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IFRS 9 — Modifications and exchanges of financial liabilities

Date recorded:

The IC received 13 comment letters. The major comments raised were as follows:

Applying IFRS 9.B5.4.6 to modifications and exchanges of financial liabilities

Some respondents disagreed with applying IFRS 9.B5.4.6 to a modification of a financial liability that did not result in derecognition. They believe that this paragraph applies to a revision of the estimated cash flows according to the original (unmodified) contractual terms of a financial instrument, which is different in nature from an exchange or modification of a financial instrument. Consequently, they believe that there are grounds to account for these two types of changes differently.

Other respondents noted that when the modification is as a result of a change in the interest rate charged, applying paragraph B5.4.6 would not represent the substance of the transaction. These respondents generally believe that such a change in interest rate would be more faithfully represented by the recognition of an increased or decreased interest expense over the remaining life of the financial liability, rather than by the recognition of a gain or loss at the time of the modification and continued recognition of interest expense at the original EIR.

The Staff believe that the key to addressing these concerns is an acknowledgement of the fact that a modified financial liability that is not derecognised is regarded as a continuation of the original liability. Accordingly, as concluded by the IC in its November 2016 meeting, one should not distinguish between a change in cash flows arising from a revision of estimates and a change in cash flows arising from a modification. In other words, IFRS 9.B5.4.6 should be applied in both cases.

The treatment of modified cash flows versus costs and fees incurred

Some respondents pointed out that there is a conflict between the requirements of paragraphs B5.4.6 and B3.3.6 of IFRS 9. The latter paragraph requires that if a modified financial liability is not derecognised, any costs or fees incurred should be adjusted to the carrying amount of the liability and be amortised over the remaining term of the modified liability. In other words, on the date of modification, no loss is recognised for costs or fees incurred, whereas a gain/loss is recognised for modifications to the future contractual cash flows. These respondents were concerned that such a difference would allow for structuring opportunities, i.e. characterising costs or fees as modifications to the future contractual cash flows or vice versa to achieve a desired impact to profit or loss on the date of modification.

The Staff acknowledge these concerns. However, they believe that this issue is beyond the scope of the original submission and should not be dealt with in the agenda decision.

Symmetry of accounting for modified financial assets and modified financial liabilities

The tentative agenda decision stated that the proposed accounting treatment for modified financial liabilities is consistent with the requirements for modifications of financial assets that do not result in derecognition.

A few respondents thought it not meaningful to draw such a comparison because the accounting for financial assets and liabilities are not symmetrical in many aspects. A lack of symmetry does not mean that the respective accounting treatments are inappropriate; just as symmetry does not necessarily mean that the respective accounting treatments are appropriate.

The Staff noted that the comparison was made because the definition of amortised cost and the application of the effective interest method apply equally to financial assets and financial liabilities. IFRS treats a modified financial asset that is not derecognised as a continuation of the original asset and requires such a modified financial asset to be accounted for using the original EIR. The IC previously concluded that this is a principle that underlies amortised cost measurement. Accordingly, this principle is equally applicable to modified financial assets and modified financial liabilities that are measured at amortised cost.

The Staff believe that the comparison should be retained in the agenda decision to highlight the underlying principle.


Some respondents suggested that specific transition provisions be provided for this issue because retrospective application may be complex, and that the existing transition provisions in s7.2 of IFRS 9 may not be applicable in practice.

The Staff note that the practical challenges of retrospective application is not limited to only this aspect of IFRS 9.  They also see no compelling reason to provide specific transition requirements for only this aspect of the classification and measurement requirements of IFRS 9.

Derecognition when the ‘10 per cent’ test is not breached

A couple of respondents asked the IC to clarify whether the assessment of what constitutes a ‘substantial modification’ and ‘substantially different terms’ for the purpose of derecognising a financial liability requires only a quantitative assessment or whether qualitative factors should also be considered.

The Staff acknowledge that there are differing views in practice, but considered that the issue is beyond the scope of the original submission and should not be addressed in the agenda decision.

An agenda decision as a mechanism to address the issue submitted

Many respondents were concerned about communicating the IC’s conclusion through an agenda decision, rather than through an Interpretation or an amendment to IFRS 9. However, the respondents did not provide any new information about the need for standard-setting beyond what has already been considered by the IC when reaching its conclusion. As such, the Staff do not propose any change to the tentative agenda decision in this regard.

Staff recommendations

The Staff recommend that the IC finalise the agenda decision. In addition, they recommend that the agenda decision be supported by other materials to highlight the relevant accounting requirements.


The IC did not approve finalising the agenda decision. Only five out of 13 members voted in favour of it.

Many members were troubled by the large number of comment letters received which did not support the tentative agenda decision. Two issues stood out from the feedback received: (1) the structuring opportunities presented by the different treatment of transaction costs and modified cash flows, and (2) the lack of transition relief. Another IC member was worried that there might be unintended consequences that neither the IC nor the Board has considered if the IC pushed ahead with finalising the agenda decision.

The Staff and the IC Chairlady held their ground and noted that the respondents did not raise any new issues that the IC had not considered when reaching its tentative agenda decision. The Chairlady also reminded the IC that the Board had looked at this issue and concluded that the requirements in IFRS 9 clearly supported the Staff’s technical conclusion. Furthermore, on the issue of transaction costs versus modified cash flows, the Staff noted that this issue exists under IAS 39, entities have handled it and it has not been raised to the IC thus far.

With regard to unintended consequences, the Staff pointed out that the proposed accounting treatment for a modified financial liability is the same as that for a modified financial asset, and the accounting for a modified financial asset had been debated by the Board and the ITG, and the ramifications were comprehensively considered during the development of IFRS 9. As such, the risk of unintended consequences for treating a modified financial liability in the same way is low. One IC member also stated that there is no point sending the issue back to the Board which would only delay the inevitable.

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