Post-implementation review (PIR) of IFRS 9 — Classification and measurement

Date recorded:

Cover note (Agenda Paper 3)

The IASB is undertaking a PIR of IFRS 9 and has started its review of IFRS 9 by looking at the classification and measurement approach. In September 2021, the IASB published a Request for Information (RFI).

At this meeting, the IASB discussed feedback on the first topic, which is assessing a financial asset’s contractual cash flow characteristics.

Contractual cash flow characteristics (Agenda Paper 3A)

This paper presented a reminder of the IFRS 9 requirements for assessing contractual cash flows characteristics, a summary of general feedback and staff analysis of that feedback, and a summary of specific feedback including application questions.

Summary of general feedback

Most respondents shared the view that generally the contractual cash flow characteristics assessment works as intended. The staff noted that the general feedback on the IFRS 9 requirements for assessing a financial asset’s contractual cash flow characteristics is overall positive and is consistent with past feedback considered by the IASB.

Some of these respondents expressed agreement with the IASB that it is appropriate to measure at FVTPL financial assets that do not have SPPI cash flows because fair value provides the most useful information.

A few respondents questioned whether measuring an entire financial asset at FVTPL provides the most useful information when the asset is ‘held-to-collect’ and generally has SPPI cash flows except for one minor feature that results in the contractual cash flows not being SPPI. The staff noted that features that are ‘minor’ should not impact the SPPI assessment, according to the concept of ‘de minimis’.

A few of those respondents expressed the view that bifurcating such features (similar to previous IAS 39 requirements) could provide more useful information. The staff note that this view conflicts with the view of other stakeholders that strongly supported to removal of bifurcation for financial assets.

Summary of specific feedback

The majority of specific feedback related to two topics: ESG-linked features and contractually-linked instruments (CLIs) (presented in agenda papers 3B and 3C). In the staff view, the significant volume of feedback and nature of application questions relating to the two main feedback, indicates that standard-setting rather than interpretation could be needed in these areas.

The staff analyse six other application questions raised by respondents and recommended:

  • Whether a financial asset has non-recourse features: Consider with PIR analysis of CLIs because the questions are connected (see Agenda Paper 3C)
  • Whether an entity needs to consider the cash flows arising from bail-in legislation: Consider within the FICE project as the topic is similar to the IASB’s recent tentative decisions in the FICE project
  • Whether interest rates that are contractually adjusted for inflation introduce leverage: Consider whether this question could meet the criteria of the IFRS Interpretations Committee
  • Whether a leverage factor imposed by the government are considered regulated interest rates: Consider whether this question could meet the criteria of the IFRS Interpretations Committee
  • Whether a prepayment feature includes reasonable compensation for the early termination: No further action as this was part of the 2017 Prepayment Features with Negative Compensation project
  • Whether particular types of interest rates include a modified time value of money element: No further action as it was part of the 2020 IBOR Reform—Phase 2 project.

IASB discussion

IASB members are overall supportive of the staff suggestions related to the application questions. Two IASB members questioned the recommendation to submit the two topics indicated above to the Interpretations Committee. They thought that the topics are too generic and recalled feedback related to it in previous projects. The staff clarified that the recommendation is not to submit the topic as questions, but instead consult with Committee members to understand how widespread those issues are. One IASB member asked the staff to comment on those topics for which the practice is settled. The staff clarified that no outreach has been performed, but they rely on information obtained from stakeholders in subsequent discussions.

Contractual cash flow characteristics—ESG-linked features (Agenda Paper 3B)

This paper provided a summary of the feedback and preliminary staff analysis on applying the contractual cash flow characteristics assessment in IFRS 9 to financial assets with features linked to environmental, social or governance (ESG) targets.

This paper specifically analysed what is considered to be ‘interest’ in the SPPI cash flows and how to assess contractual terms that change the timing or amount of contractual cash flows.

Summary of feedback

Financial assets with contractual cash flows with ESG-linked features

Most respondents provided feedback about accounting for a particular type of financial assets with ESG-linked interest rates. These financial assets typically provide general funding to a borrower, but have a contractual interest rate that is adjusted depending on the borrower achieving pre-determined ESG targets that are specific to the borrower.

Some respondents raised concerns that if entities were required to measure loans with ESG-linked features at FVTPL this could discourage investments in such financial instruments as this would lead to volatility in profit or loss.

Pervasive comments received in response to the RFI

  • Most respondents shared the view that there is not enough application guidance in IFRS 9 to assess whether the contractual cash flows of financial assets with ESG-linked features are SPPI
  • Many respondents asked the IASB to permit such financial assets to be measured at amortised cost. Most of these respondents said that amortised cost provides more useful information about the future cash flows on these financial instruments compared to fair value
  • Many respondents made suggested possible amendments to IFRS 9 to support entities in applying the requirements to financial assets with ESG-linked features. They include:
    • Enhancing the description of ‘interest’ and ‘basic lending arrangement’ to comprise at least some ESG-linked features
    • Allowing measurement of financial assets at amortised if the ESG-linked feature is a non-financial variable specific to a party to the contract
    • Adding specific requirements similar to the requirements with respect to regulated interest rate
    • Adding specific requirements similar to those on modified time value of money, which include qualitative and quantitative assessments

Staff analysis and preliminary views

The staff think IFRS 9 can be clarified by adding application guidance to support the consistent application of the SPPI condition. To ensure the maximum benefit to be gained for the lowest cost, the staff is of the view that any clarifications should not be specific only to ESG-linked features, but principle-based and robust enough to be applied to other types of financial instruments that may emerge in the future. Therefore, the staff think the IASB could consider:

  • Adding application guidance with respect to the characteristics of a basic lending arrangement and its link to amortised cost measurement
  • Clarifying how to assess whether variability arising from contractual terms that change the timing or amount of contractual cash flows are consistent with SPPI
  • Considering how the disclosure objectives and principles in IFRS 7 would apply to financial assets with ESG-linked features, including information about an entity’s exposure to risks arising from such features and how an entity manages such risks

The staff agree with respondents that this matter is a priority. The market for this type of financial instruments is growing rapidly globally. The staff therefore think there is a benefit of providing clarity as soon as possible before diverse practice becomes embedded.

IASB discussion

IASB members were overall supportive to the staff proposal to clarify and expand the IFRS 9 application guidance rather than make fundamental changes to the SPPI principles. IASB members understood that no fundamental changes to the principles should be made and no exception for ESG features would be created. Instead, the issue around ESG features should be addressed by clarifying the SPPI principles. One IASB member, whilst agreeing with the staff proposition in general, was not supportive of the idea of addressing specifically ESG features and creating exceptions to the SPPI principles. In his view, the ESG feature may be used as an example. Another IASB member conditionally agreed with the staff analysis but would like to understand what would be the proposition in a scenario where the majority of the Instruments fail SPPI. The staff clarified that the proposition is that the cash flows should be assessed according to the SPPI principles, regardless of whether the instrument has an ESG label or not, and that no changes to or exceptions from the SPPI principles would be suggested.

Contractual cash flow characteristics— assessment — Contractually-linked instruments (Agenda Paper 3C)

This paper provided a summary of the feedback and preliminary staff analysis on applying the contractual cash flow characteristics assessment in IFRS 9 to CLIs.

Feedback summary

Respondents requested that the IASB clarify the scope of the CLI requirements. They said that there are diverse interpretations of the meaning of particular terms used to describe the scope such as “multiple”, “tranche”, and “issuer”.

Respondents questioned whether, and to what extent, the substance of the contractual arrangements must be considered as opposed to the financial instruments’ legal form.

In the staff view, the key defining characteristics of a CLI is the creation of credit concentrations. The description of a CLI as currently drafted is consistent with this notion but there is room for further clarification given the questions raised by stakeholders. The IASB could clarify the key characteristics of a CLI to clarify for what types of contractual arrangements the requirements were intended.

Staff analysis

In the staff view, providing clarity as requested by respondents in this area would most effectively be done through standard-setting. The staff think that the IASB could make clarification to the CLI requirements without disrupting practice on other general SPPI requirements.

If the IASB decides to undertake standard-setting in this area, the staff think the IASB could consider whether and how the scope of the requirements and application guidance for non-recourse financial assets and CLIs can be clarified.

IASB discussion

Similarly to Agenda Paper 3B, IASB members were supportive of the staff proposition to clarify the CLI guidance, and to focus that clarification on the scope and objective rather than make fundamental changes to the SPPI principles. One IASB member highlighted a point on “feature of an instrument versus types of instruments” to address the feedback related to non-recourse, and recommended assessing whether this topic needs further clarification. Another IASB member recommended that the staff pay attention to the fact that adding clarifications for specific topics, such as CLI, bears the risk of creating multiple issues. These two IASB members agreed that no exemption should be made for senior tranches. Another IASB member questioned the number of issues raised on scope and whether the staff is proposing to address all of them. The staff replied that clarifying the scope would implicitly resolve some of them.

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