The accounting for certain modifications and exchanges of financial liabilities measured at amortised cost (e.g. bank loans and issued bonds) will change on transition from IAS 39 Financial Instruments: Recognition and Measurement to IFRS 9 Financial Instruments. This change arises from a clarification by the IASB in the Basis for Conclusions of the amendments to IFRS 9 Prepayment Features with Negative Compensation issued on 12 October 2017.

The IFRS 9 accounting treatment is applicable from 1 January 2018 (the effective date of IFRS 9, or earlier if IFRS 9 is adopted early) and will need to be applied retrospectively to all affected financial liabilities that continue to be recognised on transition from IAS 39. This will result in a transition adjustment and a change to the effective interest rate for the financial liabilities affected.

In the first part of this publication we:

• give an overview of the accounting for an exchange or modification of a financial liability under both IAS 39 and IFRS 9;
• set out the process through which the accounting was clarified; and
• explain the impact of the change on transition from IAS 39 to IFRS 9 including some of the issues that may arise in practice.

The second part of this publication is a detailed illustrative example of a modification of a financial liability under IAS 39 and the effect of transitioning to IFRS 9.

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