Amortised cost measurement project

As a reminder, the IASB had tentatively decided to propose a principles-based approach to assessing whether a modification of a financial asset or a financial liability is substantial and results in derecognition. 

After consulting the Financial Instruments Consultative Group (FICG) on this approach, the IASB tentatively decided that: 

• an entity would determine whether a modification of a financial instrument is substantial based on a holistic analysis of the changes in the contractual cash flows. The entity would consider qualitative and quantitative factors as part of this analysis. The ‘10 per cent test’ as described in paragraph B3.3.6 of IFRS 9 could supplement the analysis but would not be the decisive factor in isolation; 
• key factors that would suggest a modification is substantial include: 
  • a change in the currency in which principal or interest is denominated; 
  • a change in the cash flow characteristics that alters the assessment of whether the cash flows are solely payments of principal and interest (SPPI) for a financial asset, or whether an embedded derivative is separated from the host contract for a financial liability; 
  • a change in borrower counterparty (unless the change is between entities under common control); 
  • a commercial renegotiation to reset the financial instrument to current market terms (in contrast, a modification attributable to the borrower’s financial difficulty would suggest the modification is not substantial); 
• the relevance of a specific factor, and its weight compared to other factors, would depend on the type of financial instrument, its characteristics, and general economic conditions. An entity would be required to consider reasonable and supportable information that is available without undue cost or effort and that is relevant for the particular financial instrument being assessed. 

According to the IASB staff, the entities that are likely to be most impacted by these clarifications are those that currently rely primarily on the quantitative 10 per cent test and that give limited or no consideration to qualitative factors in their analysis.