Post-implementation Review of IFRS 9

Date recorded:

Cover Note (Agenda Paper 3)

In October 2020, the Board decided to start the Post-implementation Review (PIR) of the classification and measurement requirements in IFRS 9, but to not yet start the PIRs of the Standard’s impairment and hedge accounting requirements. In November 2020, the Board decided that it would reconsider the start dates of those PIRs in the second half of 2021.

In this session, the Board discussed the feedback from outreach, particularly the feedback on financial assets with sustainability-linked features. The Board will also discuss the staff analysis and recommendations on the matters to examine further in phase 2, i.e. which questions should be asked in the Request for Information (RFI).

At a future meeting, the Board will be asked to approve the publication of, and set a comment period for, the RFI—after Board members have reviewed a pre-publication draft. The staff expect the RFI will be publish around the end of September 2021.

Summary of feedback from phase 1 outreach (Agenda Paper 3A)

This paper summarised general feedback on the application of the classification and measurement requirements, as well as feedback on specific areas of the requirements.

Most stakeholders said that generally the classification and measurement requirements are working well in practice. However, some users of financial statements and academics said that IFRS 9 is complex and thus difficult to understand. Users of financial statements’ comments related mostly to understanding inputs into fair value measurement as opposed to understanding the requirements in IFRS 9. Academics’ comments related mostly to IFRS 9 being longer and more detailed than some other IFRS Standards. Both groups however generally acknowledged the inherent complexity involved in accounting for financial instruments, which come in many forms and are often complex in nature.

The Board was not asked to make a decision based on this paper.

Feedback on financial assets with sustainability linked features (Agenda Paper 3B)

Recent market developments have given rise to a variety of financial instruments that are linked to sustainability initiatives, indices or targets. Most of the questions raised by stakeholders relate to loans with environmental, social or governance (ESG) features, i.e. loans for which the interest rate is linked to pre-determined ESG targets that are specific to the borrower. Many stakeholders said that, at present, practice is developing with regards to how to assess whether a loan with ESG-linked adjustments has cash flows that are solely payments of principal and interest (SPPI).

In relation to green loans or bonds, the staff note that their contractual cash flows do not include any sustainability-linked adjustments. Therefore, such financial assets do not present a new challenge in assessing the contractual cash flows characteristics because the purpose of a financial asset does not affect the SPPI assessment.

In relation to structured instruments linked to green indices, the staff note that the cash flows that are based on the performance of a specified market index do not represent a return that is consistent with a basic lending arrangement. The staff think that this type of exposure is similar in nature to exposure to changes in equity prices or commodity prices, which does not give rise to contractual cash flows that are SPPI.

In relation to loans with ESG features, the key question is for what the entity is being compensated. The nature of the contingent event (i.e. the trigger) of ESG-linked adjustments is the borrower’s performance against specified ESG targets but this does not automatically mean that the adjustments represent compensation for the entity’s exposure to the ESG risk of the borrower. The larger the ESG-linked adjustments are (relative to the total interest of a loan), the more it might be an indication that adjustments represent compensation for a particular type of risk or exposure.

If a financial asset compensates an entity for its exposure to particular ESG risks of the borrower, in the staff’s preliminary view, such compensation is often unlikely to be consistent with contractual cash flows that are SPPI. However, the staff acknowledge that the assessment will require judgement and the conclusion will vary depending on the contractual terms of the financial assets.

The Board was not asked to make a decision based on this paper.

Identifying matters to examine in phase 2 (Agenda Paper 3C)

This paper provided preliminary staff analysis, recommendations, and questions for Board members on which matters to examine in phase 2 of the PIR and thus ask questions about in the RFI.

The questions in the RFI will be set within the context of the feedback from phase 1 outreach and within the context of the Board assessing:

  • Whether the requirements are working as intended
  • Whether the requirements are capable of being applied consistently
  • If there are any significant unexpected effects

Staff recommendation

The staff recommended the Board examine further in phase 2, and thus ask questions in the RFI, about the following matters:

  • Business model assessment for financial assets:
    • Application of judgement in applying the business model assessment
    • Reclassification of financial assets due to a change in business model
  • Contractual cash flow characteristics assessment for financial assets:
    • Applying the assessment in the light of market developments (including new product features)
    • Investments in contractually linked instruments (CLIs)
  • Option for equity instruments to present fair value changes in other comprehensive income (OCI):
    • Prevalence of the use of the presentation option and types of instruments it is used for
    • Effect of the option on entities’ investment decisions and on the usefulness of information to users of financial statements
  • Financial liabilities designated as fair value through profit or loss: Presentation of changes in fair value due to changes in own credit risk in OCI
  • Modifications to contractual cash flows:
    • Differences in drafting between the requirements for modifications for financial assets and financial liabilities
    • Determining when a modification results in derecognition
  • Transition to IFRS 9:
    • Effects of transition reliefs provided
    • Balance of reducing costs for preparers of financial statements and providing useful information to users of financial statements

Board discussion

The discussion was grouped by potential areas of the RFI, not by agenda paper.

Business model assessment

Board members said it would be interesting to see whether stakeholders have any comments on whether the reclassification requirements are too strict or work well in practice. One Board member said that during the pandemic, many preparers struggled to sell financial assets and therefore wanted to reclassify assets from fair value through profit or loss (FVTPL) to amortised cost (AC). However, the Vice Chair said the reclassification requirements were intentionally strict. A temporary unavailability of a market does not necessarily constitute a change in business model (and therefore allow for reclassification) if the entity was looking to return to the old business model of buy and sell after the pandemic.

One Board member said that he heard the Standard’s reliance on judgement was a problem. However, he did not share this view as this was intentional. Judgement would only be a problem if applied inconsistently, with consistent application not meaning identical application.

All Board members agreed with the staff recommendation with regard to business model assessment.

Contractual cash flow characteristics assessment

The discussion focused on new product features, especially those that are sustainability-linked (Agenda Paper 3B). Some Board members warned that the discussion about these product features should not drift into a moral discussion. IFRS 9 should not distinguish based on moral standpoints and allow AC measurement only because those features are morally superior. The question in the RFI should be whether the existing AC mechanics work well with those features, and, if not, whether additional features should be included in the SPPI category.

The Chairman said that AC measurement was designed for basic lending arrangements when IFRS 9 was developed. At that time, the mechanics of AC measurement worked well with basic lending arrangements. While financial assets with sustainability-linked features might well be considered basic lending arrangements, especially given the growing prevalence, the AC mechanics might not work for them as it will be difficult to determine an effective interest rate (EIR). In this case, AC accounting might not be possible, even though these assets are considered basic lending arrangements, unless the Board redesigned the mechanics to work for those features. The Vice Chair agreed that AC accounting might not work because of EIR and it would be challenging to account for changes in estimates but said at the same time it might be also difficult to fair value those features, so FVTPL might not work well either.

One Board member asked what would happen if over time all ‘plain vanilla’ loans would include sustainability-linked features. Other Board members understood that concern but responded that popularity of features or their prevalence in the market is not enough to guarantee AC accounting. It would be important though to ask a question in the RFI about those as the Board would like to understand the features that are prevalent in practice.

All Board members agreed with the staff recommendation on this topic with the additional instruction to carefully consider the wording of the first question.

Fair value through OCI (FVTOCI) option for equity investments

Board members said it would be interesting to see if stakeholders find the information provided by the FVTOCI option for equity investments decision useful. One Board member suggested that the target audience for this should not be intermediaries, but users who actually make capital allocation decisions. It would be also interesting to see how the use of the option affects internal performance evaluation processes.

The Chairman highlighted that the term ‘prevalence’ in the staff recommendation might not be the correct focus. He would be more interested in knowing in which circumstances the option is applied. When developing IFRS 9, the intention was that the option is applied to strategic investments only, however, it seems to be applied much more broadly in practice.

All Board members supported the staff recommendation on the FVTOCI option.

Financial liabilities designated at FVTPL

The Board members who spoke agreed with including a question on financial liabilities. One Board member asked which information the staff were looking to obtain from stakeholders. The staff responded that they simply wanted to confirm that what they heard from some stakeholders (i.e. there are no major issues with the liability side) is valid for a broader range of stakeholders. Also, there were some who said that the ‘own credit risk’ requirement should receive a wider scope, and some said that the disclosures on own credit risk were sometimes insufficient to properly analyse the financial statements. The Vice Chair said that broadening the scope for own credit risk might be challenging as it is difficult to separate own credit risk. The Board had taken a conscious decision when developing IFRS 9 to keep the scope narrow. One Board member suggested that stakeholders should be asked which approach they use for separating own credit risk and whether that would be an interesting disclosure for users.

The Chairman said that the Board could also use the opportunity to ask if stakeholders agree that the separation of embedded derivatives is only required for financial liabilities, but not for financial assets. He would be interested to hear whether this works well in practice or whether stakeholders would prefer the same approach for assets and liabilities (i.e. no bifurcation).

All Board members agreed with the staff recommendation for financial liabilities.


The Vice Chair highlighted the importance of this area and said that the Board is aware of diversity in application of the modification requirements. It would therefore be interesting to see the different approaches used in practice.

All Board members agreed with the staff recommendation on modifications.


Board members discussed whether the question with regard to transition should be specific to IFRS 9 or whether it should be formulated more generally. Some Board members preferred the ‘more general’ approach as it would be simpler to draw conclusions for future standard-setting projects. Getting many granular comments on IFRS 9 classification and measurement transition requirements might not be helpful for the Board for future projects. However, the Vice Chair said that respondents to the RFI should know what information the Board is looking for and suggested to provide an example. The Board could ask whether in the transition they should have adopted a simpler approach to cases where no change in classification was expected. In particular the Board could ask whether they should have allowed grandfathering in those cases, rather than requiring to do an instrument-by-instrument assessment of the classification.

One Board member suggested to ask whether stakeholders had any comments on the phased approach the Board adopted when developing IFRS 9, i.e. different phases for classification and measurement, impairment, and hedge accounting, including different effective dates.

All Board members supported the staff recommendation with the adaption that the questions will be more specific than suggested in the recommendation to prompt more useful responses.

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