Initial consideration — Agenda Paper 3

Background

This was a new issue.

The IC received a request about the effect of the consequential amendment that IFRS 9 made to paragraph 82(a) of IAS 1. That consequential amendment requires an entity to present separately in profit or loss interest revenue calculated using the effective interest method. The submitter asked whether that new requirement prohibits an entity from presenting particular cash flows from derivatives held for trading purposes as interest revenue in profit or loss (e.g. accrued and realised cash flows on an interest rate swap).

Staff analysis

The effective interest method, as defined, is only applicable to financial instruments measured at amortised cost or to financial assets measured at FVTOCI under IFRS 9.4.1.2A. It is not applicable to instruments measured at FVTPL because any resulting information would not be useful or relevant to users in understanding the cash flows of the instrument, given that the cash flows do not meet the SPPI requirement.

Accordingly, the Staff concluded that the requirement of IAS 1.82(a) does not apply to derivative instruments.

The Staff did not specifically address the submitter’s query of whether an entity would be prohibited from presenting particular cash flows from derivatives as interest revenue, or broader matters related to the presentation of ‘other’ interest amounts in profit or loss, on the grounds that the consequential amendment by IFRS 9 to IAS 1 does not affect these matters.

Staff recommendation

The Staff recommended that the IC not add this issue to its agenda on grounds that the requirements in existing Standards provide an adequate basis for an entity to apply IAS 1.82(a) to the fact pattern submitted.

Discussion

The IC agreed with the Staff’s technical analysis and agreed not to add the issue to its agenda.

The Chair explained that the Staff had intentionally limited the scope of the analysis and that the submitter had agreed to the revised scope. This was because they wanted to avoid the potentially significant implications that any broader discussion may have on existing practice.

The Chair clarified that the tentative agenda decision (TAD) will state that the IAS 1.82(a) line item must include, and include only, interest revenue calculated using the effective interest method for financial assets that are measured at amortised cost or FVTOCI under IFRS 9.4.1.2A. The TAD will be silent on all other matters. This effectively means that an entity is not precluded from disclosing interest income calculated on an EIR or other bases on other types of financial instruments, as long as they are disclosed separately from the IAS 1.82(a) line item.