IASB begins research project on amortised cost measurement of financial instruments (IFRS 9)

At its September meeting, the IASB discussed the project direction. The preliminary list of possible topics drawn up by the staff includes topics relating to the effective interest rate (EIR) and to modifications of financial assets and liabilities.  

The topics related to the EIR are as follows:  

• how to reflect uncertainty resulting from conditions attached to the contractual interest rate (such as indexing to ESG criteria) when determining the effective interest rate on initial recognition; 
• accounting for revised estimates and contractual modifications to future cash flows; 
• accounting for unamortised transaction costs or fees received as part of a modification of financial assets and financial liabilities, as well as the meaning of the phrase “fees and costs incurred” from the perspective of both the lender and the borrower. 
   

The topics related to modifications of financial assets and liabilities are as follows: 

• the definition of a modification, i.e. whether it refers only to contractual terms, or more broadly to cash flows, in line with the amendments to IFRS 9 relating to interest rate benchmark reform; 
• the quantitative and/or qualitative criteria used to determine whether modifications to assets lead to derecognition of those assets, depending on whether the modification is related to forbearance or on-market renegotiations; 
• the distinction between partial derecognition and modification of an asset, and the interaction between these requirements and those relating to expected credit losses, including the order in which these requirements should be applied; 
• how gains and losses resulting from modification of an asset should be presented in profit or loss – in cost of risk, interest margin or another line item; 
• the criteria used to determine when a financial asset should be written off, and how to present a loss arising from a write-off or a gain arising from a recovery of these amounts in profit or loss;  
• how to account for financial concessions (partial forgiveness of debts, payment holidays, etc.) as modifications of assets, write-offs or impairment, depending on whether these concessions are related to forbearance or required by law. 

The IASB will continue discussions on this project by organising targeted meetings with its advisory bodies.