IFRS 9 — Symmetric prepayment options

Date recorded:

IFRS 9 Financial Instruments: Symmetric prepayment options - A possible narrow amendment to IFRS 9 - Agenda paper 3


At its December 2016 meeting (AP 12F), the Board asked the Staff to present further analysis on symmetric prepayment options in assessing whether a narrow-scope exception could be made to allow instruments with such prepayment options to qualify for amortised cost measurement because they would otherwise fail the SPPI condition. See AP 7 to the November IFRIC IC meeting for the original submission.

Staff analysis

The Staff started by emphasising the fundamental principle that the EIR method is suitable only for instruments with simple cash flows that represent principal and interest. In addition, the EIR method already allows for the possibility of reasonable compensation for the early termination of a contract (IFRS 9.B4.1.11(b)), albeit compensation is generally thought of in the normal sense of the word, i.e. single directional - the party exercising the option pays the other party for any unfavourable outcome due to the prepayment, and not the other way round (‘negative’ compensation).

The Staff noted that the Board’s intention in developing the compensation notion was to address the interest rate differential between the prepaid instrument and the current market interest rate. The Staff believed that a symmetric prepayment option resulting in negative compensation achieves the same purpose, and hence it would still meet the fundamental principal of the EIR method as long as the symmetric prepayment option does not introduce any cash flows that are different from the ones already envisaged by IFRS 9.B4.1.11(b). The Staff emphasised that the proposed exception should be restricted to those instruments where only the direction of the compensation fails the requirements of IFRS 9.B4.1.11(b), and should not cover instruments that fail the said paragraph for other reasons. For example, a financial asset that is prepayable at fair value does not meet the paragraph B4.1.11(b) requirements because the prepayment amount would reflect many factors unrelated to the simple notion of compensating for the interest rate differential at the time of prepayment (in this case, fair value measurement would be more appropriate as the cash flows do not reflect those of a basic lending arrangement). Therefore, such symmetric prepayment options would not meet the proposed exception.

In order to restrict the scope of the proposed exception further, the Staff recommended that it be applicable only if the fair value of the prepayment feature is insignificant when the entity initially recognises the financial asset.

Staff recommendation

The Staff recommended that the Board propose:

  • a narrow-scope exception to IFRS 9 so that a prepayable financial asset would be eligible to be measured at amortised cost (or at FVTOCI subject to the business model condition) if:
    • (a) the financial asset would otherwise meet the requirements in paragraph B4.1.11(b) but fails it only because of the potential of the prepayment resulting in a negative compensation; and
    • (b) the fair value of the symmetric prepayment feature is insignificant on initial recognition.
  • an effective date of 1 January 2018 for the proposed amendments, with retrospective application and specific transition provisions.


The Board approved the Staff’s recommendations. In view of the tight proposed effective date, the ED will specifically seek comment on whether a later effective date would be appropriate with earlier application permitted.

The Board was well aware of the tight timeline for the proposed amendment and the risk of its being mushroomed into a much bigger issue when respondents comment on the ED. However, given the pervasiveness of the issue and its significance, the Board decided to go ahead with the proposal. The Board stressed that the proposed amendment is meant to be a very narrow exception to the general rule and that the prepayment option must first meet the ‘reasonable additional compensation’ criterion for lost long-term interest (and not for other risks) before being assessed for qualification for the proposed exception.

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