IFRS 9 — Modifications /exchanges of financial liabilities that do not result in derecognition

Date recorded:

IFRS 9 Financial Instruments — modifications /exchanges of financial liabilities that do not result in derecognition

Note: This paper was supposed to have been discussed in the September 2016 IC meeting but was not discussed due to lack of time. The content of the paper remains unchanged.


The is a new item. The submitter requested a clarification of the requirements in IFRS 9 relating to modifications or exchanges of financial liabilities. The submitter asked whether an entity recognises a gain or loss, in profit or loss, when a financial liability is modified or exchanged and that modification or exchange does not result in derecognition of the financial liability. The submitter noted that paragraph 5.4.3 of IFRS 9 requires an entity to recognise any gain or loss arising from a modification of a financial asset that does not result in its derecognition in profit or loss immediately. The submitter noted that there are divergent views as to how this new requirement might affect the accounting for modification of financial liabilities. The submitter noted two possible views:

  1. View One: recognise a gain or loss at the date of modification. This view is based on the application of paragraph B5.4.6 of IFRS 9 which is considered clearer than AG8 of IAS 39. Paragraph B5.4.6 states that if an entity revises its estimates of payments or receipts (excluding modifications in accordance with paragraph 5.4.3) it is required to adjust the gross carrying amount of the financial asset or liability to reflect actual and revised contractual cash flows, which is recognised in profit or loss as income or expense.  
  2. View Two: do not recognise a gain or loss at the date of modification: This view is based on requirements of paragraph B3.3.6 of IFRS 9 (derecognition of financial liabilities). An entity adjusts the amortised cost at the date of the modification or exchange only to reflect cost or fees incurred.

The purpose of this session is for the staff to present their analysis and recommendation.

Staff analysis

The staff conducted outreach activities which reflected that most entities are still applying IAS 39. Under that Standard, the most common approach is view two. However, some respondents noted that the new requirements in IFRS 9 for modifications of financial assets in IFRS 9 paragraph 5.4.3 and the changes in paragraph B5.4.6 could imply that view one is the appropriate answer.  The staff analysed whether the accounting for revision of estimates differs from the accounting for modifications. The staff believes that upon modification, a modified financial asset or liability continues to be the same original asset or liability. Accordingly, the staff considers that there is no basis to differentiate the accounting for changes in cash flow from revisions of estimates from the accounting for modifications. In both cases, an entity remeasures the gross carrying amount of the asset or liability by discounting the modified contractual cash flows using the financial instruments original effective interest rate (EIR). This approach is consistent with view 1. The staff also considers the measurement of financial assets and liabilities at amortised cost. The staff indicates that the requirements of paragraph 5.4.3 of IFRS 9 which deals with the accounting for modification of contractual cash flows of financial assets, implies that the modified financial asset continues to be the same financial asset and the entity uses the original EIR to discount the cash flows. The staff believes that this applies to financial liabilities.

In summary, the staff believes that the resulting gain or loss resulting from a modification reflects the fact that changes to the contractual terms result in an increase or decrease of the gross carrying amount of the financial asset or liability. The staff agrees with view 1 which requires the entity to recognise the adjustment in profit or loss.

Staff recommendation

The staff recommends not taking this issue into the Interpretations Committee’s agenda given that the existing requirements are clear as to how to account for the transaction identified by the submitter. The staff also considered whether it would be necessary to issue an Interpretation. The staff concluded that issuing an agenda decision is more efficient. However, that conclusion is dependent on whether the Interpretation Committee agree that the Standard is sufficiently clear to address this issue.

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