The One difference amongst Many of IFRS 9 Vs IAS 39 STATES that the key difference is in relation to the approach to ‘IMPAIRMENT’. IFRS 9 uses ‘Expected Credit Losses‘ (ECLs) to recognize impairment losses on financial assets, as compared to IAS 39 ‘Incurred Losses‘.
IFRS 9 Vs IAS 39 – Standards Overview
IAS 39 Financial Instruments: Recognition and Measurement was the bedrock of financial instrument accounting under IFRS for nearly two decades. Introduced in 1999 and refined through numerous amendments, it governed how entities recognized, classified, measured, impaired, and derecognized financial assets and liabilities.
However, IAS 39 attracted sustained criticism, particularly during the 2008 global financial crisis. Regulators and standard setters observed that the incurred loss model for impairment delayed recognition of credit losses until objective evidence of loss existed, often well after economic deterioration had begun. The G20 Summit in 2009 explicitly called on the IASB to reform the standard.
In response, the International Accounting Standards Board (IASB) developed IFRS 9 Financial Instruments in phases. The completed standard was published in July 2014 and became mandatory for annual reporting periods beginning on or after 1 January 2018. Early adoption was permitted.
Key Fact
While IFRS 9 fully replaced IAS 39, entities reporting under US GAAP follow ASC 326 (CECL), which is broadly analogous to IFRS 9’s ECL model but with notable differences in staging and measurement.
At its core, the transition from IAS 39 to IFRS 9 involved three major pillars of reform:
The Three Pillars of IFRS 9
- Classification & Measurement — Simplified from four to three categories for financial assets, driven by business model and cash flow characteristics
- Impairment — Replaced incurred loss with Expected Credit Loss (ECL), requiring earlier and more forward-looking loss recognition
- Hedge Accounting — Aligned more closely with risk management practice, reducing complexity and volatility
Classification & Measurement of Financial Assets – IFRS 9 Vs IAS 39
Classification determines how a financial instrument is measured on the balance sheet and how gains and losses flow through financial statements. This is one of the most practically significant differences between the IFRS 9 Vs IAS 39.
IAS 39 — Four Categories
Under IAS 39, financial assets were classified into four categories, many of which involved complex tainting rules and restrictions:
IAS 39 Financial Asset Categories
- Fair Value Through Profit or Loss (FVTPL) — Held-for-trading or designated at inception
- Held-to-Maturity (HTM) — Positive intent and ability to hold to maturity; subject to “tainting” rules
- Loans & Receivables (L&R) — Non-derivative assets with fixed payments, not quoted in active market
- Available-for-Sale (AFS) — Residual category; unrealised gains/losses in OCI, reclassified on disposal
IFRS 9 — Three Categories Based on Objective Criteria
IFRS 9 rationalized classification into three categories, determined by two objective tests: the entity’s business model for managing financial assets, and whether the asset’s contractual cash flows represent Solely Payments of Principal and Interest (SPPI).
Amortised Cost
Business model: Hold to collect. Cash flows: SPPI. Interest via EIR method.
FVOCI
Business model: Collect & sell. Cash flows: SPPI. Unrealised G/L in OCI; recycled on derecognition.
FVTPL
All remaining assets. Includes mandatory classification when SPPI fails.
The SPPI test represents a conceptual shift i.e. classification under IFRS 9 is no longer a management election but an assessment of economic substance grounded in the instrument’s contractual terms.
IASB Basis for Conclusions, IFRS 9Classification of Financial Liabilities
For Financial Liabilities, the change between IFRS 9 Vs IAS 39 is more limited. The most notable addition under IFRS 9 is the treatment of own credit risk: when a financial liability is designated at FVTPL, changes in fair value attributable to the entity’s own credit risk are presented in OCI rather than profit or loss i.e. a significant improvement over IAS 39, which ran these through profit or loss, creating counterintuitive results.
IFRS 9 Vs IAS 39 – Impairment: The Fundamental Paradigm Shift
No difference between IFRS 9 Vs IAS 39 is more consequential than the impairment model. This is where regulatory pressure after 2008 had the most direct impact.
IFRS 9 — Expected Credit Loss (ECL)
- Losses recognized from initial recognition
- Uses forward-looking, probability-weighted estimates
- Incorporates macroeconomic scenarios
- Requires significant management judgement
- Three-stage model for asset deterioration
- Results in earlier, higher loss provisioning
IAS 39 — Incurred Loss Model
- Losses recognized only after a “trigger event”
- Required objective evidence of impairment
- Backward-looking; based on historical data
- Criticized as “too little, too late”
- No staging concept; binary recognition
- Smaller provisions, later in credit cycle
The practical consequences are significant for banks and financial institutions. Under IFRS 9, provisions are recognized earlier and tend to be larger, sometimes dramatically so. The ECL model also introduces substantial volatility, as forward-looking estimates respond to changing economic conditions, even for performing loans.
The IFRS 9 Three-Stage ECL Model
One of IFRS 9’s most distinctive innovations is the three-stage model, which tracks the deterioration of credit quality from initial recognition through to credit impairment. IAS 39 had no equivalent staging framework.
Performing
Underperforming
Credit-Impaired
Practical Expedient
For trade receivables, contract assets without significant financing, and lease receivables, IFRS 9 allows a simplified approach i.e. entities recognize lifetime ECL from day one without tracking stage transfers. This reduces complexity for non-financial entities significantly.
IFRS 9 Vs IAS 39 – Hedge Accounting
Hedge Accounting is an elective accounting treatment that allows entities to offset gains and losses on hedging instruments against those on hedged items, reducing P&L volatility. Both standards provide this capability, but IFRS 9 makes it significantly more accessible and aligned with commercial risk management.
IFRS 9 Hedge Accounting
- Effectiveness test: Qualitative or quantitative (no 80–125% bright-line rule)
- Allows risk components (contractually specified or separately identifiable)
- Aggregated exposures eligible (includes derivatives as hedged item)
- Improved ability to hedge groups of items
- Voluntary discontinuation removed, must discontinue only if criteria fail
- Aligned with risk management strategy and objective
- Time value of options, forward points: recognized in OCI, not P&L
IAS 39 Hedge Accounting
- Strict 80–125% effectiveness range required retrospectively & prospectively
- Only contractually specified risk components eligible
- Derivatives could not be hedged items
- Restrictive rules on portfolio / macro hedging
- Voluntary discontinuation permitted at any time
- Less alignment with internal risk management
- Time value of options run through P&L unless separately designated
Importantly, IFRS 9 provides an option: entities may continue to apply IAS 39 hedge accounting if they have not yet adopted the IFRS 9 hedge accounting chapter. This option was intended to accommodate entities awaiting the IASB’s macro hedging project (yet to be finalized).
Derecognition of Financial Assets & Liabilities
Derecognition, the removal of a financial instrument from the balance sheet was largely carried over from IAS 39 into IFRS 9 with minimal change. The core principles remain the same.
Derecognition: What Remained Consistent
- A financial asset is derecognized when contractual rights to cash flows expire, or when the asset is transferred and substantially all risks and rewards pass to the transferee
- The “pass-through” arrangement criteria were retained
- The continuing involvement approach for partial transfers was retained
- For financial liabilities: derecognized when the obligation is discharged, cancelled, or expires
This continuity was deliberate; the IASB determined that the derecognition framework in IAS 39, while complex, was broadly sound and did not require fundamental reform.
Full Comparison Table: IFRS 9 vs IAS 39
| Dimension | IFRS 9 (Current) | IAS 39 (Superseded) |
|---|---|---|
| Effective Date | 1 January 2018 (mandatory) | Effective from 1999; now superseded |
| Asset Categories | 3 categories: Amortised Cost, FVOCI, FVTPL | 4 categories: FVTPL, HTM, L&R, AFS |
| Classification Basis | Business model + SPPI test (objective) | Management intent (subjective) |
| Reclassification | Permitted on business model change; rare | Highly restricted; HTM “tainting” rules |
| Impairment Model | Expected Credit Loss (ECL) — forward-looking | Incurred Loss — requires trigger event |
| Loss Recognition | From initial recognition (Day 1) | Only after objective evidence of loss |
| Staging | Three-stage model (performing → impaired) | No staging; binary recognition |
| Macroeconomic Data | Required in ECL measurement | Not explicitly required |
| Hedge Effectiveness | Qualitative assessment; no 80–125% rule | Strict 80–125% quantitative threshold |
| Eligible Hedged Items | Broader; risk components, aggregated exposures | Narrower; contractually specified only |
| Own Credit Risk (OCI) | Own credit risk changes in OCI for FVTPL liabilities | Own credit risk changes in P&L |
| Derecognition | Largely unchanged from IAS 39 | Original framework; carried forward to IFRS 9 |
| Time Value of Options | Recognized in OCI and released to P&L over time | Recognized immediately in P&L |
| Equity Investments (not trading) | Irrevocable FVOCI election; no recycling to P&L | Classified as AFS; gains recycled on disposal |
| Embedded Derivatives | Only bifurcate in financial liabilities; not financial assets | Bifurcate in both assets and liabilities if closely related |
| Simplified Impairment | Practical expedient for trade receivables (lifetime ECL from day 1) | No equivalent expedient |
| Disclosure Requirements | Substantially increased under IFRS 7 (amended) | Less extensive by comparison |
Transition Challenges & Practical Implications
IFRS 9 Vs IAS 39, the movement was one of the most operationally demanding accounting transitions in recent history, particularly for banks and insurers. Below are the most significant challenges entities faced.
Data and Systems Infrastructure
The ECL model demands granular loan-level data; probability of default (PD), loss given default (LGD), and exposure at default (EAD) segmented by risk stage. Many banks had to build entirely new credit risk modelling frameworks to comply. Legacy systems designed for incurred-loss provisioning were inadequate.
Significant Increase in Credit Risk (SICR)
Determining when a significant increase in credit risk has occurred, triggering a move from Stage 1 (12-month ECL) to Stage 2 (lifetime ECL) requires judgement. Entities use quantitative thresholds (e.g. PD doubling), qualitative indicators (e.g. forbearance), or backstop rules (e.g. 30 days past due). Inconsistent application across entities has been a focus of regulators.
Macroeconomic Scenarios
IFRS 9 requires entities to incorporate multiple probability-weighted economic scenarios into ECL estimates; GDP growth, unemployment, house prices, and so on. During the COVID-19 pandemic, this created significant volatility in provisions as scenarios shifted dramatically, prompting extensive regulator guidance on the application of judgement.
Volatility in Earnings
Unlike IAS 39, where provisions were relatively stable absent specific trigger events, IFRS 9 provisions fluctuate with economic outlook. This introduces greater earnings volatility i.e. a concern for analysts, investors, and bank boards alike.
The transition to IFRS 9 was more than an accounting change, it was a signal that financial reporting would now demand genuine integration between finance and credit risk functions.
Basel Committee on Banking Supervision, 2017Frequently Asked Questions
The primary difference lies in the impairment model. IAS 39 used an incurred loss model that recognized credit losses only after a loss event occurred. IFRS 9 introduced the Expected Credit Loss (ECL) model, which requires entities to recognize losses based on forward-looking projections from the date of initial recognition, even for performing assets. Additionally, IFRS 9 simplified asset classification from four to three categories, and modernized hedge accounting rules.
IFRS 9 became mandatory for annual periods beginning on or after 1 January 2018. Early adoption was permitted from the date the standard was available (2014). For most entities, fiscal year 2018 was the first year of full IFRS 9 application.
IAS 39 has been superseded for the vast majority of requirements. However, one narrow exception exists: entities that have adopted IFRS 9 may elect to continue applying IAS 39’s hedge accounting if they have not adopted the IFRS 9 hedging chapter, this was intended for entities awaiting completion of the IASB’s macro hedging project.
The Solely Payments of Principal and Interest (SPPI) test is a contractual cash flow assessment. A financial asset passes the SPPI test if its cash flows consist only of payments of principal (the amount lent) and interest on that principal (compensation for time value, credit risk, and basic lending risk). Instruments with features like leverage, equity-linked returns, or contingent cash flows typically fail the SPPI test and must be measured at FVTPL.
Banks are the entities most significantly affected by IFRS 9 due to their large loan portfolios. The ECL model required banks to build sophisticated credit risk models incorporating PD, LGD, and EAD at a granular level. Day-one implementation typically increased loan loss provisions by 20–50% for major banks. The model also introduces procyclicality concerns i.e. provisions rise sharply in downturns, potentially amplifying economic stress.
12-month ECL (Stage 1) represents the expected credit losses from default events possible within 12 months of the reporting date. It applies to performing assets with no significant credit deterioration since origination. Lifetime ECL (Stages 2 and 3) covers all possible default events over the remaining life of the instrument, a much larger provision applicable when credit risk has increased significantly or impairment has occurred.
Summary & Conclusion
A Necessary but Demanding Upgrade
IFRS 9 represents a fundamental improvement over IAS 39 in capturing economic reality; particularly in credit risk, where earlier recognition of expected losses produces more decision-useful information for investors and regulators.
The simplification of classification categories, the alignment of hedge accounting with risk management practice, and the treatment of own credit risk are all meaningful advances. However, IFRS 9 also imposes substantially greater complexity, cost, and earnings volatility especially for financial institutions.
For non-financial entities, the impact is more limited but still relevant, particularly the simplified ECL approach for trade receivables and the liberalized hedge accounting rules.
| Aspect | Winner | Rationale (IFRS 9 Vs IAS 39) |
|---|---|---|
| Simplicity of Classification | IFRS 9 | 3 categories vs 4; objective criteria vs intent |
| Timely Loss Recognition | IFRS 9 | ECL recognizes losses early; incurred loss lags |
| Earnings Stability | IAS 39 | ECL creates more P&L volatility |
| Implementation Cost | IAS 39 | IFRS 9 ECL demands heavy systems investment |
| Hedge Accounting Accessibility | IFRS 9 | No 80–125% rule; broader eligible items |
| Decision-Useful Information | IFRS 9 | Forward-looking data benefits investors & analysts |
| Own Credit Risk Treatment | IFRS 9 | OCI treatment eliminates counterintuitive P&L effects |
Note on IFRS for SME(s)
Entities applying the IFRS for SMEs standard are not required to apply IFRS 9. That standard has its own simplified financial instrument section, broadly aligned with amortised cost measurement and a simplified impairment approach.
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia