On 22 March 2018, Amendments to IFRS 9 Prepayment Features with Negative Compensation were endorsed by the European Commission for use in the European Union. The EU effective date is the same as the IASB’s effective date (annual periods beginning on or after 1 January 2019). The Amendments to IFRS 9 were issued by the IASB in October 2017 to address the concerns about how IFRS 9 Financial Instruments classifies particular prepayable financial assets.
Changes
The amendments in Prepayment Features with Negative Compensation (Amendments to IFRS 9) are:
Under the current IFRS 9 requirements, the SPPI condition is not met if the lender has to make a settlement payment in the event of termination by the borrower (also referred to as early repayment gain).
Prepayment Features with Negative Compensation amends the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at amortised cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negative compensation payments.
Under the amendments, the sign of the prepayment amount is not relevant, i. e. depending on the interest rate prevailing at the time of termination, a payment may also be made in favour of the contracting party effecting the early repayment. The calculation of this compensation payment must be the same for both the case of an early repayment penalty and the case of an early repayment gain.
The amendments also contain (in the Basis for Conclusions) a clarification regarding the accounting for a modification or exchange of a financial liability measured at amortised cost that does not result in the derecognition of the financial liability. 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. A retrospective change of the accounting treatment may therefore become necessary if in the past the effective interest rate was adjusted and not the amortised cost amount.
Effective date and transition requirements
The amendments are to be applied retrospectively for fiscal years beginning on or after 1 January 2019, i.e. one year after the first application of IFRS 9 in its current version. Early application is permitted so entities can apply the amendments together with IFRS 9 if they wish so. Additional transitional requirements and corresponding disclosure requirements must be observed when applying the amendments for the first time.
More information about Amendments to IFRS 9 can be found in our Accounting Newsletter from November 2017. The full version of the Amendments is available here.
The article is part of dReport – May 2018, Accounting news
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