Publication date: 04 Apr 2019

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Latest developments

In October 2017, the IASB issued a narrow-scope amendment to IFRS 9 for Prepayment Features with Negative Compensation. The amendment clarifies that it is possible for an instrument to pass the ‘Solely Payments of Principle and Interest’ (SPPI) test, even where on early repayment compensation could be paid by either the lender or the borrower to the other party, sometimes referred to a symmetric or ‘two-way’ prepayment clause. The amendment also provided an indication of the Board’s view of prepayment at fair value, and what constitutes ‘reasonable compensation’ in the case of early repayment under paragraph B4.1.11(b) of IFRS 9. The effective date is for annual periods beginning on or after 1 January 2019, with early application permitted. As part of the same amendment, the Board clarified (through the basis for conclusions) that under IFRS 9 the accounting for a modification that does not result in derecognition of a financial liability should be consistent with the accounting for a modification of a financial asset that does not result in derecognition, as this was previously unclear under IAS 39.

In September 2016, the IASB issued Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Amendments to IFRS 4) to address concerns by preparers on implementing IFRS 9 before the new insurance standard, IFRS 17, is effective. The amended IFRS 4 will provide all companies that issue insurance contracts the option to recognise in other comprehensive income, rather than profit or loss, the volatility that could arise when IFRS 9 is applied before IFRS 17 is issued (known as the overlay approach), and also give companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 until 2021 (known as the deferral approach). Entities deferring application of IFRS 9 will continue to apply IAS 39.

In July 2014, the IASB published IFRS 9, 'Financial instruments', the complete version of IFRS 9, 'Financial Instruments', which replaces the guidance in IAS 39. This final version includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the incurred loss impairment model used today. The new standard is effective 1 January 2018, and was endorsed by the EU in November 2016, with early application permitted. This version includes the hedge accounting amendments released in November 2013.


The publication of IFRS 9 in July 2014 was the culmination of the IASB’s efforts to replace IAS 39. IFRS 9 was released in phases from 2009 to 2014. The final standard was issued in July 2014, with a proposed mandatory effective date of periods beginning on or after 1 January 2018. Early application of IFRS 9 is permitted. The Board also amended the transitional provisions to provide relief from restating comparative information and introduced new disclosures to help users of financial statements understand the effect of moving to the IFRS 9 classification and measurement model. The board also included an amendment in relation to prepayment features with negative compensations. These amendments are effective from 1 January 2019 and allows companies to measure particular prepayable financial assets with so-called negative compensation at amortised cost or at fair value through other comprehensive income if a specified condition is met – Instead of at fair value through profit or loss.

Classification and measurement

IFRS 9 replaces the multiple classification and measurement models for financial assets in IAS 39 with a single model that has three classification categories: amortised cost, fair value through OCI and fair value through profit and loss. Classification under IFRS 9 is driven by the entity’s business model for managing the financial assets and whether the contractual characteristics of the financial assets represent solely payments of principal and interest. However, at initial recognition an entity may irrevocably designate a financial asset as measured at fair value through profit and loss if doing so eliminates or significantly reduces an accounting mismatch.

The new standard removes the requirement to separate embedded derivatives from financial asset hosts. It requires a hybrid contract to be classified in its entirety at either amortised cost or fair value if the contractual cash flows do not represent solely payments of principal and interest. IFRS 9 prohibits reclassifications except in rare circumstances when the entity’s business model changes. There is specific guidance for contractually linked instruments that leverage credit risk, which is often the case with investment tranches in a securitisation.

IFRS 9’s classification principles indicate that all equity investments should be measured at fair value through profit and loss. However, an entity has the ability to make an irrevocable election, on an instrument-by-instrument basis, to present changes in fair value in other comprehensive income (OCI) rather than profit or loss, as long as the instrument is not held for trading. IFRS 9 removes the cost exemption for unquoted equities and derivatives on unquoted equities, but provides guidance on when cost may be an appropriate estimate of fair value.

Under IFRS 9 financial liabilities continue to be measured at amortised cost, unless they are required to be measured at fair value through profit or loss or an entity has opted to measure a liability at fair value through profit or loss. However, IFRS 9 changes the accounting for financial liabilities for those liabilities where the fair value option has been elected. For such liabilities, changes in fair value related to changes in own credit risk are presented separately in OCI.

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