IAS 39 — Determining the effective interest rate of restructured Greek Government Bonds

Date recorded:

At its May 2012 meeting, the Committee considered a request for guidance on the circumstances in which the restructuring of Greek government bonds (GGB) should result in derecognition of the whole asset, or only part of it, in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The principal issue raised was whether the transaction should result in derecognition of the whole asset, or only part of it, in accordance with IAS 39.

While the Committee addressed many of the questions raised in the submission as part of the May meeting, it did not address the question of whether paragraph AG5 of IAS 39 could apply when determining the effective interest rate on initial recognition of the new GGBs that were received as part of the debt restructuring. Applying paragraph AG5 means that the effective interest rate would be determined at initial recognition using estimated cash flows that take into account incurred credit losses.

At the July 2012 meeting, Committee members generally agreed that application of paragraph AG5 of IAS 39 is not limited to purchase transactions, but includes the notion of ‘originated’ instruments even though AG5 uses the word ‘acquired’. Thus, application of paragraph AG5 applies to purchased and originated assets alike. They also agreed that the context and structure of IAS 39 means that paragraph AG5 is an integral part of the effective interest method and hence applies to all financial assets for which interest revenue is calculated on an effective interest basis, including assets that are originated.

These conclusions were generally based on supporting wording in IAS 39 which uses the term ‘acquired’ in various instances as a generic term that comprises both purchases and originations of assets. For example, paragraph 9 of IAS 39, in defining financial asset or financial liability at fair value through profit or loss and transaction costs, as well as paragraph 43 of IAS 39. The context and structure of IAS 39 and the purpose of the requirement were also seen to support this view.

Committee members requested, however, that the tentative agenda decision clearly reflect that the Committee was not asserting that an incurred credit loss is present in the specific circumstances raised in the submission. The Committee noted that the assessment of whether an incurred loss exists must be made by local regulators.

One Committee member questioned the rationale for this question as she believed the existence of an incurred loss on an originated debt instrument would be rare. However, another Committee member noted that even though the origination of a debt instrument with an incurred loss is rather unusual, there are situations in which such transactions occur. He spoke of ‘troubled debt restructurings’ in the US environment such that significant financial difficulty of an obligor result in originations of debt instruments that are outside the normal underwriting process. This could include situations in which modifications of debt instruments result in derecognition of the original financial asset and the recognition of a new financial asset. In these circumstances, new financial assets could be recognised that have incurred losses on initial recognition.

On the basis of this analysis, the Committee tentatively decided not to add the issue to its agenda. The Committee asked that the staff revise the tentative agenda decision on the basis of discussion during the meeting for recirculation.

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