IAS 39 — Negative interest rates: implication for presentation in the statement of comprehensive income

Date recorded:

The Visiting Fellow reminded the Committee that there had already been discussions around this topic in 2012 and 2013. The Committee had decided against finalising the tentative agenda decision as it could have had unintended consequences on the classification of financial assets. It had therefore been decided to wait until IFRS 9 was finalised. IFRS 9 had now been included in the analysis. Furthermore, staff had considered the negative monetary interest rates issued by the European Central Bank in the recent past. IFRS 9 had clarified that cash flows could be payments of solely principal and interest even if the interest rate was negative. Therefore, the agenda decision would have no unintended consequences on the classification of financial assets. Further analysis revealed that whilst custody cost had been considered to be a driver of negative interest rates, it was now considered to be a floor below which entities would choose to hold cash rather than pay a negative rate to another entity for holding their cash. This did however not change the staff’s view on the presentation of negative interest rates. Staff recommended that the expense caused by a negative interest rate should not be presented as interest expense. This was because the description of interest revenue in IAS 18 allowed no negative revenue. In addition, IAS 1 prohibited offsetting of income and expenses unless it was required or permitted by another Standard. Therefore, staff proposed to present amounts resulting from negative interest rates as an expense other than ‘interest expense’. This applied symmetrically to financial liabilities. However, they believed that the negative interest could be included as part of the net interest income or expense.

One Committee member said it was confusing to her that this negative interest would still be included in the effective interest rate and it would therefore be disclosed under IFRS 7 as part of interest income and expense. She suggested including this discussion in the agenda decision. An observing Board member said that IFRS 9 gave guidance on when to use fair value and when to use the effective interest rate method but it did not give any guidance on presentation. Presenting negative interest in a revenue line item would be inconsistent with the Conceptual Framework as income needed to be an increase in assets. The Committee member replied that IFRS 7 required disclosure of total interest income and total interest expense calculated using the effective interest rate method. The Board member said that this did not mean that every time the effective interest rate method was used, the item should be presented in interest income or expense.

Another Committee member struggled with the recommendation that whilst negative interest was excluded from interest income or expense it would be included in the net interest margin. This was inconsistent in his view. Several Committee members supported that view.

One Committee member expressed that she would like to see an analysis of how costs would be treated that had been incurred to hold the cash outside the bank (i.e. security measures).

A fellow Committee member said that in the financial statements he would like to see whether there was negative interest, where it came from, on what assets it was incurred and which risks were associated with it. However, he found the tentative agenda decision to be too prescriptive in his view.

The ESMA representative agreed and said that the rejection note went a step too far by saying negative interest should be included in the net interest income or expense. He would rather see a definition of net interest margin as ESMA had found that there was large diversity in practice as to what was included in the net interest income or expense.

The Technical Director asked the Committee whether they wanted to re-expose the tentative agenda decision, given the discussion. Several Committee members were uncertain as to what the initial tentative agenda decision had stated. The Chairman therefore recommended having the original tentative agenda decision distributed to Committee members over lunch and then reopening the issue after that.

When the session was reopened in the afternoon, the Technical Director said that the paper that had been distributed over lunch included a revised tentative agenda decision from January 2013 after the comment letter analysis. This revised tentative agenda decision had never been exposed as the Interpretations Committee wanted to wait for the finalisation of IFRS 9.

The Chairman recommended finalising the revised tentative agenda decision as it was now clear that it would not interfere with IFRS 9.

One Committee member said that the statement in the revised tentative agenda decision that negative interest would not be interest expense was inconsistent with IFRS 9 in his view. The Technical Director suggested deleting that reference and also including negative original interest rates in the agenda decision as the revised tentative agenda decision only considered negative effective interest rates.

Another Committee member suggested including IFRS 15. The Technical Director rejected the proposal as the original query had only asked for IAS 18.

One Committee member suggested not re-exposing the tentative agenda decision. The Chairman called a vote on re-exposure. Only one Committee member voted in favour of re-exposing. The tentative agenda decision would therefore be finalised with the agreed edits and editions.

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