31/05/2017 - EFRAG's comment letter on the IASB's Exposure Draft ED/2017/3 Prepayment Features with Negative Compensation (Proposed amendments to IFRS 9)

​​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').

In its comment letter, EFRAG welcomes 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 is 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 agrees with the first eligibility criterion, but not with the second one that states that the fair value of the prepayment feature should be insignificant at initial recognition. Moreover, given that the Amendments are being developed on a fast track timetable, EFRAG questions whether the IASB has or will be able to obtain sufficient evidence of the types of instruments that would be excluded by the second criterion and whether those outcomes are appropriate.

In order to minimise any disruption to the implementation efforts already undertaken by preparers and users, EFRAG requests the IASB to do its utmost to finalise the Amendments as soon as possible and to ensure they are limited to what is strictly necessary to address the issue submitted to the IFRS Interpretations Committee. Consequently, EFRAG is 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 proposed Amendments.

Further, EFRAG recommends that the IASB change the effective date to 1 January 2019, with early application permitted, rather than the date proposed in the Amendments. This is in order to provide more time for Europe's and other jurisdictions' translation and/or endorsement processes and to address the concerns of SEC-filers described in EFRAG's comment letter. Irrespective of whether the effective date is the same time as IFRS 9, EFRAG agrees with retrospective application of the Amendments.

The final comment letter is available here.