IFRS 9 Amendments - Prepayment features with negative compensation

Exposure draft

On 21 April 2017, the IASB issued the Exposure Draft ED/2017/3 Prepayment Features with Negative Compensation (proposed Amendments to IFRS 9) ('the ED') with a comment period ending on 24 May 2017.

The ED proposed a narrow-scope amendment to IFRS 9 Financial Instruments so that a financial asset that would otherwise meet the SPPI condition in IFRS 9 but does not do so only as a result of a contractual term that permits (or requires) the issuer to prepay a debt instrument or permits (or requires) the holder to put a debt instrument back to the issuer before maturity, is eligible to be measured at amortised cost or fair value through other comprehensive income ('FVOCI') (subject to meeting the business model condition) if:

• the prepayment amount is inconsistent with paragraph B4.1.11(b) of IFRS 9 only because the party that chooses to terminate the contract early (or otherwise causes the early termination to occur) may receive reasonable additional compensation for doing so; and
• when the entity initially recognises the financial asset, the fair value of the prepayment feature is insignificant.

EFRAG comment letter

EFRAG published a draft comment letter on 4 May 2017, with comments due by 17 May 2017.

On 31 May 2017 EFRAG published its comment letter in response to the IASB's ED.

In its comment letter, EFRAG welcomed the IASB addressing the concerns related to prepayment features with negative compensation. In EFRAG's view, the negative sign of the reasonable compensation for early termination should not be the sole reason for preventing measurement of a financial asset at amortised cost or FVOCI.

However, EFRAG was of the view that prepayment features with negative compensation should be subject to the same eligibility conditions as prepayment features with positive compensation. As a result, EFRAG agreed with the first eligibility criterion, but not with the second one that stated that the fair value of the prepayment feature should be insignificant at initial recognition.

EFRAG was strongly of the view that the final amendments to IFRS 9 should not be accompanied by references that interpret existing IFRS 9, including the meaning of ‘reasonable compensation’. Any such references might affect the accounting treatment of other financial instruments, which is beyond the scope of the ED.

Lastly, EFRAG recommended that the IASB include an effective date of 1 January 2019, with early application permitted, rather than the date proposed in the ED.

On 13 June 2017, EFRAG published a feedback describing the main comments received by EFRAG in response to its draft comment letter and how these comments were considered by EFRAG in finalising its comment letter to the IASB.

The Amendments

The IASB published Prepayment Features with Negative Compensation (Amendments to IFRS 9) ('the Amendments') on 12 October 2017. For financial instruments which contain a prepayment amount that may result in negative compensation, the Amendments propose that, in applying paragraphs B4.1.11(b) and B4.1.12(b) of IFRS 9, such a financial asset would be eligible to be measured at amortised cost or at fair value through other comprehensive income, subject to the assessment of the business model in which it is held. As a result, paragraphs B4.1.11(b) and B4.1.12(b) of IFRS 9 (as issued in 2014) have been amended to accommodate reasonable negative compensation for the early termination of the contract. Paragraph B4.1.12A has been added.

EFRAG Endorsement Advice

On 18 October 2017, EFRAG issued a draft endorsement advice letter and a separate invitation to comment relating to the endorsement for use in the EU of the Amendments. Comments were requested by 2 November 2017.

On 9 November 2017, EFRAG has submitted its Endorsement Advice relating to the Amendments for use in the European Union and European Economic Area. EFRAG assessed that the Amendments meet all technical endorsement criteria of the IAS Regulation and are conducive to the European public good. It therefore recommended their endorsement.