Contractual Cash Flow Characteristics of Financial Assets (Amendments to IFRS 9)

Date recorded:

Disclosure, transition and effective date (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). In September 2022, the IASB tentatively decided on the clarifying amendments.

This paper considered whether any additional disclosure requirements need to be added to IFRS 7 to complement the proposed clarifications to the requirements in IFRS 9, as well as any transition requirements and the potential effective date.

Staff recommendation

Disclosures

Although the amendments relate to financial assets, the staff believe that information about the effect of such features on the contractual cash flows of financial liabilities would be equally useful to users of financial statements. Therefore, the staff recommended requiring that, for each class of financial assets and financial liabilities not measured at fair value through profit or loss, an entity shall disclose:

  • A qualitative description of the nature of the contingent events that could change the timing or amount of contractual cash flows
  • Quantitative information about the potential range of changes to contractual cash flows that could result from the contractual terms
  • The gross carrying amount of financial assets and amortised cost financial liabilities subject to these contractual terms

Transition requirements

The staff recommended proposing that an entity should:

  • Apply the amendments retrospectively in accordance with IAS 8, except as specified in the bullet below
  • Not be required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods if, and only if, it is possible without the use of hindsight and the restated financial statements reflect all the requirements in IFRS 9. If an entity does not restate prior periods, the entity shall recognise any difference between the previous carrying amount and the carrying amount at the beginning of the annual reporting period that includes the date of initial application of these amendments in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application of these amendments

In addition, to the extent that the initial application of the proposed amendments results in a change in the classification of financial assets, the staff recommended requiring an entity to disclose the following information as at the date of initial application of the amendments:

  • The previous measurement category and carrying amount determined immediately before applying these amendments
  • The new measurement category and carrying amount determined after applying these amendments

Potential effective date

The staff recommended that the effective date would be determined after exposure of the proposed amendments however recommended that early application of the amendments is permitted

The staff asked the IASB if they agree with their recommendations.

IASB discussion

Overall, IASB members were in agreement with the staff recommendations and one IASB member noted that the disclosures are an important element of the clarifications made.

The IASB asked the staff to ensure the scope of the disclosures is clear. The IASB asked whether the disclosure requirements include equity instruments measured at fair value through other comprehensive income (FVTOCI). The staff noted that it does not include these instruments but does include other instruments measured at FVTOCI as for these instruments the P&L is measured at amortised cost. Another question asked was whether these disclosures are specific for the clarifications proposed or whether they would cover other events like changes in the time value of money. The staff confirmed that the disclosures are specific for the amendments and noted that drafting of the wording would need to be specific in this regard.

The staff paper recommended disclosure of possible changes based on ‘all possible cash flows’. The IASB noted that this could be wide-ranging for a preparer. The staff confirmed they mean all possible cash flows within the contract. IASB members agreed with this and asked the staff to consider the language used in the exposure draft (ED).

One IASB member asked if a question could be included in the invitation to comment in the ED on whether these disclosures would meet the cost-benefit equation. If the instrument meets SPPI criteria, the IASB member noted that the disclosure required should not be onerous, however asked the staff to request feedback in this regard.

IASB decision

11 out of 11 IASB members voted in favour of the staff’s recommendations.

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