Post-implementation Review of IFRS 9 — Classification and Measurement

Date recorded:

Modifications of financial assets and financial liabilities (Agenda Paper 3A)

In September 2021, the IASB published Request for Information (RFI) Post-implementation Review—IFRS 9 Financial Instruments—Classification and Measurement. At this meeting, the IASB will discuss the feedback on the accounting for modifications of financial assets and financial liabilities. The staff will also provide preliminary views in relation to the key application challenges identified.

Most respondents provided feedback on this topic and noted that this is one of the areas for which, in practice, most questions arise. The feedback from the respondents was that IFRS 9 could benefit from clarification and additional application guidance.

With regards to financial assets, respondents attributed the practice questions and differences in application to the fact that there is no underlying principle to determine when a modification results in derecognition. Respondents generally agreed that there are less application issues regarding the guidance for derecognition of financial liabilities.

The staff note that all of the feedback on modifications of financial assets and financial liabilities relates to application questions that have not only arisen in practice since IFRS 9 was issued but have a longer history. IFRS 9 did not introduce new requirements on modification of financial instruments. The PIR has confirmed the need for standard-setting to clarify the requirements in IFRS 9 to enable the requirements to be applied in a more consistent manner.

If the IASB decides to undertake standard-setting in this area, the staff think that the IASB could consider the following areas for clarification:

  • What constitutes a modification including the interaction of (or the boundary between) modification and expiry the rights of cash flows
  • The sequence or hierarchy of modifications and expiry to the rights of cash flows
  • Treatment of fees and costs as a result of modifying the original contract

The staff asked the IASB if they have any questions or comments.

IASB discussion

The staff reiterated that this paper explains that the staff believes the issues identified from the PIR in relation to modification of financial assets and financial liabilities can only be resolved with standard-setting.

Overall, the IASB agreed with the staff that standard-setting should be performed in this area. When the IFRS 9 classification and measurement requirements were developed it was done as a matter of urgency and not all issues in IAS 39 were revisited.

However, the IASB noted that this project could become fairly big and the staff should be selective with the issues they focus on. The IASB requested regular touch points throughout the project, so they can decide whether to continue with this project based on cost versus benefit, size of the project and how disruptive any changes would be.

One IASB member raised a query as to why the IASB has not heard more from users on this issue. The IASB and the staff discussed this, and it was concluded that the judgement is made by the company and the users only see the decisions of the entity. There is no transparency of the judgement made by the entity in the accounts.

The IASB are aware that there is an interaction between modification and impairment and therefore it would be important to wait for the feedback on the PIR of the IFRS 9 impairment requirements.

Amortised cost measurement and the effective interest method (Agenda Paper 3B)

At this meeting, the IASB will discuss the feedback on amortised cost measurements and the effective interest method.

Most respondents to the RFI agreed that amortised cost provides useful information to users of financial statements about the amount, timing and uncertainty of future cash flows. However, most respondents also noted that the effective interest method is an area that gives rise to many questions in practice and for which the IASB could make helpful clarifications and provide additional application guidance.

Respondents noted two application issues:

  • How to reflect in the effective interest rate conditions attached to the contractual interest rate
  • How to account for subsequent changes in estimates of future cash flows

If the IASB decides to undertake standard-setting in this area, the staff think the IASB should consider the following areas for clarification:

  • The term ‘market rates of interest’ in paragraph B5.4.5 of IFRS 9 and what interest rates or market-based variables of the contractual interest rates it relates to
  • The term ‘floating rate’ in paragraph B5.4.5 of IFRS 9 and the interaction with the term ‘market rates of interest’
  • The treatment of conditionality attached to the contractual interest rate and how this conditionality affects the cash flow estimate for the purposes of calculating the effective interest rate
  • The effect modifications have on determining the EIR

The staff asked the IASB if they have any questions or comments.

IASB discussion

IASB members agreed with the staff recommendation. IASB members noted that the terminology used in paragraphs B5.4.5 and B5.4.6 of IFRS 9 should be explained regardless of whether any other work is performed, as it is difficult to understand.

IASB members noted that the guidance for floating rate debt is being applied to a wider range of circumstance than the IASB expected when the requirements were developed and this should be considered as part of the project.

Modification of financial assets and financial liabilities and amortised cost measurement and the effective interest method—prioritising PIR findings (Agenda Paper 3C)

After the IASB discussed Agenda Papers 3A and 3B, the IASB was asked to decide whether and when to take further action to make those clarifications. This paper reminded the IASB of the two-step process to addressing PIR findings, the staff assessment and recommendation.

The staff recommended that the IASB categorise findings related to clarifying the requirements of IFRS 9 in relation to modification of financial assets and financial liabilities and the application of the effective interest method as a medium priority. Any decision on starting standard-setting project needs to consider any potential finding of the PIR of IFRS 9 impairment requirements.

Staff recommendation

Based on the analysis in this paper, the staff recommended the IASB adds a project to its research pipeline to explore potential clarification of the requirements for assessing modification of financial assets and financial liabilities and the application of the effective interest method.

IASB discussion

An IASB member asked why the project goes to the research pipeline and not directly to standard-setting. The staff noted that due to the interaction of these topics with impairment, it will be in the research pipeline whilst waiting for the feedback on the PIR on impairment.

The Chair asked why it was medium priority. The staff noted that it is medium priority as it is not as urgent compared to other project such as ESG-linked loans and it is also waiting on feedback from the PIR of IFRS 9 Impairment.

The IASB asked the staff to deploy capacity wisely as there are a number of financial instrument projects currently taking place.

IASB decision

All IASB members voted in favour of the staff recommendation to add these topics to the research pipeline.

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