IAS 39 — Negative Interest rates: Implication for presentation in the statement of comprehensive income

Date recorded:


In September 2012, the IFRS Interpretations Committee discussed the ramifications of the economic phenomenon of negative interest rates for the presentation of income and expenses in the statement of comprehensive income. The Interpretations Committee considered the situation where, against the backdrop of the economic crisis, the demand of investors for ‘safe harbour’ assets has increased to a degree that the yield on some assets (on some of the remaining high quality government bonds), being the overall effective interest rate, has turned negative.

The Interpretations Committee noted that interest resulting from a negative effective interest rate on a financial asset does not meet the definition of interest revenue in IAS 18 Revenue because it reflects a gross outflow, instead of a gross inflow, of economic benefits. The Interpretations Committee also noted that this amount is not an interest expense because it arises on a financial asset instead of on a financial liability of the entity. Consequently, the expense arising on a financial asset because of a negative effective interest rate should not be presented as interest revenue or interest expense, but in some other appropriate expense classification. The Interpretations Committee noted that in accordance with paragraphs 85 and 112(c) of IAS 1 Presentation of Financial Statements, the entity is required to present additional information about such an amount if that is relevant to an understanding of the entity’s financial performance or to an understanding of this item.

The Interpretations Committee considered that in the light of the existing IFRS requirements an interpretation was not necessary and tentatively decided not to add the issue to its agenda

Four comment letters were received on the tentative agenda decision.  One of the respondents agreed with the Interpretation Committee’s decision not to add this item to its agenda and agreed with the reasons in the tentative agenda decision.  Another respondent agreed with the tentative agenda decision but did not feel that it should take such an absolute position and instead allow entities the judgement in determining the appropriate presentation in profit or loss.  Another respondent agreed with the tentative agenda decision not to add this to the Interpretation Committee’s agenda but did not agree with the reasons given.  The last respondent expressed concerns about unintended consequences on other active projects such as IFRS 9 and recommended that the Interpretations Committee refrained from finalising the tentative agenda decision.

The Staff highlighted that there appears to be a divergence in how entities are presenting these amounts.  The Staff also noted that a negative return on an asset cannot be revenue and also that a negative return on an asset also does not represent interest expense.  The Staff also highlighted to the Committee members that in accordance with IFRS 9 Financial Instruments, a financial asset can only be measured at amortised cost if the contractual cash flows on the asset give rise to payments that are solely payments of principal and interest on the principal amount outstanding.  The Staff noted that the fourth respondent had a concern that if it was concluded that the negative return on the asset could not be neither interest expense or interest revenue it may not be possible to conclude that the contractual cash flows are solely payments of principal and interest (SPPI).  Hence the concern was that these financial assets would not be able to be measured at amortised cost but only fair value through the profit or loss.  The Staff noted that the tentative agenda decision only deals with the presentation of a negative yield on a financial asset so may not affect the financial instruments that can be considered to have payments that are SPPI.

The Staff asked the Interpretations Committee whether they agreed with the proposed rejection wording for the final agenda decision (i.e. not to add to their agenda).

One of the Committee members questioned paragraph 14 in the Staff paper that noted that only the issue of presentation was being addressed.  He noted that one of the respondents had raised the issue that the wording of the rejection decision could have unintended consequences with IFRS 9.  The Committee member noted that the Staff commented that they were only dealing with the issue of presentation and had noted that the nature of those payments was not a concern.  The Committee member disagreed with this Staff comment and stated that the nature of the negative “payment” was an important factor that required consideration.  He supported the view of KPMG – i.e. that there were more important accounting issues around negative yields than solely the question of the presentation of income or expense.  He felt that it was not appropriate to form a conclusion with respect to presentation until those wider issues had been considered as part of the IASB’s deliberations on classification and measurement and impairment of financial instruments.

Another Committee noted that he did not feel that the Staff intended for unintended consequences with IFRS 9.

Another Staff member agreed with the issue proposed by KPMG.  He noted that the nature of the negative payments needed to be understood.

One member questioned whether an agenda decision was required to be issued at all as he was of the opinion that no one had raised the question for an interpretation.  The Chair pointed that there had been queries from central banks, Asia and developing countries and hence the question had been raised and required a decision.  This member also noted that the magnitude of the amounts was required to be considered as they could be immaterial in nature.  He noted that if the agenda decision was definitive in saying that such amounts were not interest expense then this would have an effect on a large number of banks.  Another Committee agreed whether an interpretation was required.

A number of Committee members shared the view that the agenda decision should not be too definitive as it was currently written.

One member agreed that what the Staff had written made sense, i.e. if you have an investment that you have a negative return on you do not have interest income and if you have an investment that investment cannot produce interest expense.  He also noted that the amounts that would arise would likely be immaterial and hence could be presented anywhere.  He noted concerns regarding any proposed amendments to consider the nature of the negative interest – he was of the view that companies should not have to figure out why interest rates are negative.  These views were echoed by another Committee member.

The Chair noted that the views appeared to be:

  1. Amend agenda decision wording to say that it is a judgement call
  2. The rejection is logical and hence keep as it is
  3. Further thinking in the context of IFRS 9 and the redeliberations

He suggested that view 3 is the best option.  Hence the Board would be made aware of this issue to be addressed in their IFRS 9 redeliberations.

Comments were raised as to whether this approach would actually address the question of presentation and whether the Board would actually address this in their IFRS 9 redeliberations.  It was noted that IFRS 9 talks about interest for the purposes of looking at your cash flows.

One Committee member noted that another option may be to address this issue with the Revenue project and whether you can have negative revenue, however it was highlighted that the current project would not be able to address this.  Another Committee member concluded that from the discussions it appeared that the “interest” resulting from a negative effective interest rate on a financial asset did not actually now appear to be interest but revenue and you cannot have something negative that is revenue.  She suggested that the agenda decision state this and with this amendment it may also address the conflict with IFRS 9.  Another Committee member noted that the issue of presentation could be addressed with a footnote to explain the method adopted.  A couple of Committee members disagreed with this view.

The Chair closed the discussion and noted that he was of the opinion that the issue would not be finalised at this meeting.  He asked the Staff to mention this to the Board when they redeliberate classification.

All of the Committee members were tentatively in agreement with holding off on a final agenda decision.

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