This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IFRS 9 and IAS 1 — Presentation of interest revenue

Date recorded:

Presentation of interest revenue for particular financial instruments (Agenda Paper 3)

Background

At its November 2017 the Committee discussed a request about the effect of the consequential amendment that IFRS 9 made to IAS 1.82(a). That consequential amendment requires an entity to present separately in profit or loss interest revenue calculated using the effective interest method. The submitter asked whether that new requirement prohibits an entity from presenting particular cash flows from derivatives held for trading purposes as interest revenue in profit or loss (e.g. accrued and realised cash flows on an interest rate swap).

The Committee decided not to add the issue to its agenda, which states that the IAS 1.82(a) line item must include, and include only, interest revenue calculated using the effective interest method for financial assets that are measured at amortised cost or FVTOCI in accordance with IFRS 9.4.1.2A. A tentative Agenda Decision was published. At this meeting the staff are presenting an analysis of the comments received.

Staff analysis

Seven comment letters were received.

Some respondents expressed concerns about the scope of the agenda decision, and that the tentative decision does not effectively address the submitter’s question because it does not address whether ‘interest’ income and expense from ‘trading derivatives’ can be  presented separately from other fair value gains and losses. One respondent thinks the Committee went beyond the scope of the request by addressing how the requirement in IAS 1.82(a) applies to instruments other than ‘trading derivatives’.

The staff note that Agenda Paper 3 for the November 2017 Committee meeting explained the scope of the staff analysis and recommendation, and highlighted that scope during the meeting including acknowledging that the agenda paper intentionally addressed only the consequential amendment that IFRS 9 made to IAS 1.82(a). The staff continue to think that the agenda decision should address only the consequential amendment that IFRS 9 made to IAS 1.82(a).

The Committee concluded that the requirement in IAS 1.82(a) applies only to those financial assets that are subsequently measured at amortised cost or FVOCI. One respondent does not agree with that conclusion, providing several reasons for their view. They state that IFRS 7.B5(e) requires an entity to disclose whether net gains or net losses on financial instruments measured at FVPL include interest or dividend income, which suggests that it is acceptable to present interest revenue for financial assets measured at FVPL. The respondent also says that, while an entity is required to apply the EIM to financial assets measured at amortised cost and FVOCI, neither IFRS 9 nor IAS 1 precludes the entity from using that methodology to calculate and present interest on particular non-derivative financial assets measured at FVPL. Other respondents say that there is no conceptual reason to prohibit entities from presenting interest amounts on particular financial assets measured at FVPL (such as ‘simple’ financial assets that do not meet the SPPI condition) as ‘interest revenue calculated using the effective interest method’ as long as those interest amounts can be calculated.

In response, the staff note that at its November 2017 meeting, the Committee observed that the EIM is an integral part of amortised cost accounting. IFRS 9 prescribes which financial assets are subject to amortised cost accounting. Specifically, amortised cost accounting, including interest revenue calculated using the effective interest method and credit losses calculated using the expected credit loss impairment model, is applied only to financial assets that are subsequently measured at amortised cost or FVOCI. In contrast, amortised cost accounting is not applied to financial assets that are subsequently measured at FVPL.

Consequently, the Committee concluded that the requirement to present separately an interest revenue line item calculated using the EIM, which was added to IAS 1.82(a) as part of the Board’s deliberations on amortised cost measurement and impairment methodology, applies only to those assets that are subsequently measured at amortised cost or FVOCI.

The staff continue to agree with the Committee’s conclusion.

The staff think the comments in relation to IFRS 7.B5(e) imply a disconnect between what is presented as interest revenue from applying IAS 1.82(a) and what is disclosed or presented applying IFRS 7. However, the staff think those paragraphs address different matters—IFRS 7.B5(e) applies to ‘interest income’ on financial assets that are subsequently measured at FVPL whereas the presentation requirement added IAS 1.82(a) applies to ‘interest revenue calculated using the effective interest method’.

The staff think the tentative agenda decision does not affect the presentation, or calculation, of those amounts except for concluding that they cannot be included in the interest revenue line item required by paragraph 82(a) of IAS 1.

Some respondents suggested there might be an inconsistency between IFRS 7.20(b) which requires an entity to present interest revenue calculated using the EIM either in the statement of comprehensive income or in the notes and IAS 1.82(a) which requires an entity to present such amounts in the statement of comprehensive income. Those respondents think that the requirement in IFRS 7 should take precedence over the requirement in IAS 1 so that entities have the choice to present that information either in the statement of comprehensive income or in the notes.

The staff think that the IAS 1 and IFRS 7 requirements are complementary, rather than inconsistent. Specifically, IFRS 7 requires further disaggregation of the interest revenue information required by IAS 1 and that the disaggregation can either be disclosed in the notes or presented in the statement of comprehensive income.

Two specific suggestions were received in relation to the wording of the tentative decision—to change ‘subject to any effect…’ with ‘including any effect…’and to modify the words to avoid implying that a separate line item is required (separate presentation could be achieved in other ways, such as parenthetically to a broader revenue line item). The staff recommend no changes to the wording.

Staff recommendation

The staff recommended that the Committee finalise the Agenda Decision, on the grounds that the principles and requirements in IFRS Standards provide an adequate basis for an entity to apply paragraph 82(a) of IAS 1 and present separately, in the profit or loss section of the statement of comprehensive income or in the statement of profit or loss, interest revenue calculated using the effective interest method.

Discussion

The staff explained that they had a call with some respondents about their concerns about the presentation of interest. The discussion included a suggestion that the Board could consider the presentation of interest by financial institutions in the Primary Financial Statements project or in the dynamic risk management project. The staff will relay that to the Board as part of the public debrief. 

Some concerns were expressed about the diversity in practice as to what is shown in interest income, particularly in relation to trading derivatives. 

The Chair re-emphasised that the proposed agenda decision was more modest than the initial question asked for, but this was to be less disruptive.

Members were prepared to move ahead. Some expressed frustration that the analysis and proposed decision are so narrow but accepted that they can only interpret IAS 1.82(a). Any more fundamental changes are a matter for the Board.

The Committee decided (11:3) to finalise the decision not to add the issue to its agenda.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.