IASB asked to consider adding a limited-scope project on IFRS 9 to its agenda
05 Dec 2016
A paper for the upcoming IASB meeting dealing with IFRS 9, symmetric ‘make whole’ and fair value prepayment options, and the assessment of the SPPI criterion has been posted to the IASB's website.
The issue arose from a submission to the IFRS Interpretations Committee related to whether a debt instrument with a symmetric make whole prepayment option or a fair value prepayment option could meet the ‘solely payments of principal and interest on the principal amount’ (SPPI) criterion for measurement at amortised cost under IFRS 9. The IFRS IC discussed the issue at its November 2016 meeting where the majority of members concluded that the prepayment options described in the submission do not meet the requirements in IFRS 9.B4.1.11(b) which states:
Contractual provisions that permit the issuer or holder to extend the contractual term of a debt instrument (ie an extension option) result in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding only if:
(a) [...]; and
(b) the terms of the extension option result in contractual cash flows during the extension period that are solely payments of principal and interest on the principal amount outstanding.
As a consequence the IFRS IC concluded that the IASB should consider changing the requirements in IFRS 9 in this respect (taking into account the broader range of prepayment options that exist in practice and not only the options described in the submission) as well as the measurement basis that would provide the most relevant and useful information about particular financial assets that would otherwise meet the SPPI condition, but fail it because of the existence of a symmetric ‘make whole’ prepayment option. Nevertheless, the IFRS IC Chairman cautioned against the extent of the expectation that the Committee should have on how far the Board would take the issue given past decisions on similar issues.
The staff has now prepared a paper for the upcoming IASB meeting detailing the background to the issue, the staff analysis and conclusion, the feedback from the Interpretations Committee, and the original submission received. The staff recommendation is that the Board considers adding a limited-scope project on this issue to its agenda. The Board will discuss this recommendation on 13 December 2016.
Please click to access the staff paper on the IASB website.