Amendments to IFRS 9 and IFRS 7:

The International Accounting Standards Board (IASB) recently published the latest amendments to IFRS 9 and IFRS 7 to refine the classification, measurement and disclosure of financial assets and financial liabilities. This update is based on a post-implementation review of IFRS 9 that was completed in 2022. Despite the IASB's conclusion that the standard is essentially working as intended, it still identified provisions warranting revision based on new developments since the standard took effect and on feedback from stakeholders.

Key among these changes is the SPPI criterion (solely payments of principal and interest), which is used to classify financial assets and determines whether financial assets are to be measured at amortized cost or at fair value. The SPPI criterion requires the contractual payments of an asset to consist solely of principal and interest payments on the original principal amount. Here, changes focus on the assessment of interest components in underlying loan agreements, with the updated IASB guidelines for IFRS 9 now providing more precise information on how to consider cash flows that consist solely of principal and interest payments and are attributable to the remaining loan amount. Among the typical interest components are the time value of money, potential default risks and fundamental risks in credit contracts, such as liquidity risk. Any potential profit margin for the lender can also be taken into account here. Above all, these payments should reflect the underlying risks and costs of the lending transaction, rather than the amount of compensation. In other words, interest is considered part of a traditional lending relationship solely when it is viewed primarily as compensation for the entity's credit risks and costs. Any payments that do not meet this requirement, or that are fundamentally linked to variables other than the underlying credit risks or costs—such as market conditions or external indices—do not qualify as such a lending arrangement. 

It also revised the requirements for contractual terms and conditions that could change the timing or amount of payments. Particularly relevant are loans that include ESG-related clauses not directly related to changes in the underlying credit risks. Going forward, companies may be required to perform both qualitative and quantitative analyses that contribute to the significance of such clauses, regardless of how likely such changes are to occur. To be specific, financial assets with ESG-related clauses in the contractual terms, for example, can be valued at amortized cost as long as these have no material impact on the contractual cash flows. Disclosures on the impact of such contractual clauses must also be made as follows:

• A description of any event that causes a change in the amount of contractual cash flows.
• Gross carrying amounts of financial assets and financial liabilities.
• Quantitative information about potential changes in cash flows. 

The standard-setter's goal is to foster transparency and enable users of financial reporting to comprehend the effects of these contingent events to a sufficient degree.

An additional aspect that was defined more precisely by the amendments to IFRS 9 relates to so-called non-recourse financial assets. The term “non-recourse” refers to forms of financing in which the lender has a claim only on the cash flows from specified assets as defined in the contract. Any recourse to the debtor's other resources is excluded. Now the new rules make it clear that a financing arrangement may only be classified as 'non-recourse' if the contractual terms and conditions restrict the creditor's right to the cash flows from these specific assets. In the past, when contractually linked instruments were involved, there was often a lack of clarity regarding the delineation from non-recourse financing. Such uncertainties have, in some cases, led to divergent outcomes when applying the relevant provisions. IASB has now clarified the application guidelines in order to address this issue. In doing so, it aims to clearly distinguish between the two and ensure that the standard is applied consistently.

As a rule, a financial asset is derecognized as soon as the contractual right to receive cash flows expires or the asset has been transferred. A liability is derecognized at the time it is settled. The new rules on derecognizing financial liabilities that are settled by electronic payment systems also clarify that in certain cases companies have the option of derecognizing a liability – or part of it – even if the money is “still in transit” and the liability has therefore not yet been settled. 

There is also a further change to the disclosure requirements for equity instruments measured at fair value and classified as not affecting profit or loss. Companies are required to provide a more detailed presentation of the profit or loss from the measurement of these instruments. Among other things, this includes a differentiation between amounts attributable to derecognized shares on the one hand and those attributable to shares still held on the other. The aim of these amendments is to increase transparency and ensure that the effects on the balance sheet and income statement are transparent.

The new rules will apply from 1 January 2026. They are intended to be applied retrospectively, but without mandatory restatement of previous periods.  

The latest amendments to IFRS 9 and IFRS 7 are intended to make sure that the requirements for the classification and measurement of financial assets and financial liabilities are applied consistently and to eliminate existing uncertainties in their practical implementation and disclosure. One particular focus relates to the more precise handling of interest components in the SPPI test and ESG-related clauses in loan agreements. Our Finance and Treasury Management team will be happy to assist you at any time should you have any questions or require support with the implementation of the amendments to IFRS 9 and IFRS 7. 

Source: KPMG Corporate Treasury News, Edition 149, November 2024
Authors:
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Dr. Christoph Lippert, Senior Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG