on credit scores. Loans with a credit
score above the ‘acceptance level’ are approved because these borrowers are
considered to be able to meet contractual payment obligations. When new
mortgage loans are originated, Bank ABC uses the credit score to determine the
risk of a default occurring as at initial recognition.
IE31 At the reporting date Bank ABC determines that economic conditions are
expected to deteriorate significantly in all regions. Unemployment levels are
expected to increase while the value of residential property is expected to
decrease, causing the LTV ratios to increase. As a result of the expected
deterioration in economic conditions, Bank ABC expects default rates on the
mortgage portfolio to increase.
Individual assessment
IE32 In Region One, Bank ABC assesses each of its mortgage loans on a monthly basis
by means of an automated behavioural scoring process. Its scoring models are
based on current and historical past due statuses, levels of customer

IFRS 9 IE
indebtedness, LTV measures, customer behaviour on other financial instruments

with Bank ABC, the loan size and the time since the origination of the loan.
Bank ABC updates the LTV measures on a regular basis through an automated
process that re-estimates property values using recent sales in each post code
area and reasonable and supportable forward-looking information that is
available without undue cost or effort.
IE33 Bank ABC has historical data that indicates a strong correlation between the
value of residential property and the default rates for mortgages. That is, when
the value of residential property declines, a customer has less economic
incentive to make scheduled mortgage repayments, increasing the risk of a
default occurring.
IE34 Through the impact of the LTV measure in the behavioural scoring model, an
increased risk of a default occurring due to an expected decline in residential
property value adjusts the behavioural scores. The behavioural score can be
adjusted as a result of expected declines in property value even when the
mortgage loan is a bullet loan with the most significant payment obligations at
maturity (and beyond the next 12 months). Mortgages with a high LTV ratio are
more sensitive to changes in the value of the residential property and Bank ABC
is able to identify significant increases in credit risk since initial recognition on
individual customers before a mortgage becomes past due if there has been a
deterioration in the behavioural score.
IE35 When the increase in credit risk has been significant, a loss allowance at an
amount equal to lifetime expected credit losses is recognised. Bank ABC
measures the loss allowance by using the LTV measures to estimate the severity
of the loss, ie the loss given default (LGD). The higher the LTV measure, the
higher the expected credit losses all else being equal.
IE36 If Bank ABC was unable to update behavioural scores to reflect the expected
declines in property prices, it would use reasonable and supportable
information that is available without undue cost or effort to undertake a
collective assessment to determine the loans on which there has been a
significant increase in credit risk since initial recognition and recognise lifetime
expected credit losses for those loans.
Collective assessment
IE37 In Regions Two and Three, Bank ABC does not have an automated scoring
capability. Instead, for credit risk management purposes, Bank ABC tracks the
risk of a default occurring by means of past due statuses. It recognises a loss
allowance at an amount equal to lifetime expected credit losses for all loans that
have a past due status of more than 30 days past due. Although Bank ABC uses
past due status information as the only borrower-specific information, it also
considers other reasonable and supportable forward-looking information that is
available without undue cost or effort to assess whether lifetime expected credit
losses should be recognised on loans that are not more than 30 days past due.
This is necessary in order to meet the objective in paragraph 5.5.4 of IFRS 9 of
recognising lifetime expected credit losses for all significant increases in credit
risk.

IFRS 9 IE
Region Two
IE38 Region Two includes a mining community that is largely dependent on the
export of coal and related products. Bank ABC becomes aware of a significant
decline in coal exports and anticipates the closure of several coal mines. Because
of the expected increase in the unemployment rate, the risk of a default
occurring on mortgage loans to borrowers who are employed by the coal mines
is determined to have increased significantly, even if those customers are not
past due at the reporting date. Bank ABC therefore segments its mortgage
portfolio by the industry within which customers are employed (using the
information recorded as part of the mortgage application process) to identify
customers that rely on coal mining as the dominant source of employment (ie a
‘bottom up’ approach in which loans are identified based on a common risk
characteristic). For those mortgages, Bank ABC recognises a loss allowance at an
amount equal to lifetime expected credit losses while it continues to recognise a
loss allowance at an amount equal to 12-month expected credit losses for all
other mortgages in Region Two.61 Newly originated mortgages to borrowers who
rely on the coal mines for employment in this community would, however, have
a loss allowance at an amount equal to 12-month expected credit losses because
they would not have experienced significant increases in credit risk since initial
recognition. However, some of these mortgages may experience significant
increases in credit risk soon after initial recognition because of the expected
closure of the coal mines.
Region Three
IE39 In Region Three, Bank ABC anticipates the risk of a default occurring and thus
an increase in credit risk, as a result of an expected increase in interest rates
during the expected life of the mortgages. Historically, an increase in interest
rates has been a lead indicator of future defaults on mortgages in
Region Three—especially when customers do not have a fixed interest rate
mortgage. Bank ABC determines that the variable interest-rate portfolio of
mortgages in Region Three is homogenous and that unlike for Region Two, it is
not possible to identify particular sub portfolios on the basis of shared risk
characteristics that represent customers who are expected to have increased
significantly in credit risk. However, as a result of the homogenous nature of
the mortgages in Region Three, Bank ABC determines that an assessment can be
made of a proportion of the overall portfolio that has significantly increased in
credit risk since initial recognition (ie a ‘top down’ approach can be used). Based
on historical information, Bank ABC estimates that an increase in interest rates
of 200 basis points will cause a significant increase in credit risk on 20 per cent
of the variable interest-rate portfolio. Therefore, as a result of the anticipated
increase in interest rates, Bank ABC determines that the credit risk on
20 per cent of mortgages in Region Three has increased significantly since initial
recognition. Accordingly Bank ABC recognises lifetime expected credit losses on
61 Except for those mortgages that are determined to have significantly increased in credit risk based
on an individual assessment, such as those that are more than 30 days past due. Lifetime expected
credit losses would also be recognised on those mortgages.

IFRS 9 IE
20 per cent of the variable rate mortgage portfolio and a loss allowance at an
amount equal to 12-month expected credit losses for the remainder of the
portfolio.62
Example 6—comparison to maximum initial credit risk
IE40 Bank A has two portfolios of automobile loans with similar terms and conditions
in Region W. Bank A’s policy on financing decisions for each loan is based on an
internal credit rating system that considers a customer’s credit history, payment
behaviour on other products with Bank A and other factors, and assigns an
internal credit risk rating from 1 (lowest credit risk) to 10 (highest credit risk) to
each loan on origination. The risk of a default occurring increases exponentially
as the credit risk rating deteriorates so, for example, the difference between
credit risk rating grades 1 and 2 is smaller than the difference between credit
risk rating grades 2 and 3. Loans in Portfolio 1 were only offered to existing
customers with a similar internal credit risk rating and at initial recognition all
loans were rated 3 or 4 on the internal rating scale. Bank A determines that the
maximum initial credit risk rating at initial recognition it would accept for
Portfolio 1 is an internal rating of 4. Loans in Portfolio 2 were offered to
customers that responded to an advertisement for automobile loans and the
internal credit risk ratings of these customers range between 4 and 7 on the
internal rating scale. Bank A never originates an automobile loan with an
internal credit risk rating worse than 7 (ie with an internal rating of 8–10).
IE41 For the purposes of assessing whether there have been significant increases in
credit risk, Bank A determines that all loans in Portfolio 1 had a similar initial
credit risk. It determines that given the risk of default reflected in its internal
risk rating grades, a change in internal rating from 3 to 4 would not represent a
significant increase in credit risk but that there has been a significant increase
in credit risk on any loan in this portfolio that has an internal rating worse
than 5. This means that Bank A does not have to know the initial credit rating of
each loan in the portfolio to assess the change in credit risk since initial
recognition. It only has to determine whether the credit risk is worse than 5 at
the reporting date to determine whether lifetime expected credit losses should
be recognised in accordance with paragraph 5.5.3 of IFRS 9.
IE42 However, determining the maximum initial credit risk accepted at initial
recognition for Portfolio 2 at an internal credit risk rating of 7, would not meet
the objective of the requirements as stated in paragraph 5.5.4 of IFRS 9. This is
because Bank A determines that significant increases in credit risk arise not only
when credit risk increases above the level at which an entity would originate
new financial assets (ie when the internal rating is worse than 7). Although
Bank A never originates an automobile loan with an internal credit rating worse
than 7, the initial credit risk on loans in Portfolio 2 is not of sufficiently similar
credit risk at initial recognition to apply the approach used for Portfolio 1. This
means that Bank A cannot simply compare the credit risk at the reporting date
with the lowest credit quality at initial recognition (for example, by comparing
62 Except for those mortgages that are determined to have significantly increased in credit risk based
on an individual assessment, such as those that are more than 30 days past due. Lifetime expected
credit losses would also be recognised on those mortgages.

IFRS 9 IE
the internal credit risk rating of loans in Portfolio 2 with an internal credit risk
rating of 7) to determine whether credit risk has increased significantly because
the initial credit quality of loans in the portfolio is too diverse. For example, if a
loan initially had a credit risk rating of 4 the credit risk on the loan may have
increased significantly if its internal credit risk rating changes to 6.
Example 7—counterparty assessment of credit risk
Scenario 1
IE43 In 20X0 Bank A granted a loan of CU10,000 with a contractual term of 15 years
to Company Q when the company had an internal credit risk rating of 4 on a
scale of 1 (lowest credit risk) to 10 (highest credit risk). The risk of a default
occurring increases exponentially as the credit risk rating deteriorates so, for
example, the difference between credit risk rating grades 1 and 2 is smaller than
the difference between credit risk rating grades 2 and 3. In 20X5, when
Company Q had an internal credit risk rating of 6, Bank A issued another loan to
Company Q for CU5,000 with a contractual term of 10 years. In 20X7
Company Q fails to retain its contract with a major customer and
correspondingly experiences a large decline in its revenue. Bank A considers
that as a result of losing the contract, Company Q will have a significantly
reduced ability to meet its loan obligations and changes its internal credit risk
rating to 8.
IE44 Bank A assesses credit risk on a counterparty level for credit risk management
purposes and determines that the increase in Company Q’s credit risk is
significant. Although Bank A did not perform an individual assessment of
changes in the credit risk on each loan since its initial recognition, assessing the
credit risk on a counterparty level and recognising lifetime expected credit
losses on all loans granted to Company Q, meets the objective of the impairment
requirements as stated in paragraph 5.5.4 of IFRS 9. This is because, even since
the most recent loan was originated (in 20X7) when Company Q had the highest
credit risk at loan origination, its credit risk has increased significantly. The
counterparty assessment would therefore achieve the same result as assessing
the change in credit risk for each loan individually.
Scenario 2
IE45 Bank A granted a loan of CU150,000 with a contractual term of 20 years to
Company X in 20X0 when the company had an internal credit risk rating of 4.
During 20X5 economic conditions deteriorate and demand for Company X’s
products has declined significantly. As a result of the reduced cash flows from
lower sales, Company X could not make full payment of its loan instalment to
Bank A. Bank A re-assesses Company X’s internal credit risk rating, and
determines it to be 7 at the reporting date. Bank A considered the change in
credit risk on the loan, including considering the change in the internal credit
risk rating, and determines that there has been a significant increase in credit
risk and recognises lifetime expected credit losses on the loan of CU150,000.
IE46 Despite the recent downgrade of the internal credit risk rating, Bank A grants
another loan of CU50,000 to Company X in 20X6 with a contractual term of 5
years, taking into consideration the higher credit risk at that date.

IFRS 9 IE
IE47 The fact that Company X’s credit risk (assessed on a counterparty basis) has
previously been assessed to have increased significantly, does not result in
lifetime expected credit losses being recognised on the new loan. This is because
the credit risk on the new loan has not increased significantly since the loan was
initially recognised. If Bank A only assessed credit risk on a counterparty level,
without considering whether the conclusion about changes in credit risk applies
to all individual financial instruments provided to the same customer, the
objective in paragraph 5.5.4 of IFRS 9 would not be met.
Recognition and measurement of expected credit losses
IE48 The following examples illustrate the application of the recognition and
measurement requirements in accordance with Section 5.5 of IFRS 9, as well as
the interaction with the hedge accounting requirements.
Example 8—12-month expected credit loss measurement using

an explicit ‘probability of default’ approach
Scenario 1
IE49 Entity A originates a single 10 year amortising loan for CU1 million. Taking into
consideration the expectations for instruments with similar credit risk (using
reasonable and supportable information that is available without undue cost or
effort), the credit risk of the borrower, and the economic outlook for the next
12 months, Entity A estimates that the loan at initial recognition has a
probability of default (PD) of 0.5 per cent over the next 12 months. Entity A also
determines that changes in the 12-month PD are a reasonable approximation of
the changes in the lifetime PD for determining whether there has been a
significant increase in credit risk since initial recognition.
IE50 At the reporting date (which is before payment on the loan is due63), there has
been no change in the 12-month PD and Entity A determines that there was no
significant increase in credit risk since initial recognition. Entity A determines
that 25 per cent of the gross carrying amount will be lost if the loan defaults
(ie the LGD is 25 per cent).64 Entity A measures the loss allowance at an amount
equal to 12-month expected credit losses using the 12-month PD of 0.5 per cent.
Implicit in that calculation is the 99.5 per cent probability that there is no
default. At the reporting date the loss allowance for the 12 month expected
credit losses is CU1,250 (0.5% × 25% × CU1,000,000).
Scenario 2
IE51 Entity B acquires a portfolio of 1,000 five year bullet loans for CU1,000 each
(ie CU1million in total) with an average 12-month PD of 0.5 per cent for the
portfolio. Entity B determines that because the loans only have significant
payment obligations beyond the next 12 months, it would not be appropriate to
consider changes in the 12-month PD when determining whether there have
63 Thus for simplicity of illustration it is assumed there is no amortisation of the loan.

64 Because the LGD represents a percentage of the present value of the gross carrying amount, this
example does not illustrate the time value of money.

IFRS 9 IE
been significant increases in credit risk since initial recognition. At the

reporting date Entity B therefore uses changes in the lifetime PD to determine
whether the credit risk of the portfolio has increased significantly since initial
recognition.
IE52 Entity B determines that there has not been a significant increase in credit risk
since initial recognition and estimates that the portfolio has an average LGD of
25 per cent. Entity B determines that it is appropriate to measure the loss
allowance on a collective basis in accordance with IFRS 9. The 12-month PD
remains at 0.5 per cent at the reporting date. Entity B therefore measures the
loss allowance on a collective basis at an amount equal to 12-month expected
credit losses based on the average 0.5 per cent 12-month PD. Implicit in the
calculation is the 99.5 per cent probability that there is no default. At the
reporting date the loss allowance for the 12-month expected credit losses is
CU1,250 (0.5% × 25% × CU1,000,000).
Example 9—12-month expected credit loss measurement based

on a loss rate approach
IE53 Bank A originates 2,000 bullet loans with a total gross carrying amount of
CU500,000. Bank A segments its portfolio into borrower groups (Groups X and Y)
on the basis of shared credit risk characteristics at initial recognition. Group X
comprises 1,000 loans with a gross carrying amount per client of CU200, for a
total gross carrying amount of CU200,000. Group Y comprises 1,000 loans with
a gross carrying amount per client of CU300, for a total gross carrying amount of
CU300,000. There are no transaction costs and the loan contracts include no
options (for example, prepayment or call options), premiums or discounts,
points paid, or other fees.
IE54 Bank A measures expected credit losses on the basis of a loss rate approach for
Groups X and Y. In order to develop its loss rates, Bank A considers samples of its
own historical default and loss experience for those types of loans. In addition,
Bank A considers forward-looking information, and updates its historical
information for current economic conditions as well as reasonable and
supportable forecasts of future economic conditions. Historically, for a
population of 1,000 loans in each group, Group X’s loss rates are 0.3 per cent,
based on four defaults, and historical loss rates for Group Y are 0.15 per cent,
based on two defaults.

IFRS 9 IE
Number of Estimated Total Historic per Estimated Present Loss rate

clients in per client estimated annum total gross value of
sample gross gross average carrying observed
carrying carrying defaults amount at loss(a)
amount at amount at default
default default
Group A B C=A×B D E=B×D F G=F÷C
X 1,000 CU200 CU200,000 4 CU800 CU600 0.3%
Y 1,000 CU300 CU300,000 2 CU600 CU450 0.15%

(a) In accordance with paragraph 5.5.17(b) expected credit losses should be discounted
using the effective interest rate. However, for purposes of this example, the
present value of the observed loss is assumed.
IE55 At the reporting date, Bank A expects an increase in defaults over the next
12 months compared to the historical rate. As a result, Bank A estimates five
defaults in the next 12 months for loans in Group X and three for loans in
Group Y. It estimates that the present value of the observed credit loss per client
will remain consistent with the historical loss per client.
IE56 On the basis of the expected life of the loans, Bank A determines that the
expected increase in defaults does not represent a significant increase in credit
risk since initial recognition for the portfolios. On the basis of its forecasts,
Bank A measures the loss allowance at an amount equal to 12-month expected
credit losses on the 1,000 loans in each group amounting to CU750 and CU675
respectively. This equates to a loss rate in the first year of 0.375 per cent for
Group X and 0.225 per cent for Group Y.
Number of Estimated Total Expected Estimated Present Loss rate

clients in per client estimated defaults total gross value of
sample gross gross carrying observed
carrying carrying amount at loss
amount at amount at default
default default
Group A B C=A×B D E=B×D F G=F÷C
X 1,000 CU200 CU200,000 5 CU1,000 CU750 0.375%
Y 1,000 CU300 CU300,000 3 CU900 CU675 0.225%
IE57 Bank A uses the loss rates of 0.375 per cent and 0.225 per cent respectively to
estimate 12-month expected credit losses on new loans in Group X and Group Y
originated during the year and for which credit risk has not increased
significantly since initial recognition.
Example 10—revolving credit facilities
IE58 Bank A provides co-branded credit cards to customers in conjunction with a

local department store. The credit cards have a one-day notice period after
which Bank A has the contractual right to cancel the credit card (both the drawn
and undrawn components). However, Bank A does not enforce its contractual

IFRS 9 IE
right to cancel the credit cards in the normal day-to-day management of the
instruments and only cancels facilities when it becomes aware of an increase in
credit risk and starts to monitor customers on an individual basis. Bank A
therefore does not consider the contractual right to cancel the credit cards to
limit its exposure to credit losses to the contractual notice period.
IE59 For credit risk management purposes Bank A considers that there is only one set
of contractual cash flows from customers to assess and does not distinguish
between the drawn and undrawn balances at the reporting date. The portfolio is
therefore managed and expected credit losses are measured on a facility level.
IE60 At the reporting date the outstanding balance on the credit card portfolio is
CU60,000 and the available undrawn facility is CU40,000. Bank A determines
the expected life of the portfolio by estimating the period over which it expects
to be exposed to credit risk on the facilities at the reporting date, taking into
account:
(a) the period over which it was exposed to credit risk on a similar portfolio
of credit cards;
(b) the length of time for related defaults to occur on similar financial
instruments; and
(c) past events that led to credit risk management actions because of an
increase in credit risk on similar financial instruments, such as the
reduction or removal of undrawn credit limits.
IE61 On the basis of the information listed in paragraph IE60, Bank A determines that
the expected life of the credit card portfolio is 30 months.
IE62 At the reporting date Bank A assesses the change in the credit risk on the
portfolio since initial recognition and determines in accordance with
paragraph 5.5.3 of IFRS 9 that the credit risk on a portion of the credit card
facilities representing 25 per cent of the portfolio, has increased significantly
since initial recognition. The outstanding balance on these credit facilities for
which lifetime expected credit losses should be recognised is CU20,000 and the
available undrawn facility is CU10,000.
IE63 When measuring the expected credit losses in accordance with paragraph 5.5.20
of IFRS 9, Bank A considers its expectations about future draw-downs over the
expected life of the portfolio (ie 30 months) in accordance with
paragraph B5.5.31 and estimates what it expects the outstanding balance
(ie exposure at default) on the portfolio would be if customers were to default.
By using its credit risk models Bank A determines that the exposure at default on
the credit card facilities for which lifetime expected credit losses should be
recognised, is CU25,000 (ie the drawn balance of CU20,000 plus further
draw-downs of CU5,000 from the available undrawn commitment). The
exposure at default of the credit card facilities for which 12-month expected
credit losses are recognised, is CU45,000 (ie the outstanding balance of CU40,000
and an additional draw-down of CU5,000 from the undrawn commitment over
the next 12 months).

IFRS 9 IE
IE64 The exposure at default and expected life determined by Bank A are used to
measure the lifetime expected credit losses and 12-month expected credit losses
on its credit card portfolio.
IE65 Bank A measures expected credit losses on a facility level and therefore cannot
separately identify the expected credit losses on the undrawn commitment
component from those on the loan component. It recognises expected credit
losses for the undrawn commitment together with the loss allowance for the
loan component in the statement of financial position. To the extent that the
combined expected credit losses exceed the gross carrying amount of the
financial asset, the expected credit losses should be presented as a provision (in
accordance with IFRS 7 Financial Instruments: Disclosure).
Example 11—modification of contractual cash flows
IE66 Bank A originates a five-year loan that requires the repayment of the
outstanding contractual amount in full at maturity. Its contractual par amount
is CU1,000 with an interest rate of 5 per cent payable annually. The effective
interest rate is 5 per cent. At the end of the first reporting period (Period 1),
Bank A recognises a loss allowance at an amount equal to 12-month expected
credit losses because there has not been a significant increase in credit risk since
initial recognition. A loss allowance balance of CU20 is recognised.
IE67 In the subsequent reporting period (Period 2), Bank A determines that the credit
risk on the loan has increased significantly since initial recognition. As a result
of this increase, Bank A recognises lifetime expected credit losses on the loan.
The loss allowance balance is CU30.
IE68 At the end of the third reporting period (Period 3), following significant
financial difficulty of the borrower, Bank A modifies the contractual cash flows
on the loan. It extends the contractual term of the loan by one year so that the
remaining term at the date of the modification is three years. The modification
does not result in the derecognition of the loan by Bank A.
IE69 As a result of that modification, Bank A recalculates the gross carrying amount
of the financial asset as the present value of the modified contractual cash flows
discounted at the loan’s original effective interest rate of 5 per cent. In
accordance with paragraph 5.4.3 of IFRS 9, the difference between this
recalculated gross carrying amount and the gross carrying amount before the
modification is recognised as a modification gain or loss. Bank A recognises the
modification loss (calculated as CU300) against the gross carrying amount of the
loan, reducing it to CU700, and a modification loss of CU300 in profit or loss.
IE70 Bank A also remeasures the loss allowance, taking into account the modified
contractual cash flows and evaluates whether the loss allowance for the loan
shall continue to be measured at an amount equal to lifetime expected credit
losses. Bank A compares the current credit risk (taking into consideration the
modified cash flows) to the credit risk (on the original unmodified cash flows) at
initial recognition. Bank A determines that the loan is not credit-impaired at the
reporting date but that credit risk has still significantly increased compared to
the credit risk at initial recognition and continues to measure the loss allowance

IFRS 9 IE
at an amount equal to lifetime expected credit losses. The loss allowance

balance for lifetime expected credit losses is CU100 at the reporting date.
Period Beginning Impairment Modification Interest Cash Ending Loss Ending

gross (loss)/gain (loss)/gain revenue flows gross allowance amortised
carrying carrying cost
amount amount amount
D Gross: A F=A+C
A B C E G
× 5% +D–E H=F–G
1 CU1,000 (CU20) CU50 CU50 CU1,000 CU20 CU980
2 CU1,000 (CU10) CU50 CU50 CU1,000 CU30 CU970
3 CU1,000 (CU70) (CU300) CU50 CU50 CU700 CU100 CU600
IE71 At each subsequent reporting date, Bank A evaluates whether there is a

significant increase in credit risk by comparing the loan’s credit risk at initial
recognition (based on the original, unmodified cash flows) with the credit risk at
the reporting date (based on the modified cash flows), in accordance with
paragraph 5.5.12 of IFRS 9.
IE72 Two reporting periods after the loan modification (Period 5), the borrower has
outperformed its business plan significantly compared to the expectations at the
modification date. In addition, the outlook for the business is more positive
than previously envisaged. An assessment of all reasonable and supportable
information that is available without undue cost or effort indicates that the
overall credit risk on the loan has decreased and that the risk of a default
occurring over the expected life of the loan has decreased, so Bank A adjusts the
borrower’s internal credit rating at the end of the reporting period.
IE73 Given the positive overall development, Bank A re-assesses the situation and
concludes that the credit risk of the loan has decreased and there is no longer a
significant increase in credit risk since initial recognition. As a result, Bank A
once again measures the loss allowance at an amount equal to 12-month
expected credit losses.
Example 12—provision matrix
IE74 Company M, a manufacturer, has a portfolio of trade receivables of CU30 million

in 20X1 and operates only in one geographical region. The customer base
consists of a large number of small clients and the trade receivables are
categorised by common risk characteristics that are representative of the
customers’ abilities to pay all amounts due in accordance with the contractual
terms. The trade receivables do not have a significant financing component in
accordance with IFRS 15 Revenue from Contracts with Customers. In accordance with
paragraph 5.5.15 of IFRS 9 the loss allowance for such trade receivables is always
measured at an amount equal to lifetime time expected credit losses.
IE75 To determine the expected credit losses for the portfolio, Company M uses a
provision matrix. The provision matrix is based on its historical observed
default rates over the expected life of the trade receivables and is adjusted for

IFRS 9 IE
forward-looking estimates. At every reporting date the historical observed

default rates are updated and changes in the forward-looking estimates are
analysed. In this case it is forecast that economic conditions will deteriorate
over the next year.
IE76 On that basis, Company M estimates the following provision matrix:
Current 1–30 31–60 61–90 More than

days days days 90 days
past due past due past due past due
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%
IE77 The trade receivables from the large number of small customers amount to
CU30 million and are measured using the provision matrix.
Gross carrying Lifetime expected

amount credit loss
allowance
(Gross carrying
amount x lifetime
expected credit loss
rate)
Current CU15,000,000 CU45,000
1–30 days past due CU7,500,000 CU120,000
More than 90 days past due CU1,000,000 CU106,000
CU30,000,000 CU580,000
Example 13—debt instrument measured at fair value through

other comprehensive income
IE78 An entity purchases a debt instrument with a fair value of CU1,000 on

15 December 20X0 and measures the debt instrument at fair value through
other comprehensive income. The instrument has an interest rate of 5 per cent
over the contractual term of 10 years, and has a 5 per cent effective interest rate.
At initial recognition the entity determines that the asset is not purchased or
originated credit-impaired.
Debit Credit
(a)
Financial asset—FVOCI CU1,000
Cash CU1,000
(To recognise the debt instrument measured at its fair value)

(a) FVOCI means fair value through other comprehensive income.

IFRS 9 IE
IE79 On 31 December 20X0 (the reporting date), the fair value of the debt instrument
has decreased to CU950 as a result of changes in market interest rates. The
entity determines that there has not been a significant increase in credit risk
since initial recognition and that expected credit losses should be measured at
an amount equal to 12-month expected credit losses, which amounts to CU30.
For simplicity, journal entries for the receipt of interest revenue are not
provided.
Debit Credit
Impairment loss (profit or loss) CU30
Other comprehensive income(a) CU20
Financial asset—FVOCI CU50
(To recognise 12-month expected credit losses and other fair value changes
on the debt instrument)
(a) The cumulative loss in other comprehensive income at the reporting date was
CU20. That amount consists of the total fair value change of CU50 (ie CU1,000 –
CU950) offset by the change in the accumulated impairment amount representing
12-month expected credit losses that was recognised (CU30).
IE80 Disclosure would be provided about the accumulated impairment amount of

CU30.
IE81 On 1 January 20X1, the entity decides to sell the debt instrument for CU950,
which is its fair value at that date.
Debit Credit
Cash CU950
Financial asset—FVOCI CU950
Loss (profit or loss) CU20
Other comprehensive income CU20
(To derecognise the fair value through other comprehensive income asset
and recycle amounts accumulated in other comprehensive income to profit or
loss)
Example 14—interaction between the fair value through other

comprehensive income measurement category and foreign
currency denomination, fair value hedge accounting and
impairment
IE82 This example illustrates the accounting relating to a debt instrument

denominated in a foreign currency, measured at fair value through other
comprehensive income and designated in a fair value hedge accounting
relationship. The example illustrates the interaction with accounting for
impairment.

IFRS 9 IE
IE83 An entity purchases a debt instrument (a bond) denominated in a foreign

currency (FC) for its fair value of FC100,000 on 1 January 20X0 and classifies the
bond as measured at fair value through other comprehensive income. The bond
has five years remaining to maturity and a fixed coupon of 5 per cent over its
contractual life on the contractual par amount of FC100,000. On initial
recognition the bond has a 5 per cent effective interest rate. The entity’s
functional currency is its local currency (LC). The exchange rate is FC1 to LC1 on
1 January 20X0. At initial recognition the entity determines that the bond is not
purchased or originated credit-impaired. In addition, as at 1 January 20X0 the
12-month expected credit losses are determined to be FC1,200. Its amortised
cost in FC as at 1 January 20X0 is equal to its gross carrying amount of FC100,000
less the 12-month expected credit losses (FC100,000—FC1,200).
IE84 The entity has the following risk exposures:

(a) fair value interest rate risk in FC: the exposure that arises as a result of
purchasing a fixed interest rate instrument; and
(b) foreign exchange risk: the exposure to changes in foreign exchange rates
measured in LC.
IE85 The entity hedges its risk exposures using the following risk management
strategy:
(a) for fixed interest rate risk (in FC) the entity decides to link its interest
receipts in FC to current variable interest rates in FC. Consequently, the
entity uses interest rate swaps denominated in FC under which it pays
fixed interest and receives variable interest in FC; and
(b) for foreign exchange risk the entity decides not to hedge against any
variability in LC arising from changes in foreign exchange rates.
IE86 The entity designates the following hedge relationship:65 a fair value hedge of
the bond in FC as the hedged item with changes in benchmark interest rate risk
in FC as the hedged risk. The entity enters into an on-market swap that pays
fixed and receives variable interest on the same day and designates the swap as
the hedging instrument. The tenor of the swap matches that of the hedged item
(ie five years).
IE87 For simplicity, in this example it is assumed that no hedge ineffectiveness arises
in the hedge accounting relationship. This is because of the assumptions made
in order to better focus on illustrating the accounting mechanics in a situation
that entails measurement at fair value through other comprehensive income of
a foreign currency financial instrument that is designated in a fair value hedge
relationship, and also to focus on the recognition of impairment gains or losses
on such an instrument.
IE88 The entity makes the following journal entries to recognise the bond and the
swap on 1 January 20X0:
65 This example assumes that all qualifying criteria for hedge accounting are met (see paragraph 6.4.1
of IFRS 9). The following description of the designation is solely for the purpose of understanding
this example (ie it is not an example of the complete formal documentation required in accordance
with paragraph 6.4.1 of IFRS 9).

IFRS 9 IE
Debit Credit
LC LC
Financial asset—FVOCI 100,000
Cash 100,000
(To recognise the bond at its fair value)
Impairment loss (profit or loss) 1,200
Other comprehensive income 1,200
(To recognise the 12-month expected credit losses)(a)
Swap –
Cash –
(To recognise the swap at its fair value)

(a) In case of items measured in the functional currency of an entity the journal entry
recognising expected credit losses will usually be made at the reporting date.
IE89 As of 31 December 20X0 (the reporting date), the fair value of the bond decreased
from FC100,000 to FC96,370 because of an increase in market interest rates. The
fair value of the swap increased to FC1,837. In addition, as at 31 December 20X0
the entity determines that there has been no change to the credit risk on the
bond since initial recognition and continues to carry a loss allowance for
12-month expected credit losses at FC1,200.66 As at 31 December 20X0, the
exchange rate is FC1 to LC1.4. This is reflected in the following table:
1 January 31 December
20X0 20X0
Bond
Fair value (FC) 100,000 96,370
Fair value (LC) 100,000 134,918
Amortised cost (FC) 98,800 98,800
Amortised cost (LC) 98,800 138,320
Interest rate swap
Interest rate swap (FC) – 1,837
Interest rate swap (LC) – 2,572
continued...
66 For the purposes of simplicity the example ignores the impact of discounting when computing
expected credit losses.

IFRS 9 IE
...continued
1 January 31 December
20X0 20X0
Impairment – loss allowance
Loss allowance (FC) 1,200 1,200
Loss allowance (LC) 1,200 1,680
FX rate (FC:LC) 1:1 1:1.4
IE90 The bond is a monetary asset. Consequently, the entity recognises the changes
arising from movements in foreign exchange rates in profit or loss in accordance
with paragraphs 23(a) and 28 of IAS 21 The Effects of Changes in Foreign Exchange
Rates and recognises other changes in accordance with IFRS 9. For the purposes
of applying paragraph 28 of IAS 21 the asset is treated as an asset measured at
amortised cost in the foreign currency.
IE91 As shown in the table, on 31 December 20X0 the fair value of the bond
is LC134,918 (FC96,370 × 1.4) and its amortised cost is LC138,320
(FC(100,000–1,200) × 1.4).
IE92 The gain recognised in profit or loss that is due to the changes in foreign
exchange rates is LC39,520 (LC138,320 – LC98,800), ie the change in the
amortised cost of the bond during 20X0 in LC. The change in the fair value of
the bond in LC, which amounts to LC34,918, is recognised as an adjustment to
the carrying amount. The difference between the fair value of the bond and its
amortised cost in LC is LC3,402 (LC134,918 – LC138,320). However, the change in
the cumulative gain or loss recognised in other comprehensive income during
20X0 as a reduction is LC 4,602 (LC3,402 + LC1,200).
IE93 A gain of LC2,572 (FC1,837 × 1.4) on the swap is recognised in profit or loss and,
because it is assumed that there is no hedge ineffectiveness, an equivalent
amount is recycled from other comprehensive income in the same period. For
simplicity, journal entries for the recognition of interest revenue are not
provided. It is assumed that interest accrued is received in the period.
IE94 The entity makes the following journal entries on 31 December 20X0:
Debit Credit
LC LC
Profit or loss 39,520
(To recognise the foreign exchange gain on the bond, the adjustment to its
carrying amount measured at fair value in LC and the movement in the
accumulated impairment amount due to changes in foreign exchange rates)
continued...

IFRS 9 IE
...continued
Debit Credit
LC LC
Swap 2,572
(To remeasure the swap at fair value)
(To recognise in profit or loss the change in fair value of the bond due to a
change in the hedged risk)
IE95 In accordance with paragraph 16A of IFRS 7, the loss allowance for financial
assets measured at fair value through other comprehensive income is not
presented separately as a reduction of the carrying amount of the financial asset.
However, disclosure would be provided about the accumulated impairment
amount recognised in other comprehensive income.
IE96 As at 31 December 20X1 (the reporting date), the fair value of the bond decreased
to FC87,114 because of an increase in market interest rates and an increase in
the credit risk of the bond. The fair value of the swap increased by FC255 to
FC2,092. In addition, as at 31 December 20X1 the entity determines that there
has been a significant increase in credit risk on the bond since initial
recognition, so a loss allowance at an amount equal to lifetime expected credit
losses is recognised.67 The estimate of lifetime expected credit losses as at
31 December 20X1 is FC9,700. As at 31 December 20X1, the exchange rate is FC1
to LC1.25. This is reflected in the following table:
31 December 31 December
20X0 20X1
Bond
Fair value (FC) 96,370 87,114
Fair value (LC) 134,918 108,893
Amortised cost (FC) 98,800 90,300
Amortised cost (LC) 138,320 112,875
continued...
67 For simplicity this example assumes that credit risk does not dominate the fair value hedge
relationship.

IFRS 9 IE
...continued
31 December 31 December
20X0 20X1
Interest rate swap
Interest rate swap (FC) 1,837 2,092
Interest rate swap (LC) 2,572 2,615
Impairment – loss allowance
Loss allowance (FC) 1,200 9,700
Loss allowance (LC) 1,680 12,125
FX rate (FC:LC) 1:1.4 1:1.25
IE97 As shown in the table, as at 31 December 20X1 the fair value of the bond is
LC108,893 (FC87,114 × 1.25) and its amortised cost is LC112,875 (FC(100,000 –
9,700) × 1.25).
IE98 The lifetime expected credit losses on the bond are measured as FC9,700 as of
31 December 20X1. Thus the impairment loss recognised in profit or loss in LC
is LC10,625 (FC(9,700 – 1,200) x 1.25).
IE99 The loss recognised in profit or loss because of the changes in foreign exchange
rates is LC14,820 (LC112,875 – LC138,320 + LC10,625), which is the change in the
gross carrying amount of the bond on the basis of amortised cost during 20X1 in
LC, adjusted for the impairment loss. The difference between the fair value of
the bond and its amortised cost in the functional currency of the entity on
31 December 20X1 is LC3,982 (LC108,893 – LC112,875). However, the change in
the cumulative gain or loss recognised in other comprehensive income during
20X1 as a reduction in other comprehensive income is LC11,205 (LC3,982 –
LC3,402 + LC10,625).
IE100 A gain of LC43 (LC2,615 – LC2,572) on the swap is recognised in profit or loss
and, because it is assumed that there is no hedge ineffectiveness, an equivalent
amount is recycled from other comprehensive income in the same period.
IE101 The entity makes the following journal entries on 31 December 20X1:
Debit Credit
LC LC
(To recognise the foreign exchange gain on the bond, the adjustment to its
carrying amount measured at fair value in LC and the movement in the
accumulated impairment amount due to changes in foreign exchange rates)
continued...

IFRS 9 IE
...continued
Debit Credit
LC LC
Swap 43
Profit or loss 43
(To remeasure the swap at fair value)
Profit or loss 43
Other comprehensive income 43
(To recognise in profit or loss the change in fair value of the bond due to a
change in the hedged risk)
Profit or loss (impairment loss) 10,625
Other comprehensive income

(accumulated impairment amount) 10,625
(To recognise lifetime expected credit losses)
IE102 On 1 January 20X2, the entity decides to sell the bond for FC 87,114, which is its
fair value at that date and also closes out the swap at fair value. The foreign
exchange rate is the same as at 31 December 20X1. The journal entries to
derecognise the bond and reclassify the gains and losses that have accumulated
in other comprehensive income would be as follows:
Debit Credit
LC LC
Cash 108,893
Loss on sale (profit or loss) 1,367(a)
(To derecognise the bond)
Swap 2,615
Cash 2,615
(To close out the swap)

(a) This amount consists of the changes in fair value of the bond, the accumulated
impairment amount and the changes in foreign exchange rates recognised in other
comprehensive income (LC2,572 + LC1,200 + LC43 + LC10,625 – LC4,602 – LC11,205
= -LC1,367, which is recycled as a loss in profit or loss).

IFRS 9 IE
Application of the impairment requirements on a reporting date
Calculate a
Is the financial instrument a purchased or Yes credit-adjusted
originated credit-impaired financial asset? effective interest
rate and always
No recognise a loss
allowance for
changes in
Is the simplified approach for trade lifetime expected
receivables, contract assets and lease credit losses
receivables applicable?
No
Is the low credit

Does the financial instrument have low Yes
risk simplification
credit risk at the reporting date?
applied?
Yes No
No Yes
Has there been a significant increase in

credit risk since initial recognition? No Recognise
12-month
Yes expected credit
losses and calculate
interest revenue
on gross
Recognise lifetime expected credit losses
carrying amount
And
Calculate interest
Calculate interest
revenue on the No Is the financial instrument a Yes revenue on
gross carrying
credit-impaired financial asset? amortised cost
amount
Reclassification of financial assets (Section 5.6)
IE103 This example illustrates the accounting requirements for the reclassification of
financial assets between measurement categories in accordance with Section 5.6
of IFRS 9. The example illustrates the interaction with the impairment
requirements in Section 5.5 of IFRS 9.
Example 15—reclassification of financial assets
IE104 An entity purchases a portfolio of bonds for its fair value (gross carrying amount)
of CU500,000.
IE105 The entity changes the business model for managing the bonds in accordance
with paragraph 4.4.1 of IFRS 9. The fair value of the portfolio of bonds at the
reclassification date is CU490,000.

IFRS 9 IE
IE106 If the portfolio was measured at amortised cost or at fair value through other
comprehensive income immediately prior to reclassification, the loss allowance
recognised at the date of reclassification would be CU6,000 (reflecting a
significant increase in credit risk since initial recognition and thus the
measurement of lifetime expected credit losses).
IE107 The 12-month expected credit losses at the reclassification date are CU4,000.
IE108 For simplicity, journal entries for the recognition of interest revenue are not
provided.
Scenario 1: Reclassification out of the amortised cost

measurement category and into the fair value through
profit or loss measurement category
IE109 Bank A reclassifies the portfolio of bonds out of the amortised cost measurement
category and into the fair value through profit or loss measurement category. At
the reclassification date, the portfolio of bonds is measured at fair value. Any
gain or loss arising from a difference between the previous amortised cost
amount of the portfolio of bonds and the fair value of the portfolio of bonds is
recognised in profit or loss on reclassification.
Debit Credit
Bonds (FVPL assets) CU490,000
Bonds (gross carrying amount of the amortised CU500,000

cost assets)
Loss allowance CU6,000
Reclassification loss (profit or loss) CU4,000
(To recognise the reclassification of bonds from amortised cost to fair value
through profit or loss and to derecognise the loss allowance.)
Scenario 2: Reclassification out of the fair value through

profit or loss measurement category and into the
amortised cost measurement category
IE110 Bank A reclassifies the portfolio of bonds out of the fair value through profit or
loss measurement category and into the amortised cost measurement category.
At the reclassification date, the fair value of the portfolio of bonds becomes the
new gross carrying amount and the effective interest rate is determined based
on that gross carrying amount. The impairment requirements apply to the bond
from the reclassification date. For the purposes of recognising expected credit
losses, the credit risk of the portfolio of bonds at the reclassification date
becomes the credit risk against which future changes in credit risk shall be
compared.

IFRS 9 IE
Debit Credit
Bonds (gross carrying amount of the amortised CU490,000
cost assets)
Impairment loss (profit or loss) CU4,000
(To recognise reclassification of bonds from fair value through profit or loss to
amortised cost including commencing accounting for impairment.)
Scenario 3: Reclassification out of the amortised cost

measurement category and into the fair value through
other comprehensive income measurement category
IE111 Bank A reclassifies the portfolio of bonds out of the amortised cost measurement
category and into the fair value through other comprehensive income
measurement category. At the reclassification date, the portfolio of bonds is
measured at fair value. Any gain or loss arising from a difference between the
previous amortised cost amount of the portfolio of bonds and the fair value of
the portfolio of bonds is recognised in other comprehensive income. The
effective interest rate and the measurement of expected credit losses are not
adjusted as a result of the reclassification. The credit risk at initial recognition
continues to be used to assess changes in credit risk. From the reclassification
date the loss allowance ceases to be recognised as an adjustment to the gross
carrying amount of the bond and is recognised as an accumulated impairment
amount, which would be disclosed.
Debit Credit
Bonds (FVOCI assets) CU490,000
Bonds (gross carrying amount of amortised cost CU500,000

assets)

(a)
Other comprehensive income CU4,000
(To recognise the reclassification from amortised cost to fair value through
other comprehensive income. The measurement of expected credit losses is
however unchanged.)
(a) For simplicity, the amount related to impairment is not shown separately. If it had
been, this journal entry (ie DR CU4,000) would be split into the following two
entries: DR Other comprehensive income CU10,000 (fair value changes) and CR
other comprehensive income CU6,000 (accumulated impairment amount).

IFRS 9 IE

other comprehensive income measurement category and
into the amortised cost measurement category
IE112 Bank A reclassifies the portfolio of bonds out of the fair value through other
comprehensive income measurement category and into the amortised cost
measurement category. The portfolio of bonds is reclassified at fair value.
However, at the reclassification date, the cumulative gain or loss previously
recognised in other comprehensive income is removed from equity and adjusted
against the fair value of the portfolio of bonds. As a result, the portfolio of bonds
is measured at the reclassification date as if it had always been measured at
amortised cost. The effective interest rate and the measurement of expected
credit losses are not adjusted as a result of the reclassification. The credit risk at
initial recognition continues to be used to assess changes in the credit risk on
the bonds. The loss allowance is recognised as an adjustment to the gross
carrying amount of the bond (to reflect the amortised cost amount) from the
reclassification date.
Debit Credit
Bonds (gross carrying value of the amortised CU490,000
cost assets)
Bonds (gross carrying value of the amortised CU10,000

cost assets)
Other comprehensive income(a) CU4,000
(To recognise the reclassification from fair value through other comprehensive
income to amortised cost including the recognition of the loss allowance
deducted to determine the amortised cost amount. The measurement of
expected credit losses is however unchanged.)
(a) The cumulative loss in other comprehensive income at the reclassification date was
CU4,000. That amount consists of the total fair value change of CU10,000
(ie CU500,000 – 490,000) offset by the accumulated impairment amount recognised
(CU6,000) while the assets were measured at fair value through other
comprehensive income.

profit or loss measurement category and into the fair
value through other comprehensive income
measurement category
IE113 Bank A reclassifies the portfolio of bonds out of the fair value through profit or
loss measurement category and into the fair value through other comprehensive
measurement category. The portfolio of bonds continues to be measured at fair
value. However, for the purposes of applying the effective interest method, the
fair value of the portfolio of bonds at the reclassification date becomes the new
gross carrying amount and the effective interest rate is determined based on
that new gross carrying amount. The impairment requirements apply from the

IFRS 9 IE
reclassification date. For the purposes of recognising expected credit losses, the
credit risk of the portfolio of bonds at the reclassification date becomes the
credit risk against which future changes in credit risk shall be compared.
Debit Credit
Impairment loss (profit or loss) CU4,000
Other comprehensive income CU4,000
(To recognise the reclassification of bonds from fair value through profit or
loss to fair value through other comprehensive income including commencing
accounting for impairment. The other comprehensive income amount reflects
the loss allowance at the date of reclassification (an accumulated impairment
amount relevant for disclosure purposes) of CU4,000.)

other comprehensive income measurement category and
into the fair value through profit or loss measurement
category
IE114 Bank A reclassifies the portfolio of bonds out of the fair value through other
comprehensive income measurement category and into the fair value through
profit or loss measurement category. The portfolio of bonds continues to be
measured at fair value. However, the cumulative gain or loss previously
recognised in other comprehensive income is reclassified from equity to profit
or loss as a reclassification adjustment (see IAS 1 Presentation of Financial
Statements).
Debit Credit
Reclassification loss (profit or loss) CU4,000
Other comprehensive income(a) CU4,000
(To recognise the reclassification of bonds from fair value through other
comprehensive income to fair value through profit or loss.)
(a) The cumulative loss in other comprehensive income at the reclassification date was
CU4,000. That amount consists of the total fair value change of CU10,000
(ie CU500,000 – 490,000) offset by the loss allowance that was recognised (CU6,000)
while the assets were measured at fair value through other comprehensive income.

IFRS 9 IE
Hedge accounting for aggregated exposures
IE115 The following examples illustrate the mechanics of hedge accounting for
aggregated exposures.
Example 16—combined commodity price risk and foreign

currency risk hedge (cash flow hedge/cash flow hedge
combination)
Fact pattern
IE116 Entity A wants to hedge a highly probable forecast coffee purchase (which is
expected to occur at the end of Period 5). Entity A’s functional currency is its
Local Currency (LC). Coffee is traded in Foreign Currency (FC). Entity A has the
following risk exposures:
(a) commodity price risk: the variability in cash flows for the purchase price,
which results from fluctuations of the spot price of coffee in FC; and
(b) foreign currency (FX) risk: the variability in cash flows that result from
fluctuations of the spot exchange rate between LC and FC.
IE117 Entity A hedges its risk exposures using the following risk management strategy:
(a) Entity A uses benchmark commodity forward contracts, which are
denominated in FC, to hedge its coffee purchases four periods before
delivery. The coffee price that Entity A actually pays for its purchase is
different from the benchmark price because of differences in the type of
coffee, the location and delivery arrangement.68 This gives rise to the risk
of changes in the relationship between the two coffee prices (sometimes
referred to as ‘basis risk’), which affects the effectiveness of the hedging
relationship. Entity A does not hedge this risk because it is not
considered economical under cost/benefit considerations.
(b) Entity A also hedges its FX risk. However, the FX risk is hedged over a
different horizon—only three periods before delivery. Entity A considers
the FX exposure from the variable payments for the coffee purchase in FC
and the gain or loss on the commodity forward contract in FC as one
aggregated FX exposure. Hence, Entity A uses one single FX forward
contract to hedge the FX cash flows from a forecast coffee purchase and
the related commodity forward contract.
IE118 The following table sets out the parameters used for Example 16 (the ‘basis
spread’ is the differential, expressed as a percentage, between the price of the
coffee that Entity A actually buys and the price for the benchmark coffee):
68 For the purpose of this example it is assumed that the hedged risk is not designated based on a
benchmark coffee price risk component. Consequently, the entire coffee price risk is hedged.

IFRS 9 IE
Example 16—Parameters
Period 1 2 3 4 5
Interest rates for
remaining maturity [FC] 0.26% 0.21% 0.16% 0.06% 0.00%
Interest rates for
remaining maturity [LC] 1.12% 0.82% 0.46% 0.26% 0.00%
Forward price [FC/lb] 1.25 1.01 1.43 1.22 2.15
Basis spread -5.00% -5.50% -6.00% -3.40% -7.00%
FX rate (spot) [FC/LC] 1.3800 1.3300 1.4100 1.4600 1.4300
Accounting mechanics
IE119 Entity A designates as cash flow hedges the following two hedging
relationships:69
(a) A commodity price risk hedging relationship between the coffee price
related variability in cash flows attributable to the forecast coffee
purchase in FC as the hedged item and a commodity forward contract
denominated in FC as the hedging instrument (the ‘first level
relationship’). This hedging relationship is designated at the end of
Period 1 with a term to the end of Period 5. Because of the basis spread
between the price of the coffee that Entity A actually buys and the price
for the benchmark coffee, Entity A designates a volume of
112,500 pounds (lbs) of coffee as the hedging instrument and a volume of
118,421 lbs as the hedged item.70
(b) An FX risk hedging relationship between the aggregated exposure as the
hedged item and an FX forward contract as the hedging instrument (the
‘second level relationship’). This hedging relationship is designated at
the end of Period 2 with a term to the end of Period 5. The aggregated
exposure that is designated as the hedged item represents the FX risk
that is the effect of exchange rate changes, compared to the forward FX
rate at the end of Period 2 (ie the time of designation of the FX risk
hedging relationship), on the combined FX cash flows in FC of the two
items designated in the commodity price risk hedging relationship,
which are the forecast coffee purchase and the commodity forward
contract. Entity A’s long-term view of the basis spread between the price
of the coffee that it actually buys and the price for the benchmark coffee
with IFRS 9.6.4.1(b)).
70 In this example, the current basis spread at the time of designation is coincidentally the same as
Entity A’s long-term view of the basis spread (-5 per cent) that determines the volume of coffee
purchases that it actually hedges. Also, this example assumes that Entity A designates the hedging
instrument in its entirety and designates as much of its highly probable forecast purchases as it
regards as hedged. That results in a hedge ratio of 1/(100%-5%). Other entities might follow
different approaches when determining what volume of their exposure they actually hedge, which
can result in a different hedge ratio and also designating less than a hedging instrument in its
entirety (see paragraph 6.4.1 of IFRS 9).

IFRS 9 IE
has not changed from the end of Period 1. Consequently, the actual
volume of hedging instrument that Entity A enters into (the nominal
amount of the FX forward contract of FC140,625) reflects the cash flow
exposure associated with a basis spread that had remained at -5 per cent.
However, Entity A’s actual aggregated exposure is affected by changes in
the basis spread. Because the basis spread has moved from -5 per cent to
-5.5 per cent during Period 2, Entity A’s actual aggregated exposure at the
end of Period 2 is FC140,027.
IE120 The following table sets out the fair values of the derivatives, the changes in the
value of the hedged items and the calculation of the cash flow hedge reserves
and hedge ineffectiveness:71
Example 16—Calculations
Period 1 2 3 4 5
Commodity price risk hedging relationship (first level relationship)
Forward purchase contract for coffee
Volume (lbs) 112,500
Forward price [FC/lb] 1.25 Price (fwd) [FC/lb] 1.25 1.01 1.43 1.22 2.15
Fair value [FC] 0 (26,943) 20,219 (3,373) 101,250
Fair value [LC] 0 (20,258) 14,339 (2,310) 70,804
Change in fair value [LC] (20,258) 34,598 (16,650) 73,114
Hedged forecast coffee purchase

Hedge ratio 105.26% Basis spread -5.00% -5.50% -6.00% -3.40% -7.00%
Hedged volume 118,421 Price (fwd) [FC/lb] 1.19 0.95 1.34 1.18 2.00
Implied forward price 1.1875 Present value [FC] 0 27,540 (18,528) 1,063 (96,158)
Present value [LC] 0 20,707 (13,140) 728 (67,243)
Change in present value [LC] 20,707 (33,847) 13,868 (67,971)
Accounting LC LC LC LC LC
Derivative 0 (20,258) 14,339 (2,310) 70,804
Cash flow hedge reserve 0 (20,258) 13,140 (728) 67,243
Change in cash flow hedge reserve (20,258) 33,399 (13,868) 67,971
Profit or loss 0 1,199 (2,781) 5,143
Retained earnings 0 0 1,199 (1,582) 3,561
continued...
71 In the following table for the calculations all amounts (including the calculations for accounting
purposes of amounts for assets, liabilities, equity and profit or loss) are in the format of positive
(plus) and negative (minus) numbers (eg a profit or loss amount that is a negative number is a loss).

IFRS 9 IE
...continued
Period 1 2 3 4 5
FX risk hedging relationship (second level relationship)
FX rate [FC/LC] Spot 1.3800 1.3300 1.4100 1.4600 1.4300
Forward 1.3683 1.3220 1.4058 1.4571 1.4300
FX forward contract (buy FC/sell LC)

Volume [FC] 140,625
Forward rate (in P2) 1.3220 Fair value [LC] 0 (6,313) (9,840) (8,035)
Change in fair value [LC] (6,313) (3,528) 1,805
Hedged FX risk
Aggregated FX
exposure Hedged volume [FC] 140,027 138,932 142,937 135,533
Present value [LC] 0 6,237 10,002 7,744
Change in present value [LC] 6,237 3,765 (2,258)
Accounting LC LC LC LC
Derivative 0 (6,313) (9,840) (8,035)
Cash flow hedge reserve 0 (6,237) (9,840) (7,744)
Change in cash flow hedge reserve (6,237) (3,604) 2,096
Profit or loss (76) 76 (291)
Retained earnings 0 (76) 0 (291)
IE121 The commodity price risk hedging relationship is a cash flow hedge of a highly
probable forecast transaction that starts at the end of Period 1 and remains in
place when the FX risk hedging relationship starts at the end of Period 2, ie the
first level relationship continues as a separate hedging relationship.
IE122 The volume of the aggregated FX exposure (in FC), which is the hedged volume
of the FX risk hedging relationship, is the total of:72
(a) the hedged coffee purchase volume multiplied by the current forward
price (this represents the expected spot price of the actual coffee
purchase); and
(b) the volume of the hedging instrument (designated nominal amount)
multiplied by the difference between the contractual forward rate and
the current forward rate (this represents the expected price differential
from benchmark coffee price movements in FC that Entity A will receive
or pay under the commodity forward contract).
72 For example, at the end of Period 3 the aggregated FX exposure is determined as: 118,421 lbs ×
1.34 FC/lb = FC159,182 for the expected price of the actual coffee purchase and 112,500 lbs × (1.25
[FC/lb] – 1.43 [FC/lb]) = FC(20,250) for the expected price differential under the commodity forward
contract, which gives a total of FC138,932—the volume of the aggregated FX exposure at the end of
Period 3.

IFRS 9 IE
IE123 The present value (in LC) of the hedged item of the FX risk hedging relationship
(ie the aggregated exposure) is calculated as the hedged volume (in FC)
multiplied by the difference between the forward FX rate at the measurement
date and the forward FX rate at the designation date of the hedging relationship
(ie the end of Period 2).73
IE124 Using the present value of the hedged item and the fair value of the hedging
instrument, the cash flow hedge reserve and the hedge ineffectiveness are then
determined (see paragraph 6.5.11 of IFRS 9).
IE125 The following table shows the effect on Entity A’s statement of profit or loss and
other comprehensive income and its statement of financial position (for the sake
of transparency the line items74 are disaggregated on the face of the statements
by the two hedging relationships, ie for the commodity price risk hedging
relationship and the FX risk hedging relationship):
Example 16—Overview of effect on statements of financial performance and

financial position
[All amounts in LC]
Period 1 2 3 4 5
Statement of profit or loss and other comprehensive income
Hedge ineffectiveness
Commodity hedge 0 (1,199) 2,781 (5,143)
FX hedge 0 76 (76) 291
Profit or loss 0 0 (1,123) 2,705 (4,852)
Other comprehensive income (OCI)

Commodity hedge 20,258 (33,399) 13,868 (67,971)
FX hedge 0 6,237 3,604 (2,096)
Total other comprehensive income 0 20,258 (27,162) 17,472 (70,067)
Comprehensive income 0 20,258 (28,285) 20,177 (74,920)
continued...
73 For example, at the end of Period 3 the present value of the hedged item is determined as the
volume of the aggregated exposure at the end of Period 3 (FC138,932) multiplied by the difference
between the forward FX rate at the end of Period 3 (1/1.4058) and the forward FX rate and the time
of designation (ie the end of Period 2: 1/1.3220) and then discounted using the interest rate (in LC) at
the end of Period 3 with a term of 2 periods (ie until the end of Period 5 – 0.46%). The calculation is:
FC138,932 × (1/(1.4058[FC/LC]) – 1/(1.3220 [FC/LC]))/(1 + 0.46%) = LC6,237.
74 The line items used in this example are a possible presentation. Different presentation formats
using different line items (including line items that include the amounts shown here) are also
possible (IFRS 7 sets out disclosure requirements for hedge accounting that include disclosures
about hedge ineffectiveness, the carrying amount of hedging instruments and the cash flow hedge
reserve).

IFRS 9 IE
...continued

financial position
[All amounts in LC]
Period 1 2 3 4 5
Statement of financial position
Commodity forward 0 (20,258) 14,339 (2,310) 70,804
FX forward 0 (6,313) (9,840) (8,035)
Total net assets 0 (20,258) 8,027 (12,150) 62,769
Equity
Accumulated OCI
Commodity hedge 0 20,258 (13,140) 728 (67,243)
FX hedge 0 6,237 9,840 7,744
0 20,258 (6,904) 10,568 (59,499)
Retained earnings
Commodity hedge 0 0 (1,199) 1,582 (3,561)
FX hedge 0 76 0 291
0 0 (1,123) 1,582 (3,270)
Total equity 0 20,258 (8,027) 12,150 (62,769)
IE126 The total cost of inventory after hedging is as follows:75
Cost of inventory [all amounts in LC]

Cash price (at spot for commodity price risk and FX risk) 165,582
Gain/loss from CFHR for commodity price risk (67,243)
Gain/loss from CFHR for FX risk 7,744
Cost of inventory 106,083
IE127 The total overall cash flow from all transactions (the actual coffee purchase at
the spot price and the settlement of the two derivatives) is LC102,813. It differs
from the hedge adjusted cost of inventory by LC3,270, which is the net amount
of cumulative hedge ineffectiveness from the two hedging relationships. This
hedge ineffectiveness has a cash flow effect but is excluded from the
measurement of the inventory.
75 ‘CFHR’ is the cash flow hedge reserve, ie the amount accumulated in other comprehensive income
for a cash flow hedge.

IFRS 9 IE
Example 17—combined interest rate risk and foreign currency

risk hedge (fair value hedge/cash flow hedge combination)
Fact pattern
IE128 Entity B wants to hedge a fixed rate liability that is denominated in Foreign
Currency (FC). The liability has a term of four periods from the start of Period 1
to the end of Period 4. Entity B’s functional currency is its Local Currency (LC).
Entity B has the following risk exposures:
(a) fair value interest rate risk and FX risk: the changes in fair value of the
fixed rate liability attributable to interest rate changes, measured in LC.
(b) cash flow interest rate risk: the exposure that arises as a result of
swapping the combined fair value interest rate risk and FX risk exposure
associated with the fixed rate liability (see (a) above) into a variable rate
exposure in LC in accordance with Entity B’s risk management strategy
for FC denominated fixed rate liabilities (see paragraph IE129(a) below).
IE129 Entity B hedges its risk exposures using the following risk management strategy:
(a) Entity B uses cross-currency interest rate swaps to swap its FC
denominated fixed rate liabilities into a variable rate exposure in LC.
Entity B hedges its FC denominated liabilities (including the interest) for
their entire life. Consequently, Entity B enters into a cross-currency
interest rate swap at the same time as it issues an FC denominated
liability. Under the cross-currency interest rate swap Entity B receives
fixed interest in FC (used to pay the interest on the liability) and pays
variable interest in LC.
(b) Entity B considers the cash flows on a hedged liability and on the related
cross-currency interest rate swap as one aggregated variable rate
exposure in LC. From time to time, in accordance with its risk
management strategy for variable rate interest rate risk (in LC), Entity B
decides to lock in its interest payments and hence swaps its aggregated
variable rate exposure in LC into a fixed rate exposure in LC. Entity B
seeks to obtain as a fixed rate exposure a single blended fixed coupon
rate (ie the uniform forward coupon rate for the hedged term that exists
at the start of the hedging relationship).76 Consequently, Entity B uses
interest rate swaps (denominated entirely in LC) under which it receives
variable interest (used to pay the interest on the pay leg of the
cross-currency interest rate swap) and pays fixed interest.
76 An entity may have a different risk management strategy whereby it seeks to obtain a fixed rate
exposure that is not a single blended rate but a series of forward rates that are each fixed for the
respective individual interest period. For such a strategy the hedge effectiveness is measured based
on the difference between the forward rates that existed at the start of the hedging relationship and
the forward rates that exist at the effectiveness measurement date for the individual interest
periods. For such a strategy a series of forward contracts corresponding with the individual interest
periods would be more effective than an interest rate swap (that has a fixed payment leg with a
single blended fixed rate).

IFRS 9 IE
IE130 The following table sets out the parameters used for Example 17:
Example 17—Parameters
t0 Period 1 Period 2 Period 3 Period 4
FX spot rate [LC/FC] 1.2000 1.0500 1.4200 1.5100 1.3700
Interest curves
(vertical presentation of rates for each quarter
of a period on a p.a. basis)
LC 2.50% 5.02% 6.18% 0.34% [N/A]
2.75% 5.19% 6.26% 0.49%
2.91% 5.47% 6.37% 0.94%
3.02% 5.52% 6.56% 1.36%
2.98% 5.81% 6.74%
3.05% 5.85% 6.93%
3.11% 5.91% 7.19%
3.15% 6.06% 7.53%
3.11% 6.20%
3.14% 6.31%
3.27% 6.36%
3.21% 6.40%
3.21%
3.25%
3.29%
3.34%
FC 3.74% 4.49% 2.82% 0.70% [N/A]

4.04% 4.61% 2.24% 0.79%
4.23% 4.63% 2.00% 1.14%
4.28% 4.34% 2.18% 1.56%
4.20% 4.21% 2.34%
4.17% 4.13% 2.53%
4.27% 4.07% 2.82%
4.14% 4.09% 3.13%
4.10% 4.17%
4.11% 4.13%
4.11% 4.24%
4.13% 4.34%
4.14%
4.06%
4.12%
4.19%

IFRS 9 IE
IE131 Entity B designates the following hedging relationships:77
(a) As a fair value hedge, a hedging relationship for fair value interest rate
risk and FX risk between the FC denominated fixed rate liability (fixed
rate FX liability) as the hedged item and a cross-currency interest rate
swap as the hedging instrument (the ‘first level relationship’). This
hedging relationship is designated at the beginning of Period 1 (ie t0)
with a term to the end of Period 4.
(b) As a cash flow hedge, a hedging relationship between the aggregated
exposure as the hedged item and an interest rate swap as the hedging
instrument (the ‘second level relationship’). This hedging relationship is
designated at the end of Period 1, when Entity B decides to lock in its
interest payments and hence swaps its aggregated variable rate exposure
in LC into a fixed rate exposure in LC, with a term to the end of Period 4.
The aggregated exposure that is designated as the hedged item
represents, in LC, the variability in cash flows that is the effect of changes
in the combined cash flows of the two items designated in the fair value
hedge of the fair value interest rate risk and FX risk (see (a) above),
compared to the interest rates at the end of Period 1 (ie the time of
designation of the hedging relationship between the aggregated
exposure and the interest rate swap).
IE132 The following table78 sets out the overview of the fair values of the derivatives,
the changes in the value of the hedged items and the calculation of the cash flow
hedge reserve and hedge ineffectiveness.79 In this example, hedge ineffectiveness
arises on both hedging relationships.80
Fixed rate FX liability
Fair value [FC] (1,000,000) (995,522) (1,031,008) (1,030,193) (1,000,000)
Fair value [LC] (1,200,000) (1,045,298) (1,464,031) (1,555,591) (1,370,000)
Change in fair value [LC] 154,702 (418,733) (91,560) 185,591
continued...
with paragraph 6.4.1(b) of IFRS 9.
78 Tables in this example use the following acronyms: ‘CCIRS’ for cross-currency interest rate swap,
‘CF(s)’ for cash flow(s), ‘CFH’ for cash flow hedge, ‘CFHR’ for cash flow hedge reserve, ‘FVH’ for fair
value hedge, ‘IRS’ for interest rate swap and ‘PV’ for present value.
purposes of amounts for assets, liabilities and equity) are in the format of positive (plus) and
negative (minus) numbers (eg an amount in the cash flow hedge reserve that is in brackets is a loss).
80 For a situation such as in this example, hedge ineffectiveness can result from various factors, for
example credit risk, differences in the day count method or, depending on whether it is included in
the designation of the hedging instrument, the charge for exchanging different currencies that is
included in cross-currency interest rate swaps (commonly referred to as the ‘currency basis’).

IFRS 9 IE
...continued
CCIRS (receive fixed FC/pay variable LC)
Fair value [LC] 0 (154,673) 264,116 355,553 170,000
Change in fair value [LC] (154,673) 418,788 91,437 (185,553)
IRS (receive variable/pay fixed)

Fair value [LC] 0 18,896 (58,767) 0
Change in fair value [LC] 18,896 (77,663) (58,767)
CF variability of the aggregated exposure

Present value [LC] 0 (18,824) 58,753 0
Change in present value [LC] (18,824) 77,577 (58,753)
CFHR
Balance (end of period) [LC] 0 18,824 (58,753) 0
Change [LC] 18,824 (77,577) 58,753
IE133 The hedging relationship between the fixed rate FX liability and the
cross-currency interest rate swap starts at the beginning of Period 1 (ie t0) and
remains in place when the hedging relationship for the second level
relationship starts at the end of Period 1, ie the first level relationship continues
as a separate hedging relationship.
IE134 The cash flow variability of the aggregated exposure is calculated as follows:
(a) At the point in time from which the cash flow variability of the
aggregated exposure is hedged (ie the start of the second level
relationship at the end of Period 1), all cash flows expected on the fixed
rate FX liability and the cross-currency interest rate swap over the
hedged term (ie until the end of Period 4) are mapped out and equated to
a single blended fixed coupon rate so that the total present value (in LC)
is nil. This calculation establishes the single blended fixed coupon rate
(reference rate) that is used at subsequent dates as the reference point to
measure the cash flow variability of the aggregated exposure since the
start of the hedging relationship. This calculation is illustrated in the
following table:

IFRS 9 IE
Example 17—Cash flow variability of the aggregated exposure (calibration)
Variability in cash flows of the aggregated exposure

FX liability CCIRS FC leg CCIRS LC leg Calibration PV
CF(s) PV CF(s) PV CF(s) PV 1,200,000 Nominal
5.6963% Rate
4 Frequency
[FC] [FC] [FC] [FC] [LC] [LC] [LC] [LC]
Time
t0
t1
Period t2
1 t3
t4
t5 0 0 0 0 (14,771) (14,591) 17,089 16,881
Period t6 (20,426) (19,977) 20,246 19,801 (15,271) (14,896) 17,089 16,669

2 t7 0 0 0 0 (16,076) (15,473) 17,089 16,449
t8 (20,426) (19,543) 20,582 19,692 (16,241) (15,424) 17,089 16,229
t9 0 0 0 0 (17,060) (15,974) 17,089 16,002
Period t10 (20,426) (19,148) 20,358 19,084 (17,182) (15,862) 17,089 15,776
3 t11 0 0 0 0 (17,359) (15,797) 17,089 15,551
t12 (20,426) (18,769) 20,582 18,912 (17,778) (15,942) 17,089 15,324
t13 0 0 0 0 (18,188) (16,066) 17,089 15,095
Period t14 (20,426) (18,391) 20,246 18,229 (18,502) (16,095) 17,089 14,866
4 t15 0 0 0 0 (18,646) (15,972) 17,089 14,638
t16 (1,020,426) (899,695) 1,020,582 899,832 (1,218,767) (1,027,908) 1,217,089 1,026,493
Totals (995,522) 995,550 (1,200,000) 1,199,971
Totals in LC (1,045,298) 1,045,327 (1,200,000) 1,199,971
PV of all CF(s) [LC] 0
The nominal amount that is used for the calibration of the reference rate
is the same as the nominal amount of aggregated exposure that creates
the variable cash flows in LC (LC1,200,000), which coincides with the
nominal amount of the cross-currency interest rate swap for the variable
rate leg in LC. This results in a reference rate of 5.6963 per cent
(determined by iteration so that the present value of all cash flows in
total is nil).

IFRS 9 IE
(b) At subsequent dates, the cash flow variability of the aggregated exposure
is determined by comparison to the reference point established at the
end of Period 1. For that purpose, all remaining cash flows expected on
the fixed rate FX liability and the cross-currency interest rate swap over
the remainder of the hedged term (ie from the effectiveness
measurement date until the end of Period 4) are updated (as applicable)
and then discounted. Also, the reference rate of 5.6963 per cent is
applied to the nominal amount that was used for the calibration of that
rate at the end of Period 1 (LC1,200,000) in order to generate a set of cash
flows over the remainder of the hedged term that is then also
discounted. The total of all those present values represents the cash flow
variability of the aggregated exposure. This calculation is illustrated in
the following table for the end of Period 2:
Example 17—Cash flow variability of the aggregated exposure (at the end of
Period 2)

Calibra-
FX liability CCIRS FC leg CCIRS LC leg tion PV
5.6963% Rate
4 Frequency
Time
t0
t1
Period 1
t2
t3
t4
t5 0 0 0 0 0 0 0 0
Period 2
t6 0 0 0 0 0 0 0 0
t7 0 0 0 0 0 0 0 0
t8 0 0 0 0 0 0 0 0
t9 0 0 0 0 (18,120) (17,850) 17,089 16,835
Period 3
t10 (20,426) (20,173) 20,358 20,106 (18,360) (17,814) 17,089 16,581
t11 0 0 0 0 (18,683) (17,850) 17,089 16,327
t12 (20,426) (19,965) 20,582 20,117 (19,203) (18,058) 17,089 16,070
continued...

IFRS 9 IE
...continued
Example 17—Cash flow variability of the aggregated exposure (at the end of
Period 2)

Calibra-
FX liability CCIRS FC leg CCIRS LC leg tion PV
5.6963% Rate
4 Frequency
t13 0 0 0 0 (19,718) (18,243) 17,089 15,810
Period 4
t14 (20,426) (19,726) 20,246 19,553 (20,279) (18,449) 17,089 15,547
t15 0 0 0 0 (21,014) (18,789) 17,089 15,280
t16 (1,020,426) (971,144) 1,020,582 971,292 (1,221,991) (1,072,947) 1,217,089 1,068,643
Totals (1,031,008) 1,031,067 (1,200,000) 1,181,092
Totals in LC (1,464,031) 1,464,116 (1,200,000) 1,181,092
PV of all CF(s) [LC] (18,824)
The changes in interest rates and the exchange rate result in a change of
the cash flow variability of the aggregated exposure between the end of
Period 1 and the end of Period 2 that has a present value of LC-18,824.81
IE135 Using the present value of the hedged item and the fair value of the hedging
instrument, the cash flow hedge reserve and the hedge ineffectiveness are then
determined (see paragraph 6.5.11 of IFRS 9).
IE136 The following table shows the effect on Entity B’s statement of profit or loss and
of transparency some line items82 are disaggregated on the face of the
81 This is the amount that is included in the table with the overview of the calculations (see
paragraph IE132) as the present value of the cash flow variability of the aggregated exposure at the
end of Period 2.
reserve).

IFRS 9 IE
statements by the two hedging relationships, ie for the fair value hedge of the
fixed rate FX liability and the cash flow hedge of the aggregated exposure):83

financial position
[All amounts in LC]
Interest expense
FX liability 45,958 50,452 59,848 58,827
FVH adjustment (12,731) 11,941 14,385 (49,439)
33,227 62,393 74,233 9,388
Reclassifications (CFH) 5,990 (5,863) 58,982
Total interest expense 33,227 68,383 68,370 68,370
Other gains/losses
Change in fair value of the CCIRS 154,673 (418,788) (91,437) 185,553
FVH adjustment (FX liability) (154,702) 418,733 91,560 (185,591)
Hedge ineffectiveness 0 (72) (54) (19)
Total other gains/losses (29) (127) 68 (57)
Profit or loss 33,198 68,255 68,438 68,313

Effective CFH gain/loss (12,834) 71,713 229
Reclassifications (5,990) 5,863 (58,982)
Total other comprehensive income (18,842) 77,577 (58,753)
Comprehensive income 33,198 49,432 146,015 9,560
continued...
83 For Period 4 the values in the table with the overview of the calculations (see paragraph IE132) differ
from those in the following table. For Periods 1 to 3 the ‘dirty’ values (ie including interest accruals)
equal the ‘clean’ values (ie excluding interest accruals) because the period end is a settlement date
for all legs of the derivatives and the fixed rate FX liability. At the end of Period 4 the table with the
overview of the calculations uses clean values in order to calculate the value changes consistently
over time. For the following table the dirty values are presented, ie the maturity amounts including
accrued interest immediately before the instruments are settled (this is for illustrative purposes as
otherwise all carrying amounts other than cash and retained earnings would be nil).

IFRS 9 IE
...continued

financial position
[All amounts in LC]
FX liability (1,200,000) (1,045,298) (1,464,031) (1,555,591) (1,397,984)
CCIRS 0 (154,673) 264,116 355,553 194,141
IRS 0 18,896 (58,767) (13,004)
Cash 1,200,000 1,166,773 1,098,390 1,030,160 978,641
Total net assets 0 (33,198) (82,630) (228,645) (238,205)
Equity
Accumulated OCI 0 (18,824) 58,753 0
Retained earnings 0 33,198 101,454 169,892 238,205
Total equity 0 33,198 82,630 228,645 238,205
IE137 The total interest expense in profit or loss reflects Entity B’s interest expense
that results from its risk management strategy:
(a) In Period 1 the risk management strategy results in interest expense

reflecting variable interest rates in LC after taking into account the effect
of the cross-currency interest rate swap, including a difference between
the cash flows on the fixed rate FX liability and the fixed leg of the
cross-currency interest rate swap that were settled during Period 1 (this
means the interest expense does not exactly equal the variable interest
expense that would arise in LC on a borrowing of LC1,200,000). There is
also some hedge ineffectiveness that results from a difference in the
changes in value for the fixed rate FX liability (as represented by the fair
value hedge adjustment) and the cross-currency interest rate swap.
(b) For Periods 2 to 4 the risk management strategy results in interest
expense that reflects, after taking into account the effect of the interest
rate swap entered into at the end of Period 1, fixed interest rates in LC
(ie locking in a single blended fixed coupon rate for a three-period term
based on the interest rate environment at the end of Period 1). However,
Entity B’s interest expense is affected by the hedge ineffectiveness that
arises on its hedging relationships. In Period 2 the interest expense is
slightly higher than the fixed rate payments locked in with the interest
rate swap because the variable payments received under the interest rate
swap are less than the total of the cash flows resulting from the

IFRS 9 IE
aggregated exposure.84 In Periods 3 and 4 the interest expense is equal to

the locked in rate because the variable payments received under the
swap are more than the total of the cash flows resulting from the
aggregated exposure.85
Example 18—combined interest rate risk and foreign currency

risk hedge (cash flow hedge/fair value hedge combination)
Fact pattern
IE138 Entity C wants to hedge a variable rate liability that is denominated in Foreign
Currency (FC). The liability has a term of four periods from the start of Period 1
to the end of Period 4. Entity C’s functional currency is its Local Currency (LC).
Entity C has the following risk exposures:
(a) cash flow interest rate risk and FX risk: the changes in cash flows of the
variable rate liability attributable to interest rate changes, measured
in LC.
(b) fair value interest rate risk: the exposure that arises as a result of
swapping the combined cash flow interest rate risk and FX risk exposure
associated with the variable rate liability (see (a) above) into a fixed rate
exposure in LC in accordance with Entity C’s risk management strategy
for FC denominated variable rate liabilities (see paragraph IE139(a)
below).
IE139 Entity C hedges its risk exposures using the following risk management strategy:
(a) Entity C uses cross-currency interest rate swaps to swap its FC
denominated variable rate liabilities into a fixed rate exposure in LC.
Entity C hedges its FC denominated liabilities (including the interest) for
their entire life. Consequently, Entity C enters into a cross-currency
interest rate swap at the same time as it issues an FC denominated
liability. Under the cross-currency interest rate swap Entity C receives
variable interest in FC (used to pay the interest on the liability) and pays
fixed interest in LC.
(b) Entity C considers the cash flows on a hedged liability and on the related
cross-currency interest rate swap as one aggregated fixed rate exposure
in LC. From time to time, in accordance with its risk management
strategy for fixed rate interest rate risk (in LC), Entity C decides to link its
interest payments to current variable interest rate levels and hence
swaps its aggregated fixed rate exposure in LC into a variable rate
84 In other words, the cash flow variability of the interest rate swap was lower than, and therefore did
not fully offset, the cash flow variability of the aggregated exposure as a whole (sometimes called an
‘underhedge’ situation). In those situations the cash flow hedge does not contribute to the hedge
ineffectiveness that is recognised in profit or loss because the hedge ineffectiveness is not
recognised (see paragraph 6.5.11 of IFRS 9). The hedge ineffectiveness arising on the fair value
hedge affects profit or loss in all periods.
85 In other words, the cash flow variability of the interest rate swap was higher than, and therefore
more than fully offset, the cash flow variability of the aggregated exposure as a whole (sometimes
called an ‘overhedge’ situation). In those situations the cash flow hedge contributes to the hedge
ineffectiveness that is recognised in profit or loss (see paragraph 6.5.11 of IFRS 9). The hedge
ineffectiveness arising on the fair value hedge affects profit or loss in all periods.

IFRS 9 IE
exposure in LC. Consequently, Entity C uses interest rate swaps

(denominated entirely in LC) under which it receives fixed interest (used
to pay the interest on the pay leg of the cross-currency interest rate swap)
and pays variable interest.
IE140 The following table sets out the parameters used for Example 18:
Example 18—Parameter overview

FX spot rate [LC/FC] 1.2 1.05 1.42 1.51 1.37
Interest curves
(vertical presentation of rates for each quarter
of a period on a p.a. basis)
LC 2.50% 1.00% 3.88% 0.34% [N/A]
2.75% 1.21% 4.12% 0.49%
2.91% 1.39% 4.22% 0.94%
3.02% 1.58% 5.11% 1.36%
2.98% 1.77% 5.39%
3.05% 1.93% 5.43%
3.11% 2.09% 5.50%
3.15% 2.16% 5.64%
3.11% 2.22%
3.14% 2.28%
3.27% 2.30%
3.21% 2.31%
3.21%
3.25%
3.29%
3.34%
FC 3.74% 4.49% 2.82% 0.70% [N/A]

4.04% 4.61% 2.24% 0.79%
4.23% 4.63% 2.00% 1.14%
4.28% 4.34% 2.18% 1.56%
4.20% 4.21% 2.34%
4.17% 4.13% 2.53%
4.27% 4.07% 2.82%
4.14% 4.09% 3.13%
4.10% 4.17%
4.11% 4.13%
4.11% 4.24%
4.13% 4.34%
4.14%
4.06%
4.12%
4.19%

IFRS 9 IE
IE141 Entity C designates the following hedging relationships:86
(a) As a cash flow hedge, a hedging relationship for cash flow interest rate
risk and FX risk between the FC denominated variable rate liability
(variable rate FX liability) as the hedged item and a cross-currency
interest rate swap as the hedging instrument (the ‘first level
relationship’). This hedging relationship is designated at the beginning
of Period 1 (ie t0) with a term to the end of Period 4.
(b) As a fair value hedge, a hedging relationship between the aggregated
exposure as the hedged item and an interest rate swap as the hedging
instrument (the ‘second level relationship’). This hedging relationship is
designated at the end of Period 1, when Entity C decides to link its
interest payments to current variable interest rate levels and hence
swaps its aggregated fixed rate exposure in LC into a variable rate
exposure in LC, with a term to the end of Period 4. The aggregated
exposure that is designated as the hedged item represents, in LC, the
change in value that is the effect of changes in the value of the combined
cash flows of the two items designated in the cash flow hedge of the cash
flow interest rate risk and FX risk (see (a) above), compared to the interest
rates at the end of Period 1 (ie the time of designation of the hedging
relationship between the aggregated exposure and the interest rate
swap).
IE142 The following table87 sets out the overview of the fair values of the derivatives,
the changes in the value of the hedged items and the calculation of the cash flow
hedge reserve.88 In this example no hedge ineffectiveness arises on either
hedging relationship because of the assumptions made.89
with paragraph 6.4.1(b) of IFRS 9).
87 Tables in this example use the following acronyms: ‘CCIRS’ for cross-currency interest rate swap,
‘CF(s)’ for cash flow(s), ‘CFH’ for cash flow hedge, ‘CFHR’ for cash flow hedge reserve, ‘FVH’ for fair
value hedge, ‘IRS’ for interest rate swap and ‘PV’ for present value.
purposes of amounts for assets, liabilities and equity) are in the format of positive (plus) and
negative (minus) numbers (eg an amount in the cash flow hedge reserve that is a negative number is
a loss).
89 Those assumptions have been made for didactical reasons, in order to better focus on illustrating
the accounting mechanics in a cash flow hedge/fair value hedge combination. The measurement
and recognition of hedge ineffectiveness has already been demonstrated in Example 16 and
Example 17. However, in reality such hedges are typically not perfectly effective because hedge
ineffectiveness can result from various factors, for example credit risk, differences in the day count
method or, depending on whether it is included in the designation of the hedging instrument, the
charge for exchanging different currencies that is included in cross-currency interest rate swaps
(commonly referred to as the ‘currency basis’).

IFRS 9 IE
Variable rate FX liability
Fair value [FC] (1,000,000) (1,000,000) (1,000,000) (1,000,000) (1,000,000)
Fair value [LC] (1,200,000) (1,050,000) (1,420,000) (1,510,000) (1,370,000)
Change in fair value [LC] 150,000 (370,000) (90,000) 140,000
PV of change in variable CF(s) [LC] 0 192,310 (260,346) (282,979) (170,000)

Change in PV [LC] 192,310 (452,656) (22,633) 112,979
CCIRS (receive variable FC/pay fixed LC)

Fair value [LC] 0 (192,310) 260,346 282,979 170,000
Change in fair value [LC] (192,310) 452,656 22,633 (112,979)
CFHR
Opening balance 0 0 (42,310) (28,207) (14,103)
Reclassification FX risk 153,008 (378,220) (91,030) 140,731
Reclassification (current period CF) (8,656) (18,410) 2,939 21,431
Effective CFH gain/loss (186,662) (479,286) 20,724 (135,141)
Reclassification for interest rate risk 0 (82,656) 67,367 (27,021)
Amortisation of CFHR 0 14,103 14,103 14,103
Ending balance (42,103) (28,207) (14,103) 0
IRS (receive fixed/pay variable)

Fair value [LC] 0 (82,656) (15,289) (42,310)
Change in fair value (82,656) 67,367 (27,021)
Change in present value of the aggregated exposure

Present value [LC] (1,242,310) (1,159,654) (1,227,021) (1,200,000)
Change in present value [LC] 82,656 (67,367) 27,021
IE143 The hedging relationship between the variable rate FX liability and the
cross-currency interest rate swap starts at the beginning of Period 1 (ie t0) and
remains in place when the hedging relationship for the second level
relationship starts at the end of Period 1, ie the first level relationship continues
as a separate hedging relationship. However, the hedge accounting for the first
level relationship is affected by the start of hedge accounting for the second level
relationship at the end of Period 1. The fair value hedge for the second level
relationship affects the timing of the reclassification to profit or loss of amounts
from the cash flow hedge reserve for the first level relationship:
(a) The fair value interest rate risk that is hedged by the fair value hedge is
included in the amount that is recognised in other comprehensive
income as a result of the cash flow hedge for the first level hedging
relationship (ie the gain or loss on the cross-currency interest rate swap

IFRS 9 IE
that is determined to be an effective hedge).90 This means that from the

end of Period 1 the part of the effective cash flow hedging gain or loss
that represents the fair value interest rate risk (in LC), and is recognised
in other comprehensive income in a first step, is in a second step
immediately (ie in the same period) transferred from the cash flow hedge
reserve to profit or loss. That reclassification adjustment offsets the gain
or loss on the interest rate swap that is recognised in profit or loss.91 In
the context of accounting for the aggregated exposure as the hedged
item, that reclassification adjustment is the equivalent of a fair value
hedge adjustment because in contrast to a hedged item that is a fixed
rate debt instrument (in LC) at amortised cost, the aggregated exposure is
already remeasured for changes regarding the hedged risk but the
resulting gain or loss is recognised in other comprehensive income
because of applying cash flow hedge accounting for the first level
relationship. Consequently, applying fair value hedge accounting with
the aggregated exposure as the hedged item does not result in changing
the hedged item’s measurement but instead affects where the hedging
gains and losses are recognised (ie reclassification from the cash flow
hedge reserve to profit or loss).
(b) The amount in the cash flow hedge reserve at the end of Period 1
(LC42,310) is amortised over the remaining life of the cash flow hedge for
the first level relationship (ie over Periods 2 to 4).92
IE144 The change in value of the aggregated exposure is calculated as follows:
(a) At the point in time from which the change in value of the aggregated
exposure is hedged (ie the start of the second level relationship at the
end of Period 1), all cash flows expected on the variable rate FX liability
and the cross-currency interest rate swap over the hedged term (ie until
the end of Period 4) are mapped out and their combined present value, in
LC, is calculated. This calculation establishes the present value that is
used at subsequent dates as the reference point to measure the change in
present value of the aggregated exposure since the start of the hedging
relationship. This calculation is illustrated in the following table:
90 As a consequence of hedging its exposure to cash flow interest rate risk by entering into the
cross-currency interest rate swap that changed the cash flow interest rate risk of the variable rate FX
liability into a fixed rate exposure (in LC), Entity C in effect assumed an exposure to fair value
interest rate risk (see paragraph IE139).
91 In the table with the overview of the calculations (see paragraph IE142) this reclassification
adjustment is the line item “Reclassification for interest rate risk” in the reconciliation of the cash
flow hedge reserve (eg at the end of Period 2 a reclassification of a gain of LC82,656 from the cash
flow hedge reserve to profit or loss—see paragraph IE144 for how that amount is calculated).
92 In the table with the overview of the calculations (see paragraph IE142) this amortisation results in
a periodic reclassification adjustment of LC14,103 that is included in the line item “Amortisation of
CFHR” in the reconciliation of the cash flow hedge reserve.

IFRS 9 IE
Example 18—Present value of the aggregated exposure (starting point)
Present value of the aggregated exposure
FX liability CCIRS FC leg CCIRS LC leg
CF(s) PV CF(s) PV CF(s) PV

[FC] [FC] [FC] [FC] [LC] [LC]
Time
t0
t1
Period 1 t2
t3
t4
t5 (11,039) (10,918) 11,039 10,918 (9,117) (9,094)
Period 2 t6 (11,331) (11,082) 11,331 11,082 (9,117) (9,067)

t7 (11,375) (11,000) 11,375 11,000 (9,117) (9,035)
t8 (10,689) (10,227) 10,689 10,227 (9,117) (9,000)
t9 (10,375) (9,824) 10,375 9,824 (9,117) (8,961)
Period 3 t10 (10,164) (9,528) 10,164 9,528 (9,117) (8,918)

t11 (10,028) (9,307) 10,028 9,307 (9,117) (8,872)
t12 (10,072) (9,255) 10,072 9,255 (9,117) (8,825)
t13 (10,256) (9,328) 10,256 9,328 (9,117) (8,776)
Period 4 t14 (10,159) (9,147) 10,159 9,147 (9,117) (8,727)

t15 (10,426) (9,290) 10,426 9,290 (9,117) (8,678)
t16 (1,010,670) (891,093) 1,010,670 891,093 (1,209,117) (1,144,358)
Totals (1,000,000) 1,000,000 (1,242,310)
Totals in LC (1,050,000) 1,050,000 (1,242,310)
PV of aggregated exposure [LC] (1,242,310)
The present value of all cash flows expected on the variable rate FX
liability and the cross-currency interest rate swap over the hedged term
at the end of Period 1 is LC-1,242,310.93
(b) At subsequent dates, the present value of the aggregated exposure is
determined in the same way as at the end of Period 1 but for the
remainder of the hedged term. For that purpose, all remaining cash
93 In this example no hedge ineffectiveness arises on either hedging relationship because of the
assumptions made (see paragraph IE142). Consequently, the absolute values of the variable rate FX
liability and the FC denominated leg of the cross-currency interest rate are equal (but with opposite
signs). In situations in which hedge ineffectiveness arises, those absolute values would not be equal
so that the remaining net amount would affect the present value of the aggregated exposure.

IFRS 9 IE
flows expected on the variable rate FX liability and the cross-currency

interest rate swap over the remainder of the hedged term (ie from the
effectiveness measurement date until the end of Period 4) are updated (as
applicable) and then discounted. The total of those present values
represents the present value of the aggregated exposure. This
calculation is illustrated in the following table for the end of Period 2:
Example 18—Present value of the aggregated exposure (at the end of Period 2)
Present value of the aggregated exposure
FX liability CCIRS FC leg CCIRS LC leg
CF(s) PV CF(s) PV CF(s) PV

[FC] [FC] [FC] [FC] [LC] [LC]
Time
t0
t1
Period 1 t2
t3
t4
t5 0 0 0 0 0 0
Period 2 t6 0 0 0 0 0 0
t7 0 0 0 0 0 0
t8 0 0 0 0 0 0
t9 (6,969) (6,921) 6,969 6,921 (9,117) (9,030)
Period 3 t10 (5,544) (5,475) 5,544 5,475 (9,117) (8,939)

t11 (4,971) (4,885) 4,971 4,885 (9,117) (8,847)
t12 (5,401) (5,280) 5,401 5,280 (9,117) (8,738)
t13 (5,796) (5,632) 5,796 5,632 (9,117) (8,624)
Period 4 t14 (6,277) (6,062) 6,277 6,062 (9,117) (8,511)

t15 (6,975) (6,689) 6,975 6,689 (9,117) (8,397)
t16 (1,007,725) (959,056) 1,007,725 956,056 (1,209,117) (1,098,568)
Totals (1,000,000) 1,000,000 (1,159,654)
Totals in LC (1,420,000) 1,420,000 (1,159,654)
PV of aggregated exposure [LC] (1,159,654)

IFRS 9 IE
The changes in interest rates and the exchange rate result in a present
value of the aggregated exposure at the end of Period 2 of LC-1,159,654.
Consequently, the change in the present value of the aggregated
exposure between the end of Period 1 and the end of Period 2 is a gain of
LC82,656.94
IE145 Using the change in present value of the hedged item (ie the aggregated
exposure) and the fair value of the hedging instrument (ie the interest rate
swap), the related reclassifications from the cash flow hedge reserve to profit or
loss (reclassification adjustments) are then determined.
IE146 The following table shows the effect on Entity C’s statement of profit or loss and
of transparency some line items95 are disaggregated on the face of the
statements by the two hedging relationships, ie for the cash flow hedge of the
variable rate FX liability and the fair value hedge of the aggregated exposure):96

financial position
[All amounts in LC]
Interest expense
FX liability 45,122 54,876 33,527 15,035
FVH adjustment 0 (20,478) 16,517 (26,781)
45,122 34,398 50,045 (11,746)
Reclassifications (CFH) (8,656) (18,410) 2,939 21,431
36,466 15,989 52,983 9,685
Amortisation of CFHR 0 14,103 14,103 14,103
Total interest expense 36,466 30,092 67,087 23,788
continued...
94 This is the amount that is included in the table with the overview of the calculations (see
paragraph IE142) as the change in present value of the aggregated exposure at the end of Period 2.
reserve).
96 For Period 4 the values in the table with the overview of the calculations (see paragraph IE142) differ
from those in the following table. For Periods 1 to 3 the ‘dirty’ values (ie including interest accruals)
equal the ‘clean’ values (ie excluding interest accruals) because the period end is a settlement date
for all legs of the derivatives and the fixed rate FX liability. At the end of Period 4 the table with the
overview of the calculations uses clean values in order to calculate the value changes consistently
over time. For the following table the dirty values are presented, ie the maturity amounts including
accrued interest immediately before the instruments are settled (this is for illustrative purposes as
otherwise all carrying amounts other than cash and retained earnings would be nil).

IFRS 9 IE
...continued

financial position
[All amounts in LC]
Other gains/losses
IRS 0 82,656 (67,367) 27,021
FX gain/loss (liability) (150,000) 370,000 90,000 (140,000)
FX gain/loss (interest) (3,008) 8,220 1,030 (731)
Reclassification for FX risk 153,008 (378,220) (91,030) 140,731
Reclassification for interest rate risk 0 (82,656) 67,367 (27,021)
Total other gains/losses 0 0 0 0
Profit or loss 36,466 30,092 67,087 23,788

Effective gain/loss 186,662 (479,286) (20,724) 135,141
Reclassification (current period CF) 8,656 18,410 (2,939) (21,431)
Reclassification for FX risk (153,008) 378,220 91,030 (140,731)
Reclassification for interest rate risk 0 82,656 (67,367) 27,021
Amortisation of CFHR 0 (14,103) (14,103) (14,103)
Total other comprehensive income 42,310 (14,103) (14,103) (14,103)
Comprehensive income 78,776 15,989 52,983 9,685

FX liability (1,200,000) (1,050,000) (1,420,000) (1,510,000) (1,375,306)
CCIRS 0 (192,310) 260,346 282,979 166,190
IRS 0 (82,656) (15,289) (37,392)
Cash 1,200,000 1,163,534 1,147,545 1,094,562 1,089,076
Total net assets 0 (78,776) (94,765) (147,748) (157,433)
Accumulated OCI 0 42,310 28,207 14,103 0

Retained earnings 0 36,466 66,558 133,645 157,433
Total equity 0 78,776 94,765 147,748 157,433
IE147 The total interest expense in profit or loss reflects Entity C’s interest expense
that results from its risk management strategy:
(a) In Period 1 the risk management strategy results in interest expense

reflecting fixed interest rates in LC after taking into account the effect of
the cross-currency interest rate swap.

IFRS 9 IE
(b) For Periods 2 to 4, after taking into account the effect of the interest rate
swap entered into at the end of Period 1, the risk management strategy
results in interest expense that changes with variable interest rates in LC
(ie the variable interest rate prevailing in each period). However, the
amount of the total interest expense is not equal to the amount of the
variable rate interest because of the amortisation of the amount that was
in the cash flow hedge reserve for the first level relationship at the end of
Period 1.97
97 See paragraph IE143(b). That amortisation becomes an expense that has an effect like a spread on
the variable interest rate.

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IFRS 9 IE

姝 IFRS Foundation B1121

IFRS 9 Financial Instruments

Financial liabilities at fair value through profit or loss

(a) LIBOR has decreased to 4.75 per cent.

[paragraph B5.7.18(a)] At the start of the period of a 10-year bond

58 In this guidance monetary amounts are denominated in ‘currency units’ (CU).

B1122 姝 IFRS Foundation

[paragraph B5.7.18(c)] The market price of the liability at the end

Impairment (Section 5.5)

姝 IFRS Foundation B1123

Example 1—significant increase in credit risk

IE8 At initial recognition, because of the considerations outlined in paragraph IE7,

IE9 Subsequent to initial recognition, macroeconomic changes have had a negative

(b) Company Y is closer to breaching its covenants, which may result in a

B1124 姝 IFRS Foundation

Example 2—no significant increase in credit risk

IE12 Company C, is the holding company of a group that operates in a cyclical

姝 IFRS Foundation B1125

IE16 Despite the expected continuing deterioration in market conditions, Bank B

IE17 As a consequence, Bank B does not recognise a loss allowance at an amount

Example 3—highly collateralised financial asset

IE19 Subsequent to initial recognition, the revenues and operating profits of

B1126 姝 IFRS Foundation

initial recognition in accordance with paragraph 5.5.3 of IFRS 9, irrespective of

Example 4—public investment-grade bond

(a) The latest quarterly report of Company A revealed a quarter-on-quarter

姝 IFRS Foundation B1127

(b) Rating agencies have reacted negatively to a profit warning by

Example 5—responsiveness to changes in credit risk

B1128 姝 IFRS Foundation

indebtedness, LTV measures, customer behaviour on other financial instruments

姝 IFRS Foundation B1129

B1130 姝 IFRS Foundation

Example 6—comparison to maximum initial credit risk

姝 IFRS Foundation B1131

Example 7—counterparty assessment of credit risk

B1132 姝 IFRS Foundation

Recognition and measurement of expected credit losses

Example 8—12-month expected credit loss measurement using

63 Thus for simplicity of illustration it is assumed there is no amortisation of the loan.

姝 IFRS Foundation B1133

been significant increases in credit risk since initial recognition. At the

Example 9—12-month expected credit loss measurement based

B1134 姝 IFRS Foundation

Number of Estimated Total Historic per Estimated Present Loss rate

Group A B C=A×B D E=B×D F G=F÷C

X 1,000 CU200 CU200,000 4 CU800 CU600 0.3%

Y 1,000 CU300 CU300,000 2 CU600 CU450 0.15%

Number of Estimated Total Expected Estimated Present Loss rate

Group A B C=A×B D E=B×D F G=F÷C

X 1,000 CU200 CU200,000 5 CU1,000 CU750 0.375%

Y 1,000 CU300 CU300,000 3 CU900 CU675 0.225%

Example 10—revolving credit facilities

IE58 Bank A provides co-branded credit cards to customers in conjunction with a

姝 IFRS Foundation B1135

B1136 姝 IFRS Foundation

Example 11—modification of contractual cash flows

姝 IFRS Foundation B1137