Accounting Alert

The International Accounting Standards Board (IASB) has published amendments to International Financial Reporting Standards (IFRS) 9, Financial Instruments that allow companies to measure particular prepayable financial assets with negative compensation at amortised cost or at fair value through other comprehensive income (FVOCI), - instead of measuring them at fair value through profit or loss (FVTPL).

Background of and Main issues addressed by the Practice Statement

This amendment has been issued in reference with the query received by the IFRS interpretations Committee (IFRIC) on how to apply the IFRS 9 requirements for recognising and measuring certain debt instruments with prepayable with negative compensation (i.e. the borrower is permitted to prepay the instrument at an amount that could be less than the unpaid principal and interest).

In applying the existing IFRS 9 requirements, debt instruments with prepayment feature shall be classified at FVTPL because the cash flows may not be solely for payments of principal and interest (SPPI). However, if the prepayment feature allows a negative compensation, such feature may qualify under the SPPI test as the creditor will compensate the debtor in the event that prepayment happens.

Amendments to IFRS 9

In response to the query received by the IFRIC, The IASB finalized and issued 'Prepayment Feature with Negative Compensation (Amendments to IFRS 9)' which allows entities to measure some prepayable financial assets with negative compensation at amortised cost. 

The amendments are effective for annual periods beginning on or after January 1, 2019, with earlier application permitted.

Clarificatory matters discussed by the IASB

The IASB also discussed the accounting for a modification or exchange of a financial liability measured at amortised cost that does not result in the derecognition of financial liability. In the discussion, the IASB concluded that no amendments are required but only clarified the existing position by adding text to the Basis for Conclusions of IFRS 9.  To summarise, the IASB clarified that a modification (or exchange) of financial liability that do not constitute derecognition shall be recognized in profit or loss at the date of the modification (or exchange), similar to the treatment of financial assets.

 The IASB clarifies that an entity recognises any adjustment to the amortised cost of the financial liability arising from a modification or exchange in profit or loss at the date of the modification or exchange 

Download the IASB issues Prepayment Features with Negative Compensation (Amendments IFRS 9).