Classification and Measurement of Financial Instruments 2

What’s the issue?

The International Accounting Standards Board (IASB) has continued its analysis of the feedback received to the exposure draft: Amendments to the Classification and Measurement of Financial Instruments Proposed amendments to IFRS 9 and IFRS 7.

What does this mean?

At its meeting in January 2024, following its first deliberations in November 2023, the IASB has tentatively decided to the following:

General requirements

At the IASB’s meeting in October 2023, the staff papers initially suggested that the SPPI nature of a contingent loan compensation clause could be indicated by analysing whether or not the fair value of the clause was insignificant at initial recognition. The IASB has now tentatively decided to:

• Clarify, in paragraph B4.1.8A of the exposure draft, that the quantitative aspect of the adjustment linked to the compensation clause shall be taken into account in the SPPI analysis, in addition to the qualitative analysis linked to the nature of the clause.
• Clarify, in paragraph B4.1.10A of the exposure draft, that, when the nature of a contingent event is not directly related to a change in basic lending risks or costs, a financial asset has contractual cash flows that are SPPI:
  • when, irrespective of the probability that the contingent event will occur, the contractual cash flows before and after any contingent event(s), considered in isolation, are solely payments of principal and interest; and
  • when the contractual cash flows arising from a contingent event are not significantly different from the cash flows on a similar financial asset without such a contingent event and do not represent an investment in particular assets or cash flows;
  • delete from paragraph B4.1.10A of the exposure draft the notion of investment "specific to the debtor", which had received mixed feedback from stakeholders.

Financial assets with non-recourse features and contractually linked instruments

Many stakeholders who commented on the exposure draft expressed reservations about the existence of alternative structures to avoid applying requirements of the standard for contractually linked instruments (CLIs). This would be the case, for example, where the junior debt instrument is held by the sponsor on initial recognition and subsequently transferred to a third party, with no possible reassessment of the instrument as a CLI.

The IASB tentatively decided to finalise the proposed amendments in the exposure draft, subject to a requirement, under paragraph B4.1.20A, that the junior debt instrument be held by the debtor (the sponsoring entity) throughout the life of the transaction.

Minor drafting suggestions will also be made to clarify the proposed amendments. The staff papers suggest, in particular:

• For assets with non-recourse features: removing the reference to non-recourse feature “throughout the life of the instrument”, in paragraph B4.1.16A, to retain only the case of default of the debtor. 
• For contractually linked instruments: clarifying, in paragraph B4.1.23, the existence of a rebuttable presumption of SPPI nature when a group of underlying assets includes lease receivables.

When is it effective?

In the coming months, the IASB will continue to analyse and deliberate the feedback comments with a view to finalising the draft amendment in the first half of 2024.

Further information

For further details about the proposed changes set out in the original exposure draft, refer to our articles:

• Proposed IFRS Amendments – IASB publishes exposure draft relating to the classification and measurement of financial instruments (April 2023).