IAS 39 — Accounting for different aspects of restructuring Greek Government Bonds
The Committee has received a request for guidance related to the restructuring of Greek Government Bonds (GGBs) and whether such restructuring should result in derecognition of the whole financial asset, or only part of the financial asset.
The restructuring of GGBs includes a 53.5% forgiveness of the principal amount, a 31.5% exchange of the principal amount for 20 new Greek bond instruments with maturities of 11 to 30 years (with coupons of 2% from 2012 to 2015, then 3% from 2015 to 2020 and 4.3% from 2020 to 2042), and the remaining 15% of principal amount exchanged for short-dated securities issued by the European Financial Stability Facility. In addition, for each new bond, participants will also receive a security with an initial nominal amount of €100 where the holder is not entitled to receive principal or interest but instead the security is linked to the Gross Domestic Product of Greece.
Specifically, the questions asked of the Committee include whether the modification to the GGBs fall within the scope of paragraphs 17(a) or 17(b) and whether the lender can apply IAS 8 and analogise to the existing criteria for modifications of financial liabilities.
Paragraph 17(b) requires an entity to derecognise a financial asset when the entity transfers the financial asset and the transfer qualifies for derecognition. The term ‘transfer’ is not defined in IAS 39 but paragraph 18 states an entity transfers a financial asset if it transfers the contractual rights to receive the cash flows of the financial asset. Under the GGB modification, the transfer occurs between the holder of the instrument and the issuer of the instrument, rather than a transfer to another third party. The staff believes that paragraph 17(b) only applies to transfers between a holder and a third party rather than between a holder and an issuer and as this represents an extinguishment it should be assess under paragraph 17(a).
Paragraph 17(a) states that an entity shall derecognise a financial asset when the contractual rights to the cash flows from the financial asset expire. The staff believes that a modification of the contractual terms of a financial asset can, but will not always, result in the expiry of the right to the cash flows and derecognition of a financial asset. Therefore, it is necessary to determine whether the changes in the contractual terms of an instrument represents expiry of the rights to the cash flows of the original instrument or merely modifications to the original instrument. In the scenario of the GGB restructuring, a single instrument has been replaced with twenty individual instruments each with varying maturity dates and cash flow profiles, all bondholders received the same restructuring deal and the terms of the new bonds are substantially different from the original bonds including such items as the change in the governing law, the introduction of collection action clauses and modifications of the amount, term and coupons on the instrument.
IAS 39 does not specifically address the accounting from a lender’s perspective as to when derecognition applies to an exchange of debt instruments. As a result, questions have arisen on whether bondholders should develop an accounting policy by applying IAS 8 paragraphs 10 to 12. Paragraph 11 of IAS 8 requires that the first source of information to be used in making a judgment about the accounting policy is the requirements of IFRSs dealing with similar and related issues (in this case paragraphs 40 and AG62 of IAS 39 address the accounting for modifications of financial liabilities). The staff note that IAS 8 requires the use of judgment to develop and apply an accounting policy in the absence of an IFRS that specifically applies to the transaction. IAS 39.40 requires a financial liability to be extinguished and a new liability recognised when there has been a substantial modification of terms (paragraph AG 62 says a substantial modification occurs when the modified cash flows are at least 10% different). The staff expressed concern with introduction of a brightline analysis for financial assets using the substantial modification guidance because of the overlay of impairment considerations for financial assets but believe that the notion of a substantial change of terms is an appropriate analogy.
Based on consideration of the above guidance, the staff believe that the GGBs restructuring result in changes that could be considered an expiry of the rights to the cash flows of the original instrument or a substantial change of the terms of the financial asset. Either alternative would result derecognition of the surrendered bonds and recognition of the new bonds received in the exchange.
The Committee tentatively agreed with the staff analysis that the GGBs restructuring result in changes that could be considered an expiry of the rights to the cash flows of the original instrument or a substantial change of the terms of the financial asset. The Committee tentatively agreed not to add this item to its agenda as both approaches mentioned above would lead to derecognition.
Some Committee members wanted the issue to be more broad than just limited to GGBs as modification of financial assets is a fairly common issue. However the staff responded that because the GGBs are highly visible and relevant right now, they were attempting to balance the need to address this issue in a timely basis rather than trying to address all modification scenarios which could take much more time. Some Committee members expressed various concerns with the drafting of the tentative agenda decision. The Committee chair asked a subgroup of Committee members to work with the staff in drafting the tentative agenda decision.
The request for guidance also asked for clarification on how to account for the GDP-linked securities granted as part of the restructuring transaction described above. The submitter suggested four alternatives for the accounting for these instruments: 1) the instrument is ‘close’ to being a derivative and should be accounted for at fair value through profit or loss, 2) the instrument should be accounted for at amortised cost and paragraph AG8 of IAS 39 should be applied to account for the modification of cash flows, 3) the instrument is classified as available for sale, or 4) the instrument is not within the scope of IAS 39 and the entity should apply IAS 18 to recognise the revenues from the instrument and IAS 37 to account for a provision if needed.
The Committee tentatively decided not to add the issue of accounting for the GDP-linked security to its agenda. The Committee believes that the instrument falls within the scope of IAS 39 and would not meet the criteria for classification as either loans and receivables or held to maturity assets. Therefore the Committee believes that the instrument would be classified as available for sale unless one of the fair value through profit or loss criteria applied.