Mahesh Narayanasami
Partner
KPMG US, DPP New York
Over the past few years, questions have arisen regarding how to classify some financial assets with ESG-linked features – e.g. a loan with a reduction in its interest rate if a specified ESG target is met by the borrower – under existing requirements. As the global market for these financial assets is growing rapidly, there has been an urgent need for clarification on how such features should be analysed.
The International Accounting Standards Board (IASB) has now amended IFRS 9 Financial Instruments following its post-implementation review (PIR) of the classification and measurement requirements. The amendments include guidance on the classification of financial assets, including those with contingent features.
The IASB has also amended IFRS 7 Financial Instruments: Disclosures. Companies will now be required to provide additional disclosures on financial assets and financial liabilities that have certain contingent features.
We welcome the IASB tackling emerging issues promptly. The new amendments will help companies to assess whether financial assets with ESG features meet the ‘solely payments of principal and interest’ (SPPI) criterion. Additional disclosures will also help users to understand how financial instruments with certain contingent features impact financial statements.
What's the issue?
Under IFRS 9, it was unclear whether the contractual cash flows of some financial assets with ESG-linked features represented SPPI, which is a condition for measurement at amortised cost. This could have resulted in financial assets with ESG-linked features being measured at fair value through profit or loss.
Although the new amendments are more permissive, they apply to all contingent features, not just ESG-linked features. While the amendments may allow certain financial assets with contingent features to meet the SPPI criterion, companies may need to perform additional work to prove this. Judgement will be required in determining whether the new test is met.
Classifying financial assets with a contingent feature
Under the amendments, certain financial assets including those with ESG-linked features could now meet the SPPI criterion, provided that their cash flows are not significantly different from an identical financial asset without such a feature.
The amendments also include additional disclosures for all financial assets and financial liabilities that have certain contingent features that are:
- not related directly to a change in basic lending risks or costs; and
- are not measured at fair value through profit or loss.
Other related amendments
Contractually linked instruments (CLIs) and non-recourse features
The amendments clarify the key characteristics of CLIs and how they differ from financial assets with non-recourse features. The amendments also include factors that a company needs to consider when assessing the cash flows underlying a financial asset with non-recourse features (the ‘look through’ test).
Disclosures on investments in equity instruments
The amendments require additional disclosures for investments in equity instruments that are measured at fair value with gains or losses presented in other comprehensive income (FVOCI).
Recognition and derecognition of financial assets and financial liabilities
The amendments address the recognition and derecognition of financial assets and financial liabilities, including an exception relating to the derecognition of financial liabilities that are settled using an electronic payment system.
Refer to our article for more detail.
Effective from 1 January 2026
The amendments apply for reporting periods beginning on or after 1 January 2026.
Companies can choose to early-adopt these amendments (including the associated disclosure requirements), separately from the amendments for the recognition and derecognition of financial assets and financial liabilities.