Amortised Cost Measurement

The meeting tackled two topics: 

• determining the effective interest rate (EIR) at initial recognition; 
• accounting for subsequent changes to cash flows on the instrument. 

Determining the EIR at initial recognition of an instrument 

The IASB examined the issue of determining the effective interest rate (EIR) at initial recognition of financial instruments with specific contractual features (such as ESG-linked targets or changes in operational performance indicators). 

The staff analysis concludes that IFRS 9 is sufficiently clear: all contractual terms and conditions must be considered, except in rare cases when it is not possible to reliably estimate cash flows. In practice, feedback received by the IASB indicates that entities, by analogy with the provisions of IAS 37.39-40 and IFRIC 23.11, use either a weighted probability method or a most likely outcome method, and use judgement to determine the most appropriate method based on specific facts and circumstances.  

Consequently, the IASB has tentatively decided to take no further action on this matter. 

Impact of changes to estimated cash flows over the life of an instrument 

The IASB also discussed paragraphs B5.4.5 and B5.4.6 of IFRS 9 relating to changes in estimated cash flows over the life of the instrument. 

Readers will recall that the application of paragraph B5.4.5 generally leads to a re-estimation of the EIR without changing the carrying amount, whereas paragraph B5.4.6 leads to a change in this amount against the income statement and leaves the EIR unchanged (the ‘catch-up’ approach). 

The staff explored three approaches to clarify the scope of paragraphs B5.4.5 and B5.4.6. These consisted of applying B5.4.5: 

• solely to changes in market variables (such as the benchmark interest rate or inflation rate); 
• to any market changes, including borrowerspecific components (credit spread), allowing the contractual rate to be aligned with the market rate; or 
• to any changes in a contractual interest rate that result from contractually specified variables, including non-market changes (e.g. ESG clauses, predetermined credit spread adjustments). 

No decisions have been taken at this stage. The IASB will continue its deliberations in the coming months to assess the operational impacts and relevance of the information produced when applying each of these methods.