Proposed amendments to IFRS 9 on the SPPI test for debt assets

Keywords: Mazars, Thailand, IFRS, IASB,IFRS 9, PiR, SPPI test, CLI

Readers will remember that this phase, which began in September 2021, covers the classification and measurement section of IFRS 9. If necessary, the IASB may propose amendments to improve parts of the standard that the various stakeholders have found challenging to implement (for more information on the first phase of the IFRS 9 PiR.

As part of this review, the IASB has tentatively decided to amend IFRS 9 to clarify how the SPPI test (“solely payments of principal and interest”) should apply to debt assets. The SPPI test permits an entity to classify a debt asset as a basic lending arrangement if its contractual cash flows are solely payments of principal and interest. An asset that passes the SPPI test may be recognised at amortised cost or at fair value through equity with recycling to profit or loss, depending on the business model.

The IASB has reached tentative decisions on a number of topics, detailed below.

General principles of the SPPI test

The IASB has tentatively decided to make the following amendments to IFRS 9:

• if the contractual cash flows of a debt asset comprise variability arising from risks and factors that are unrelated to the borrower, the asset does not pass the SPPI test, even if such variability is common in the market in which the entity operates;
• however, an asset does pass the SPPI test if the variability in the contractual cash flows meets all of the following four criteria:
  • the contractual cash flows arising from contingent events are solely payments of principal and interest, regardless of the probability of the event;
  • the contingent event is specific to the borrower;
  • the timing and amount of any variability in contractual cash flows are predetermined;
  • the contractual cash flows arising from contingent events specific to the borrower do not represent exposure to the borrower’s business risk or the performance of any underlying assets

The IASB will produce examples to illustrate these principles.

This proposal would mean that certain debt assets may be classified as basic lending arrangements if their return is affected by ESG metrics that are specific to the borrower.

Debt assets with non-recourse features

The IASB has tentatively decided to amend IFRS 9 to clarify that a debt asset has “non-recourse features” if:

• the lender is exposed to the performance risk of the underlying asset both throughout the life of the instrument and in the event of default;
• the lender’s contractual right is limited over the life of the instrument to the cash flows generated by the underlying asset.

To help entities determine whether debt assets with non-recourse features pass the SPPI test, the IASB has also tentatively decided to add examples of relevant criteria for analysing the characteristics of contractual cash flows, such as:

• the legal or capital structure of the borrower;
• the extent to which the expected cash flows from the debt asset with non-recourse features are covered by the expected cash flows from the underlying assets;
• whether there are other sources of finance that are subordinated to the debt asset with non-recourse features.

Contractually-linked instruments

Readers will remember that contractually-linked instruments (CLIs) are usually issued by an ad hoc structure and backed by underlying financial assets held by that structure.

The IASB has tentatively decided to amend IFRS 9 to clarify that a debt asset can only be classified as a CLI if it meets all of the following four criteria:

• the structure has issued multiple instruments that are contractually linked to one another;
• the debt asset has no recourse to other assets apart from the underlying pool held by the structure;
• payments to investors are prioritised through a waterfall payment structure;
• the prioritisation of payments results in a disproportionate reduction of the contractual rights of some investors in the event that insufficient cash flows are generated by the underlying financial assets.

The IASB also tentatively decided to expand the scope of eligible underlying financial assets to include some that are not entirely within the scope of IFRS 9, such as certain lease receivables.

Tentative decisions to be confirmed

Further discussions are required on these topics, and the IASB may make additional clarifications.

The proposed amendments to IFRS 9 set out above will not be finalised until the IASB’s due process has been completed. A key stage in this process is the publication of an exposure draft to gather feedback from stakeholders on the proposals.