TLTRO III transactions (IFRS 9 and IAS 20)

Date recorded:


In its June 2021 meeting, the Committee discussed a submission asking how banks account for the European Central Bank (ECB)’s Targeted Longer-Term Refinancing Operations (TLTRO). Specifically, the submission asked whether the TLTRO III tranches are loans at a below-market interest rate which should be accounted for as a government grant. Moreover, it asked how banks calculate the applicable effective interest rate, account for changes in estimated cash flows due to the revised assessment of meeting the conditions attached to the liability and account 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.

The staff analysed the general criteria of a government grant in IAS 20 and explained that the Committee is not in a position to provide a view as to whether the TLTRO III contains a government grant because the assessment involves non-accounting questions. For the matters related to calculating the effective interest rate and estimation of future cash flows, the staff considered that they are too narrow for the Committee to consider in isolation and should be addressed as part of the Board's post-implementation review of the classification and measurement requirements of IFRS 9 ("PIR"). The Committee members generally agreed with these.

15 comment letters were received. Regarding whether this matter is in the scope of IAS 20, they largely supported the Committee’s position. However, some respondents thought that it would be helpful for the Committee to provide clearer guidance to reduce diversity in practice. For the effective interest method, the respondents provided some questions to the Committee and asked to clarify.  

Staff analysis

Regarding the applicability of IAS 20 to the TLTRO III, some respondents considered that there is a single set of specific facts available to all banks to assess whether the ECB meets the definition of ‘government’. It would help if the Committee provided clarity about how to determine which “similar bodies” are regarded as government rather than deferring to a potential standard-setting project. Also, they suggested that the Committee provide explanatory material on how to evaluate whether central programmes constitute below-market rates. However, the staff continued to be of the view that entities would need to consider a range of relevant facts and circumstances in making the judgement about whether the ECB meets the definition of government and whether the interest rate is below market. The staff is not in a position to provide a view on this. The staff considered that if entities apply their judgement appropriately, same conclusions could be reached in the same set of facts and circumstances. 

In respect of the recognition and measurement of a government grant, some respondents disagreed with a reading of IAS 20 that implies that an entity recognises a government grant only at initial recognition and suggested the agenda decision clarify whether IAS 20:10A permits the recognition of a grant at a later date when the requirements of the grant is met, especially in the case when the terms of the loan have been modified. One respondent said that the waiving of interest cash payments in the TLTRO III fact pattern that results in a reduction of the liability meets the definition of a forgivable loan in IAS 20.

The staff emphasised that IFRS 9 is the starting point for a borrowing bank to determine the accounting for TLTRO IIII transactions because the financial liability arising is in the scope of IFRS 9. If the loan is regarded as below-market interest rate, the difference (benefit) between the fair value of the financial liability at its initial recognition and its transaction price is "treated" as a government grant applying IFRS 20:10A, which is a narrow and specific requirements. Its scope is unrelated to the definition of a government grant in IAS 20:3. The benefit portion is detached from the financial liability and accounted for under IAS 20.

The staff said the waiving of interest cash payments is not considered as a forgivable loan under IAS 20:10 because it does not meet the definition of waiving the repayment of the loan. Furthermore, the staff did not agree that an entity may recognise a government grant after initial recognition because IAS 20:10A specifically refers only to the initial carrying value of the loan. If an entity assesses that there is reasonable assurance that it will comply the conditions attached to the loan, it represents a change in expected cash flows to which the subsequent measurement requirements in IFRS 9 apply. If the lender decreases the interest rate on a loan, the entity applies IFRS 9 in assessing those modifications and changes. The recognition of a government grant is only possible if the modifications are substantial and there is a benefit of recognising a below-market rate loan following the derecognition of the old financial liability.

For the application of the effective interest method, some respondents considered the whole interest rate should be a floating rate because the ECB, as a central bank, is able to reset and amend the terms unilaterally. The staff disagreed with this and continued to support the Committee's view that a borrowing rate could consist of a floating and fixed/other interest rate components, which some respondents agreed with. The staff explained that the interest rate of the TLTRO III liabilities could be characterised as a floating component, the main refinancing operations (MRO) rate, with another component, i.e. a contractually specified spread of three different bases for three periods which varies every period but the changes are not market rate changes.  

Regarding the subsequent measurement of the financial liability, most respondents were of the view that IFRS 9:B5.4.5 should be applied to the reset in interest rate by the ECB which represents a movement in market rates. A few respondents considered that IFRS 9: B5.4.6 should be applied to the revision in original estimates of conditional elements (meeting lending targets) of the interest rate. The staff disagreed that the whole interest rate on the loan could be a market floating rate without any component being seen as not part of the market floating interest rate. They were of the view that IFRS 9:B5.4.5 applies to the movement in the market rate of interest that are not specific to the entity while IFRS 9:B5.4.6 applies to the reset of the market rate for a particular instrument that reflect any other changes, i.e. entity-specific factors, in addition to general market rates.

The staff continued to agree that the matter is part of a broader matter that should be a part of the PIR of the classification and measurement requirements in FIRS 9, together with similar matters already identified.

Staff recommendation

The staff recommended finalising the agenda decision with some editorial changes.

Committee discussion

A number of Committee members had concerns on the analysis in respect of IAS 20 mainly due to the analysis on the interaction of the subsequent change in cash flows of the loans with IAS 20. They did not agree that subsequent payment of interest that is less than the MRO rate cannot be seen as a waived/forgiven government grant and that re-assessment of whether there is a forgivable loan is allowed only when there is a substantial modification of loan. They were of the view that IAS 20:10A could be applied more broadly and it did not preclude the subsequent assessment when there is change in cash flow. If both substantial and non-substantial modifications of the loan result in forgivable loans, the accounting treatment should not be different. Instead, whenever there is a subsequent change in estimated cash flows, irrespective of whether it results in a substantial or a non-substantial modification, it would trigger the assessment of whether there is a forgivable loan in which the entity would need to apply judgement. In addition, some Committee members still considered that the agenda decision should make it clearer how to determine whether the entity is a government, government agency or similar body.

Regarding the IFRS 9 aspect, the Committee members largely agreed that it should be brought into the PIR of IFRS 9. One Committee member had concerns about the "interest rate" and "interest component" analysis because these are not addressed in IFRS 9. Instead, the IFRS 9 analysis for changes in cash flow estimates is using "cash flows" which is determined by contractual terms. The Chair replied that the purpose of analysing interest rate is to determine whether the rate is "floating", in which case IFRS 9:B5.4.5 applies, or other changes in which case IFRS 9:B5.4.6 applies. The Committee member responded that the analysis using "cash flow" could give the same conclusion and is the exact term used in IFRS 9. A few other Committee members agreed with this comment and staff agreed to make editorial changes for this.

Despite the concerns raised by some Committee members, the staff still considered that there are merits in finalising the agenda decision so that further standard-setting or the PIR could proceed.

Committee decision

The Committee decided, by a majority vote of 8, to finalise the agenda decision.

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