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IASB asked to consider adding a limited-scope project on IFRS 9 to its agenda

  • IFRS - IASB Image

Dec 05, 2016

On December 5, 2016, the International Accounting Standards Board (IASB) released a staff paper for the upcoming IASB meeting dealing with IFRS 9, symmetric "make whole" and fair value prepayment options, and the assessment of the solely payments of principal and interest on the principal amount (SPPI) criterion.

The issue arose from a submission to the IFRS Interpretations Committee related to whether a debt instrument with a symmetric "make whole" prepayment option or a fair value prepayment option could meet the SPPI criterion for measurement at amortized cost under IFRS 9. The IFRS IC discussed the issue at its November 2016 meeting where the majority of members concluded that the prepayment options described in the submission do not meet the requirements in IFRS 9.B4.1.11(b) which states:

Contractual provisions that permit the issuer or holder to extend the contractual term of a debt instrument (ie an extension option) result in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding only if:

(a) [...]; and

(b) the terms of the extension option result in contractual cash flows during the extension period that are solely payments of principal and interest on the principal amount outstanding.

As a consequence the IFRS IC concluded that the IASB should consider changing the requirements in IFRS 9 in this respect (taking into account the broader range of prepayment options that exist in practice and not only the options described in the submission), as well as the measurement basis that would provide the most relevant and useful information about particular financial assets that would otherwise meet the SPPI condition, but fail it because of the existence of a symmetric "make whole" prepayment option. Nevertheless, the IFRS IC Chairman cautioned against the extent of the expectation that the Committee should have on how far the Board would take the issue given past decisions on similar issues.

The staff recommendation is that the Board considers adding a limited-scope project on this issue to its agenda. The Board will discuss this recommendation on December 13, 2016.

Review the staff paper on the IASB's website.

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