The Board's consideration of this matter were triggered by a submission to the IFRS Interpretations Committee. The Committee noted that under IFRS 9 Financial Instruments certain prepayment options would preclude instruments that otherwise only feature contractual cash flows that are solely payments of principal and interest from being measured at amortised cost or fair value through other comprehensive income. Problematic in this case are prepayment features where the lender could be forced to accept a prepayment amount that is substantially less than unpaid amounts of principal and interest because this would constitute a payment to the borrower by the lender and not a compensation from the borrower to the lender. The Interpretations Committee was convinced that using amortised cost measurement could provide useful information in this case and asked the Board to consider adding a narrow-scope exception to IFRS 9.
The Board followed the Interpretations Committee's reasoning and therefore ED/2017/3 Prepayment Features with Negative Compensation (Proposed amendments to IFRS 9) proposes a narrow exception to IFRS 9 for particular financial assets that would otherwise have contractual cash flows that are solely payments of principal and interest but do not qualify for amortised cost or fair value through other comprehensive income measurement as a result of a prepayment feature.
The Board proposes that such a financial asset would be eligible to be measured at amortised cost or at fair value through other comprehensive income (depending on a company's business model) if two conditions are met:
- the assessment that the prepayment amount is not solely a payment of principal and interest on the principal amount outstanding only hinges on the fact that the party that chooses to terminate the contract early may receive reasonable additional compensation for doing so; and
- when the entity initially recognises the financial asset, the fair value of the prepayment feature is insignificant.
The ED also contains proposed amendments to IFRS 7 and IFRS 1 for cases where it is impracticable to assess whether the fair value of a prepayment feature was insignificant at initial recognition.
Effective date and transition requirements
The proposed effective date of the amendments is 1 January 2018 (to coincide with the effective date of IFRS 9). The exception would be applied retrospectively, however, certain relief is granted if at the date of initial application it is impracticable for an entity to assess whether the fair value of a prepayment feature was insignificant at initial recognition of the financial asset.
The IASB argues that the matter is narrow in scope and urgent and has therefore set a comment period of 30 days instead of the standard minimum period of 120 days. Consequently, comments on the ED are requested by 24 May 2017.
In order to meet the intended effective date of 1 January 2018, the Board follows a very tight project timeline. After the end of the comment period in May, the Board intends to redeliberate the issue in June and July 2017 and (if it decides to proceed with the proposed amendments) issue a final amendment by the end of October 2017.
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