Which IFRS standard applies to Litigation Finance Contracts –

IFRS 15 or IFRS 9?

 Author: DM Technical Team : March 2026

Litigation Finance – A snapshot. 

Commercial litigation finance is an arrangement where a third-party funder provides capital to a claimant i.e. an individual or corporate entity involved in a legal dispute. This capital is used by the claimant to fund the costs of the legal proceedings, and the funder receives a portion of financial proceeds (if any) from the case. Unlike traditional lending, litigation finance is typically non-recourse, meaning the funder only receives a portion of the settlement if the case is successful. Any return the funder may receive is contingent on the outcome of the litigation proceedings which introduces significant uncertainty in terms of timing and the amount of any inflows.

Accounting for Litigation Finance Contracts – IFRS 15 or IFRS 9?

To address the accounting question of how litigation finance contracts should be accounted for we need to consider specifically are these contracts within the scope of IFRS 15 – Revenue from Contracts with Customers or do they fall under the remit of IFRS 9 – Financial Instruments. The answer is not always clear cut and is determined by factors regarding the nature of the arrangement under consideration.

In this post the DM Technical Team explore the critical considerations when assessing which IFRS standard should be applied. 

Considering situations where IFRS 15 may apply

In certain circumstances as part of the contract, in tandem with the financing aspect, the funder also provides litigation management services to the claimant. An example of this would be a claims management firm that offers bundled services comprising of funding and management of the case in return for a portion of the case proceeds. In this scenario there are then two components to the contract, the financing component, and the services component.

The financing component of these types of contracts typically contains the features of a contract with a customer as defined by IAS 32 i.e. any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

The services component often contains the features of a contract with a customer as defined by IFRS 15, i.e. a contract with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

In accordance with IFRS 15 a contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard, for example IFRS 9. If accounting standards other than IFRS 15 (e.g. IFRS 9) specify how to separate and/or initially measure one or more parts of a contract, then the lender first applies the separation and/or measurement requirements as per the other standards. If the other standard (i.e. IFRS 9) does not specify how to separate and/or initially measure one or more parts of the loan contract, then the lender applies IFRS 15 to the whole or remaining parts of the contract.

IFRS 9 does not provide any specific guidance on instruments that have features of both financial instruments and contracts with customers. Therefore, if the service component of the contract meets the criteria as set out in IFRS 15, the contract in its entirety should be examined under IFRS 15.

Implications of when IFRS 15 applies

Under IFRS 15, revenue associated with the litigation contracts is presented as litigation service revenue and the costs the funder incurs in satisfying its performance obligation of the contract as litigation service expense on the statement of comprehensive income. The measurement of the revenue from the contract can only be reasonable measured once the outcome of the litigation is known. Under IFRS 15 (paragraphs 50-58) this is a permissible approach in such circumstances.

The finance component of the litigation contracts is measured at cost on the statement of financial position and presented as current or non-current.

The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore, an entity should disclose qualitative and quantitative information in the financial statements in line with the typical disclosures under IFRS 15.

Considering situations where IFRS 9 may apply

In many situations, litigation funders are not providing a service to the claimant but rather solely investing capital in a legal claim, such as in single claim funding which often involves high value disputes. In this circumstance the funder’s right to a return on the investment is solely based on the success of the legal case, not on delivering a performance obligation to a customer. As such the litigation funding contracts should be examined if they meet the conditions of a financial instrument under IAS 32. Under IAS 32, a financial instrument is any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument of another. A financial asset includes a contractual right to receive cash or another financial asset, or it can also be considered as a contract that will or may be settled in cash depending on certain future events.

Litigation contracts typically grant the funder a contractual right to receive cash i.e. a share of the legal proceedings if the case is successful. Therefore, these types of contracts give rise to a financial asset for the funder, even though the cash flows are contingent on the case being successful.

IFRS 9 applies to all financial assets including those that involve contractual rights that are contingent or variable.

Implications of when IFRS 9 applies

Under IFRS 9, the litigation contracts are accounted for as a financial asset in the statement of financial position, measured initially at fair value and remeasured at fair value at each reporting date, with the changes in fair value recognised in profit or loss in the statement of comprehensive income.

The entity would also disclose qualitative and quantitative information in the financial statements in line with the typical disclosures under IFRS 9. As there is no active market for these types of contracts, funders typically classify these contracts as Level 3 assets, therefore the entity would need to include disclosures in the financial statements around the valuation techniques and the key observable inputs used.

Conclusion

Determining the correct standard for litigation finance contracts under IFRS requires professional judgement based on the specific clauses and aspects of the contract. If the arrangement includes both funding and services IFRS 15 will apply. If the funder’s return is based only on the success of the legal claim and no additional services have been provided by the funder, IFRS 9 is appropriate. The disclosure implications of applying IFRS 15 or IFRS 9 are discussed in the implications sections above.

Careful analysis and professional judgment are essential to ensure the chosen standard accurately reflects the contract’s substance.

Our Technical Team