IFRS 9 amendment on symmetric prepayment options

On 12 October, the IASB published an amendment to IFRS 9 on financial instruments.

Keywords: Mazars, Thailand, IFRS, IASB, IFRS 9, SPPI, EU

13 December 2017

Under IFRS 9, financial assets must satisfy the SPPI test in order to be classified in accordance with the business model under which they are held. By default, “non-SPPI” assets are measured at fair value through profit or loss.

The Board’s main aim in enacting this amendment was to clarify the impact, on the SPPI test, of prepayment features with symmetric or negative compensation (compensation that may be received by the party activating the prepayment option and therefore potentially paid by the party on which prepayment is imposed). 

Following discussions in the wake of the April 2017 exposure draft, it appeared that while symmetric prepayment options do produce more variable cash flows on the instrument, they can nevertheless satisfy the SPPI test under some circumstances. This is the case, inter alia, where the prepayment compensation reflects changes in the benchmark interest rate since the origination of the instrument. The Board has therefore clarified that the “symmetric” nature of the prepayment compensation would not in itself prevent the instrument from passing the SPPI test.

In the Basis for Conclusions to this amendment, the Board also added some other information, including:

▪ clarification that a prepayment option at fair value would not invariably prevent classification as SPPI;

▪ clarifications on prepayment compensation based on the fair value of the associated hedging instrument. In particular, the amendment states that compensation for changes in the benchmark interest rates do not prevent classification as SPPI;

▪ the fact that it is not possible to make assumptions as to whether or not an instrument including this type of prepayment option will satisfy the SPPI test, and that an analysis must be conducted case by case.

This amendment is of mandatory application on 1 January 2019, but early application is authorised. Rapid progress towards endorsement by the European Union will enable European entities affected to apply IFRS 9 in a uniform, long-term manner that avoids, if possible, any transitory arrangements during 2018, which would be a source of complexity for preparers and users of financial statements alike.