Post-implementation review of IFRS 9 — Classification and measurement

Date recorded:

Contractual cash flow characteristics—Prioritising PIR findings (Agenda Paper 3)

In September 2021, the IASB published Request for Information (RFI) Post-implementation Review—IFRS 9 Financial Instruments—Classification and Measurement. In April 2022, the IASB discussed feedback received in response to the RFI on the requirements for assessing a financial asset’s contractual cash flow characteristics (i.e. the ‘solely payments of principal and interest’ (SPPI) requirements).

The IASB discussed preliminary views that it may need to clarify particular aspects of the requirements in response to the feedback. At this meeting, the IASB was asked to decide whether and when to take further action to make those clarifications.

Most respondents to the RFI agreed that generally these IFRS 9 requirements work as intended, indicating that there is not a need for fundamental changes to the requirements. However, feedback indicated that the IASB could help entities with consistent application by clarifying particular aspects of the SPPI requirements. This was indicated in particular by the many questions raised by respondents about how to apply the SPPI requirements to financial assets with ESG-linked features, and about the scope of the requirements for contractually-linked instruments (CLIs).

The staff recommended that the IASB categorise findings related to clarifying the SPPI requirements for features such as ESG-linked features as high priority. Clarification is needed urgently before diverse practice becomes embedded. Consistent with the IASB discussion in April 2022, the staff continue to think that it is unnecessary to create an exception from the SPPI requirements for ESG-linked features to ensure useful information about the amount, timing and uncertainty of contractual cash flows are provided to users of the financial statements. Nor do they think there is a need for fundamental changes to the principles of the SPPI requirements in IFRS 9. Instead they recommend adding more explanation of the overall objective of the SPPI requirements and providing additional application guidance through standard-setting will address the issue effectively and efficiently.

The staff think that if it were considered in isolation, the findings related to CLIs and financial assets with non-recourse features could be categorised as medium priority. However, if the IASB decides to start a standard-setting project to clarify the general SPPI requirements they think this is a good opportunity for the IASB to also clarify the CLI requirements.

Respondents also asked how to account for revisions in estimated contractual cash flows if those financial assets with ESG-linked features are measured at amortised cost (i.e. whether to apply a prospective method in paragraph B5.4.5 or a retrospective method applying paragraph B5.4.6 of IFRS 9). This question exists in circumstances other than for financial assets with ESG-linked features. The IASB plans to discuss the feedback on that issue more broadly at a future meeting.

Staff recommendation

The staff recommended that the IASB starts a standard-setting project to clarify particular aspects of the requirements for assessing a financial asset’s contractual cash flow characteristics (paragraphs B4.1.7−B4.1.26 of IFRS 9).

IASB discussion

IASB members were generally supportive of the staff recommendation. Even though ESG-linked features are relatively new, diversity in practice is developing that needs to be addressed quickly before too many instruments have to change their classification upon an amendment.

IASB members had mixed views as to whether to address ESG-linked features and CLIs together. Those in favour cited economies of scale, while those opposed questioned whether SPPI (the issue for ESG-linked features) and waterfall structures (the issue for CLIs) have sufficiently much in common to combine them.

One IASB member questioned whether SPPI would now only be opened up because of one type of product (i.e. ESG-linked features) or whether the staff think that the IASB would have addressed the issues with SPPI anyway. He said that he would not agree to opening up a well-working principle solely because of one product type and would instead clarify the accounting for that one product through an Interpretations Committee (IC) agenda decision. The staff responded that they have received many clarification requests with regard to basic lending arrangements and SPPI and therefore believe that the IASB would have opened up SPPI anyway.

The Chairman picked up on that and said that the papers suggested an IC style clarification of the issue while the discussion now pointed more towards an amendment to the SPPI principle. The latter may bring unintended consequences for other instruments that the IASB may not be able to foresee. In his view, the standard has a clear principle and it could be clarified how the principle applies to ESG-linked features without changing it. This would also involve applying the principle rigorously to ESG-linked features even if that resulted in fair value accounting. He cautioned that ESG-linked features becoming more common would not be a good enough reason to measure them at amortised cost (against the SPPI principle).

IASB members reacted to this by saying they would prefer a clarification of how to apply the SPPI principle to ESG-linked features. If it turns out that a clarification would still not resolve the developing diversity in practice, the IASB could consider a change to the principle.

When asked by the Chairman about the next step, the staff said that they would come back with further analysis in June.

IASB decision

All IASB members voted in favour of the staff recommendation.

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