Summary of feedback from comment letters (Agenda Paper 16)

In March 2023, the IASB published the Exposure Draft Amendments to the Classification and Measurement of Financial Instruments (ED). This paper provided a summary of feedback on the ED from comment letters and outreach events.

The ED proposed the following amendments to IFRS 9:

• Derecognition of a financial liability settled through electronic transfer—to clarify that an entity is required to apply settlement date accounting when derecognising a financial asset or a financial liability and to permit an entity to deem a financial liability that is settled using an electronic payment system to be discharged before the settlement date if specified criteria are met
• Classification of financial assets—to clarify the application guidance for assessing the contractual cash flow characteristics of financial assets, including:
  • Financial assets with contractual terms that could change the timing or amount of contractual cash flows, for example, those with ESG linked features
  • Financial assets with non-recourse features
  • Financial assets that are contractually linked instruments

The ED proposed amendments and additions to IFRS 7 with regard to the following topics:

• Investments in equity instruments designated at fair value through other comprehensive income (OCI)
• Financial instruments with contractual terms that could change the timing or amount of contractual cash flows on the occurrence (or non-occurrence) of a contingent event that is specific to the debtor

Summary of feedback

Overview

Over 107 comment letters were received in response to the ED. Some respondents asked the IASB to prioritise finalising the proposals relating to the classification of financial assets with ESG-linked features over other matters and that these amendments should have a different effective date from the other amendments so that entities are able to apply them independently.

Derecognition of a financial liability

Most respondents agreed with the proposed clarification that settlement date accounting is applied when recognising or derecognising financial assets and financial liabilities, although many respondents recommended further clarifying the requirements to avoid unintended consequences. For example, it is unclear how the proposed requirements would apply to derivatives, such as forward contracts, which are recognised on their commitment date.

Most respondents welcomed the proposal to permit derecognition of a financial liability that is settled in cash using an electronic payment system before the settlement date when specified criteria are met, although some raised concerns about the practical application of the proposed criteria. They noted that the criteria are too high a hurdle to overcome in practice resulting in the proposals having little practical benefit. In addition, some respondents asked for similar requirements regarding financial assets.

Classification of financial assets

Many respondents expressed the view that the proposed clarifications of the requirements for assessing the contractual cash flow characteristics of financial assets would be useful in determining the classification of financial assets with ESG-linked features. However, some respondents expressed concerns that the proposals do not provide a sufficiently clear basis for assessing whether particular ESG features are consistent with a basic lending arrangement and that this may lead to unintended consequences for the classification of other financial assets. For example, ‘increased cost clauses’ in which the lender reserves the right to adjust the interest rate due to changes in tax laws or regulations which increase the cost of lending would be ‘a change in contractual cash flows due to a contingent event that is specific to the creditor or another party would be inconsistent with a basic lending arrangement.’

Some respondents said that the proposals do not adequately explain why contingent events that are specific to the debtor are consistent with the concept of basic lending risks and costs. In addition, the example provided in the ED does not provide a clear basis for why those ESG-linked features are considered to be basic lending risks or costs.

For the proposals around ‘the occurrence (or non-occurrence) of the contingent event must be specific to the debtor’, many respondents observed that this would preclude any instruments from amortised cost measurement if the ESG-linked targets are set at a consolidated level or for a group entity other than the legal debtor. Some respondents also noted that it is unclear whether so-called Scope 3 greenhouse gas emissions, for which an entity is only indirectly responsible, can be considered ‘specific to the debtor’.

Most respondents supported the proposed clarifications to the assessment of contractual cash flows in the case of financial assets with non-recourse features and contractually linked instruments, although many respondents commented on some aspects of the proposals. These included concerns over the description of the financial assets with non-recourse features included in the ED.

Disclosure requirements

Many respondents supported the proposed amendments to the disclosure requirements for equity instruments to which the OCI presentation option is applied, although some respondents reiterated their disappointment that the IASB did not reconsider the reclassification of fair value gains or losses accumulated in OCI to profit or loss when an equity instrument is disposed of.

Many respondents, specifically banks and banking organisations, voiced strong objections against the proposed scope of the disclosure requirements relating to contractual terms that could change the timing or amount of contractual cash flows based on a contingent event specific to the borrower, saying that it will place a significant cost on preparers which will outweigh any perceived benefits to investors. These respondents made suggestions for limiting the scope of the proposed disclosure requirements.

IASB discussion

Derecognition of a financial liability

IASB members were pleased about the positive support for the proposals. One IASB member addressed the concerns that the proposals may cause a difference between financial assets and liabilities and lead to an inconsistency in the accounting for intercompany balances by saying that the requirement is optional and therefore preparers can avoid the inconsistency. Another IASB member warned the staff about scope creep, noting that not all issues can be resolved in these narrow-scope amendments.

The feedback noted that by allowing the requirements to be applied on a system-by system basis, there is potential for abuse. IASB members asked that the staff provide more insight into the specific concerns raised in this area.

Classification of financial assets

Respondents noted concerns around a contingent event specific to a debtor which would preclude instruments where the ESG-linked targets are set at a consolidated level. IASB members noted that this is a practical issue and requested that the staff examine if this could be addressed.

Respondents noted a contradiction in the ED. On the one hand, the ED stated that “the assessment of interest focuses on what an entity is being compensated for, rather than how much compensation an entity receives”. On the other hand, it stated that “a change in contractual cash flows is inconsistent with a basic lending arrangement if it is not aligned with the direction and magnitude of the change in basic lending risks or costs.” IASB members liked that the respondents suggested solutions and thought this should be addressed by amending the language used in the final drafting.  

Respondents requested more complex examples and IASB members thought that it is worth expanding the examples. However, IASB members also reminded the project team that the amendments should be objectives-based and do not intend to provide clarity for each fact pattern.

Disclosures

Banks and banking organisations voiced strong objections against the proposed scope of the requirements stating that it will place significant cost on preparers. These respondents provided some areas where the scope could be limited. IASB members asked if the staff could examine this further, specifically with regard to whether the scope has been misunderstood or whether the scope is too broad. If respondents have interpreted the scope more widely than intended, the final wording might need to be more specific.

Some respondents noted that the additional disclosure requirements are unnecessary, and the post-implementation review of the classification and measurement requirements did not provide evidence that users require the proposed additional disclosures. IASB members asked the staff to give consideration to how to address and respond to this point.

Respondents suggested that different effective dates could be given to different sections of the amendments. IASB members had mixed views about this.

No decisions were made.