Under the ED, certain prepayable financial assets with so-called negative compensation could be measured at amortized 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.”
- “[W]hen the entity initially recognises the financial asset, the fair value of the prepayment feature is insignificant.”
The ED also contains proposed amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards, and IFRS 7, Financial Instruments: Disclosures.
These amendments concern situations in which it is impracticable to assess whether the fair value of a prepayment feature was insignificant at initial recognition.
The amendments would become effective on January 1, 2018, to coincide with the effective date of IFRS 9. Comments on the ED are due by May 24, 2017.
For more information, see the press release and ED on the IASB’s Web site.