Investments and financial assets

A financial asset is cash, an equity instrument of another entity, or a contractual right to receive cash or another financial asset — trade receivables, loans, bonds and shares. (Investments giving control, joint control or significant influence are covered by IFRS 10, IFRS 11 and IAS 28 instead.) IFRS 9 sorts financial assets into three measurement categories.

Debt instruments (bonds, loans, receivables) are classified using two tests: 1. Business model — how the entity manages the assets to generate cash flows: hold to collect contractual cash flows; hold to collect and sell; or something else (trading, managing on a fair value basis). 2. SPPI — are the contractual cash flows solely payments of principal and interest on the principal outstanding? Plain fixed- or floating-rate bonds usually pass; returns linked to equity prices, commodity prices or the borrower's profits fail.

Equity instruments (shares) never pass SPPI, so they default to FVTPL. For an equity investment not held for trading, an entity may make an irrevocable election at initial recognition to present fair value changes in OCI. Those gains and losses are never recycled to profit or loss, even on sale (they may be transferred within equity); dividends are still recognised in profit or loss.

Initial measurement is at fair value. Transaction costs are added for assets at amortised cost or FVOCI, but expensed immediately for FVTPL assets. Amortised cost uses the effective interest method: interest income = carrying amount × effective rate, so any discount is accreted to face value over the term. Assets at amortised cost and debt at FVOCI also carry an expected credit loss allowance (the topic of the credit-losses lesson). Reclassification happens only when the business model changes, which is rare. The IASB's May 2024 amendments, effective for periods beginning on or after 1 January 2026, clarify the SPPI assessment for features such as ESG-linked interest rates and the derecognition of liabilities settled electronically.

US GAAP uses different categories: debt securities are held-to-maturity (amortised cost), available-for-sale (fair value through OCI) or trading (fair value through net income) under ASC 320; equity securities with readily determinable fair values are measured at fair value through net income (ASC 321), with no OCI option.