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IAS 39 - Presentation of income and expense

Date recorded:

Historically, negative interest rates have been a rare phenomenon. However, as a result of the economic crisis, the demand of investors for ‘safe harbour’ assets has increased, ultimately resulting in a negative yield on some assets. As a result, the Committee discussed the ramifications of the economic phenomenon of negative interest rates on the presentation of income and expenses in the statement of comprehensive income.

The staff noted that IAS 18 and IAS 1 include guidance on what is interest revenue and whether income and expenses can be offset. The staff considered that interest resulting from a negative interest rate on a financial asset should not be presented as a ‘negative’ offset of interest revenue (i.e., a reduction) because doing so would be:

  • inconsistent with the notion of interest revenue under IFRSs; and
  • violate the offsetting requirements for revenue and expenses.

This applies accordingly to interest resulting from a negative interest rate on a financial liability, which must not be presented as a negative part of interest expense (i.e., a reduction).

As a result of this analysis, the staff recommended the following presentation in the statement of comprehensive income:

  • presenting amounts resulting from a negative interest rate on a financial asset as an expense other than ‘interest expense’ (and in a line item that does not roll up into the mandatory line item for finance costs).
  • presenting amounts resulting from a negative interest rate on a financial liability as income other than ‘interest revenue’.

Committee members generally supported the staff’s conclusion that interest resulting from a negative interest rate on a financial asset should not be presented as a ‘negative’ offset of interest revenue. Committee members highlighted presentation as interest revenue is not appropriate since the balance is a debit, and similarly, presentation as interest expense is not appropriate since it is not the result of a borrowing. Instead, it was seen by many Committee members as a custodial fee/safe-keeping fee.

However, many Committee members expressed concern that the staff’s recommendation was too prescriptive given that it suggested a required presentation of such negative interest. Further, one Committee member expressed concern that the staff’s recommendation, suggesting that the balance was not interest, but rather, a fee, might impact an entity’s ability to achieve amortised cost accounting in IFRS 9. Other Committee members refuted this view noting that the amortised cost measurement criteria requires that a debt instrument have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. In this case, contractual cash flows are payments of principal and interest, even though the interest payments are effectively nil.

As informal outreach suggested that this issue was not pervasive, and in light of the staff’s analysis of existing IFRS requirements, the Committee tentatively decided not to add this issue to its agenda. It asked, however, that the tentative agenda decision not provide prescriptive presentation requirements for negative interest. Instead, Committee members preferred that the tentative agenda decision state only that the balance is neither interest income (given that it is a debit) nor interest expense (given that the entity did not borrow). If the balance is significant to understanding the financial statements, the Committee noted that preparers should disclose how the balance has been presented. The staff will update the tentative agenda decision accordingly.