Amortised Cost Measurement project

Its two aims in the discussion were to:  

• clarify the definition of “modification”  
• better explain the relationship between the modification of a financial instrument and its derecognition. 

Clarifying the concept of modification of a financial instrument 

Analysis of the feedback received from the Post implementation Review (PiR) of IFRS 9 and the 2025 consultations showed the need to1: 

• standardise terminology for modifications of financial assets (currently “modification of contractual cash flows” – IFRS 9 5.4.3) and modifications of financial liabilities (currently “modification of the terms” – IFRS 9 3.3.2); 
• exclude from the scope modifications of cash flows resulting from clauses incorporated in the contract from the outset (e.g. those resulting from triggering of covenants), which are covered by the rules on changes in estimates (IFRS 9 B5.4.6); 
• take account of the fact that a modification of the contractual terms (e.g. adding a guarantee or waiving a covenant) does not necessarily imply a modification of the cash flows, so would not necessarily be classified as a “modification” in accounting terms; 
• not simply reproduce the approach used in the August 2020 amendments to IFRS 9 relating to interest rate benchmark reform, which focused on the substance rather than the form of the change.  

In this context, the IASB tentatively decided to clarify that a modification of a financial asset or a financial liability constitutes a change in contractual terms that changes the nature, timing, amounts or uncertainty of contractual cash flows. 

Relationship between modification and derecognition of a financial instrument 

Analysis of the feedback received from the PiR of IFRS 9 and the consultations carried out in 2025 showed broad diversity in practice, and consequently a need to: 

• for financial assets: define what constitutes a “substantial” modification resulting in derecognition, as opposed to a modification that is not substantial, which is treated similarly to a change in estimates (IFRS 9 5.4.3), with the modification gain or loss recognised in profit or loss; 
• for financial liabilities: clarify to what extent a qualitative approach may be used, in addition to the quantitative “10 per cent test” (IFRS 9 B3.3.6), to determine whether a modification of a financial liability is substantial and should result in derecognition. 

In this context, the IASB tentatively decided to: 

• clarify that a substantial modification of a financial asset (or part of a financial asset) results in derecognition of the asset and recognition of a new financial asset. This clarification could, for example, be incorporated into the section of the standard that deals with derecognition of financial assets (IFRS 9 3.2)1; 
• propose a principles-based approach to assessing whether a modification of a financial asset or a financial liability is substantial and results in derecognition. 

This could be a sequential approach1, with first a qualitative assessment of the modification based on the economic substance of the changes affecting contractual cash flows. If this is not determinative, a quantitative assessment would then be carried out. 

A qualitative assessment could, for example, take account of a change in currency, counterparty, or failure to meet the SPPI test (solely payments of principal and interest). For loans specifically, it could also take account of the purpose of the modification, e.g. whether its goal is to maximise collection of cash flows during a period of financial difficulty for the lender, or to maintain a customer relationship by renegotiating terms to bring the loan back into line with the market. 

The quantitative assessment could extend the “10 per cent test” to financial assets, specifying that any write-off should be accounted for first. A version of this approach could be used for specific types of instrument, such as renewable credit facilities. 

These decisions suggest that the new approach could impact entities that currently use a purely quantitative assessment to determine whether modifications of financial liabilities are substantial.