European Central Bank’s Third Targeted Longer-Term Refinancing Operations Programme (IFRS 9)

Date recorded:


The Committee received a submission asking how banks accounts for the European Central Bank’s (ECB’s) Targeted Longer-Term Refinancing Operations Programme (TLTRO), specifically the questions are: (a) whether the TLTRO III tranches are loans at a below-market interest rate and, if so, whether the borrowing bank is required to apply IFRS 9 or IAS 20 to account for the benefit of the below-market interest rate; (b) if the bank is required to apply IAS 20 to account for the benefit of the below market interest rate: (i) how it assesses the period(s) in which it recognises the benefit of the TLTRO III transactions; and (ii) whether, for the purpose of presentation, the bank adds the amount of the benefit to the carrying amount of the TLTRO III liability; (c) how the bank calculates the applicable effective interest rate; (d) whether the bank applies IFRS 9:B5.4.6 to account for changes in estimated cash flows due to the revised assessment of meeting the conditions attached to the liability; and (e) how the bank accounts for changes in cash flows related to the prior period that result from the bank’s lending behaviour or from changes in the TLTRO III conditions determined by the ECB.

Staff analysis

The staff did not perform an outreach for the submission because they are aware that the TLTRO programmes have been prevalent in Europe since the first series of TLTROs was announced in 2014. In addition, they were already aware of the diversity in accounting treatment for such transactions. This was also confirmed by the staff’s research which included a high-level desktop review of the financial statements of some European banks.

The staff said that IFRS 9 must be the starting point for the borrowing banks to determine the accounting treatment for TLTRO III transactions because the financial liability arising from the banks’ participation in the programme is within the scope of IFRS 9. For question (a), the staff were of the view that, for the TLTRO III to contain a government grant within the scope of IAS 20, all three criteria in IAS 20 need to be met. These include (i) determining that the ECB meets the definition of government in IAS 20; (ii) the interest rate charged on it would need to be determined to be a below-market interest rate; and (iii) the transactions with ECB would need to be distinguished from the normal trading transactions of the bank. The staff considered the first two criteria are non-accounting questions and judgement is required based on specific facts and circumstances. Therefore, the Committee is not in a position to opine on whether the TLTRO III tranches contain a government grant within the scope of IAS 20. However, if the banks conclude there is a government grant after considering the three criteria, the staff believe that the requirements in IAS 20 are clear about how to account for the grant with and over which period to recognise the grant. IAS 20 would apply only to the difference between the fair value of the financial liability at initial recognition and its transaction price. Therefore, the staff did not further analyse question (b).

For question (c), it is clear from the definition of amortised cost of the financial liability at initial recognition, that it is the fair value on initial recognition plus or minus any transaction costs as required by IFRS 9:5.1.1. However, the question arises as to what to consider in estimating the "expected future cash flows", in particular whether the bank will satisfy the conditions (i.e. the lending thresholds) attached to the liability. The staff considered that this question arises in many other circumstances and they are aware of diversity in practice. They decided not to analyse the question in the fact pattern in isolation because it is part of a broader practice matter and should be considered as part of the PIR on the classification and measurement requirements in IFRS 9, together with similar matters already identified by the staff in the first phase of the PIR.

In respect of question (d) and (e), the staff analysed the application of IFRS 9:B5.4.5 and B5.4.6 which set out the accounting for changes in estimated (future) cash flows. When considering changes in cash flow estimates in a floating rate instrument, IFRS 9:B.5.4.5 applies but it is only applicable to the variable interest rate element (e.g. the element in a TLTRO III tranche relating to the banks' rate on main refinancing operations (MRO) or deposit facility (DFR)) of the liability. Accordingly, the banks can periodically adjust the contractual cash flows to reflect movements in the changes in MRO or DFR. For changes in estimated future cash flows other than those addressed in IFRS 9:B5.4.5, IFRS 9:B5.4.6 applies. If the banks estimate the final repayment cash flow in the TLTRO III liability to be different from that at initial recognition due to modification or other changes in expected cash flows, the adjustment to the carrying amount reflect this change in line with the contractual terms discounted at original effective interest rate and is recognised in profit or loss as required by IFRS 9:5.4.3 (for modification) and IFRS 9:B5.4.6 (for changes in expected cash flows). The banks therefore make no adjustments to interest recognised in prior periods because such changes do not constitute the correction of an error.

Staff recommendation

Based on the above analysis, the staff recommended not to add a standard-setting project but to publish a tentative agenda decision that explains the Committee is not in a position to provide a view as to whether the TLTRO III programme contains a government grant and the matters related to calculating the effective interest rate are too narrow for the Committee to consider in isolation and should be addressed as part of the Board's PIR of IFRS 9.  


Committee members generally agreed with the staff's analysis and the conclusion but there was a long and lively discussion on some areas and some Committee members requested edits and clarifications in the agenda decision.

Committee members agreed that the starting point of the analysis is IFRS 9 for the liability and judgement is required to determine whether there is a government grant within the scope of IAS 20 at initial recognition. However, a number of them disagreed that the questions for determining if the ECB meets the definition of government in IAS 20 and the question of whether the interest rate charged on the TLTRO III is a below-market rate are "non-accounting questions". In their view, while the answer to these questions may require the information from legal or other experts, the assessment is still accounting-related. They suggested to only mention that judgement is required in answering these questions. They agreed that the agenda decision is not the right place for such an analysis but recommended more guidance should be given in the agenda decision to answer these two questions. For the interest rate on the loan (50 basis point below main refinancing operations/deposit facility rates, depending on whether the lending threshold is met or not), one Committee member did not agree that this is a blend of variable and fixed rates because if it is available to a broad range of market participants (i.e. the EU banks), the whole rate should be a market rate.

Regarding the determination of the initial effective interest rate and the subsequent estimation of cash flows, Committee members were generally in agreement that these are complicated matters and should be part of a broader scope of work by the Board. Only one Committee member considered these had already been addressed by IFRS 9.B5.4.6-7 after considering IAS 39:AG7 when developing IFRS 9.

For the subsequent re-pricing of the loan (as a result of meeting or not meeting the lending threshold), one Committee member considered it not a change of cash flows under IFRS 9 but as forgiving interest to be paid to the government. However, other Committee members were of the opposite view that the repricing of loans is not a forgiveness of the loan by the government under IAS 20 but changes in cash flows for which IFRS 9:B5.4.6 applies. They suggested adding analysis for this. The staff responded that after the determination that there is a government grant, there are two separate units of account: one is the grant liability arising from IAS 20 and one is the loan under IFRS 9. For the grant liability, the bank should determine if there is reasonable assurance that it will comply with the conditions attached to the grant, the liability may be revised if the bank considers that there is no reasonable assurance that it can comply with the conditions. For the liability under IFRS 9, paragraph B5.4.6 should be applied for the changes in cash flows other than those arising from a change in variable rate.

Some Committee members commented that the subsequent assessment of whether there is a government grant throughout the life of the grant is missing. They said if there is repricing of the loan and it results in substantial derecognition of the original loan and recognition of a new liability, the entity would need to apply IAS 20 again on the new liability recognised. If the repricing/modification of the liability is not substantial, it is not clear how it is assessed. They requested clarification and analysis of this aspect.

A few Committee members reminded the staff that the agenda decision should add the disclosure requirements for the judgement applied under IAS 1 when there is a modification gain/loss resulting from the repricing/modification of the loan.

The Committee decided, by a majority vote, not to add the matter to the standard-setting agenda. Also, by a vote of 9:5, the Committee members agreed with the suggested edits to the tentative agenda decision.

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