Contractual cash flow characteristics of financial assets (amendments to IFRS 9)

Date recorded:

Project plan (Agenda paper 16)

In May 2022, the IASB decided to start a standard-setting project to clarify particular aspects of the IFRS 9 requirements for assessing a financial asset’s contractual cash flow characteristics (i.e. the ‘solely payments of principal and interest’ (SPPI) requirements).

This paper set out the proposed objective, scope and an indicative timeline for the project.

The proposed objective of this project would be to make clarifying amendments to the application guidance in IFRS 9 to enable the consistent application of the SPPI requirements and to consider whether additional disclosure requirements are needed. No fundamental changes will be made to the principles of the SPPI requirements in IFRS 9.

The staff believe that the objective for this project will be best achieved by clarifying the following aspects of the SPPI application guidance:

  • The concept of a basic lending arrangement
  • Whether and how the nature of a contingent event (i.e. the trigger for a change in the timing or amount of contractual cash flows) is relevant to determining whether the cash flows are SPPI
  • Examples of applying the SPPI requirements to specific fact patterns (including adding additional examples for financial assets with ESG-linked features)
  • The meaning and characteristics of non-recourse features (including rearticulation of the need to assess the underlying assets or cash flows)
  • The meaning and scope of instruments to which the contractually linked instruments (CLI) requirements are applied
  • The requirements for the underlying pool of instruments for a CLI to meet the SPPI requirements

In addition, the staff proposed assessing whether additional disclosure requirements are needed regarding contractual terms that could affect the amount or timing of contractual cash flows.

The application challenges relating to financial assets with ESG-linked features is considered a high priority matter and therefore the indicative timings are as followings:

  • Q3 2022: Consideration of potential clarifications
  • Q4 2022: Consideration of potential clarifications (continued) and permission to ballot
  • Q1 2023: Publication of exposure draft

The staff asked the IASB if they have any questions or comments on the project plan. The IASB were not asked to make any decisions at the meeting.

IASB discussion

Overall, IASB members explained that this paper is important to ensure the correct messaging is provided in the short term during outreach and other discussions the IASB may have whilst the staff perform the technical work. One IASB member summarised the key messages to stakeholders are:

  • The clear rationale for deciding to start a standard -setting project
  • For ESG-linked instruments, there is no intention to make an exception in IFRS 9, but rather to clarify the current requirements
  • The ED is expected in Q1 2023

A concern was raised around potentially adding additional disclosures. One IASB member said that the post-implementation review was not on IFRS 7 and therefore, the IASB does not have the information on the effectiveness of IFRS 7 and whether it needs to be amended. Another IASB member suggested that the staff assess the current disclosure requirements to see if they are useful, rather than create new ones.

In the paper, the staff stated that the project would not clarify or amend the effective interest rate method (EIR). The Chair asked the staff to confirm that this meant it would not change the mechanics of the EIR but would clarify how to apply the EIR to these instruments. The staff confirmed this.

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