Consequently, they believe that there are grounds to account for these two types of changes differently. Banks and other financial institutions are most affected. “Modification” is broadly defined in the regulations. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Earlier application is permitted for annual periods beginning after 24 July 2014 but before 1 January 2019. Definitions 8 2.2. SCOPE . Financial instrument. Once entered, they are only Modified time value of money 17 3.1.2.2. Hence, if this analogy to financial liabilities is applied to financial assets, a substantial change of terms (whether … Contrary to widespread belief, IFRS 9 affects more than just financial institutions. They believe that this paragraph applies to a revision of the estimated cash flows according to the original (unmodified) contractual terms of a financial instrument, which is different in nature from an exchange or modification of a financial instrument. In general, a modification means any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer or a holder of a debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise. They confirmed the tentative view of the Interpretations Committee that when a financial liability measured at amortised cost is modified without this resulting in derecognition, a gain or loss should be recognised in profit or loss. However, for entities that are currently amortising the difference between the original and modified amortised cost arising on modifications of this nature, this treatment will need to change upon transition to IFRS 9. Effective Date. Under IAS 39, if an entity modifies or exchanges a financial liability, it must determine whether that modification results in the financial liability being derecognised (the standard contains guidance about how to make this determination). These form part of the Memorandum of Understanding, which sets out a roadmap for convergence between IFRS and US GAAP. The IASB had always intended to reconsider IAS 39, but the financial crisis made this a priority. MFRS 9 will be effective for financial period beginning on or after 1 January 2018 with early application permitted. New and emerging trends provide innovative solutions for adapting irrevocable trusts to changing circumstances. The Staff note that the practical challenges of retrospective application is not limited to only this aspect of IFRS 9. Our Technology & Media team work with clients in media, advertising, software, managed services, fintech and in most sectors of economy. Please read, IFRS 3 — Acquisition of a group of assets, IAS 38 — Goods required for promotional activities, IAS 37 — Costs considered in determining whether a contract is onerous, IAS 41 — Biological assets growing on bearer plants, IAS 33 — Tax arising from payments on participating equity instruments, IFRS 9 — Centrally cleared client derivatives, IFRS 9 — Modifications and exchanges of financial liabilities, Annual Improvements 2015–2017: IAS 23 — Borrowing costs on completed qualifying assets, IAS 28 — Associate or joint venture and common control, Some respondents disagreed with applying IFRS 9.B5.4.6 to a modification of a financial liability that did not result in derecognition. We also produce a series of... Our Life Sciences team are passionate about this diverse and innovative sector. Scope 9 3. A financial liability is derecognized when it is discharged or cancelled or expires for example - Payment is made to the lender, or borrower is legally released from primary responsibility or there is substantial modification in the terms of debts. IFRS IN PRACTICE 2018 fi IFRS 9 FINANCIAL INSTRUMENTS 3 TABLE OF CONTENTS 1. Financial Instruments, to consider as well. Section 3856 – Financial Instruments. exchange for higher/lower interest payments (often referred to as a debt modification) or by replacing the original loan with a new loan with the same lender with different economic terms … instrument embedded in the new debt, etc.). It is worth noting that recognising an immediate gain or loss is consistent with how other revisions of estimated cash flows (except those that are due to changes in floating market rates of interest, such as LIBOR) are accounted for under both IAS 39 and IFRS 9. A lack of symmetry does not mean that the respective accounting treatments are inappropriate; just as symmetry does not necessarily mean that the respective accounting treatments are appropriate. By using this site you agree to our use of cookies. a proposal to replace its existing financial instruments standard, IAS 39, in three phases. Modifications to financial assets and financial liabilities (e.g. They also see no compelling reason to provide specific transition requirements for only this aspect of the classification and measurement requirements of IFRS 9. The different versions of IFRS 9 IFRS 9 has been completed in stages, with the IASB’s phased approach reflected in a number of versions of the standard being . When the contractual terms of a financial liability are substantially modified, it is accounted for as an extinguishment of the original debt instrument and the recognition of a new financial liability. Relevant Australian Standards References in this TA alert are made to standards issued by the International Accounting Standards Board. A modification that changes the yield of a debt instrument will be significant if the modified yield varies by the greater of 1/4 of 1% or 5% of the annual yield of the unmodified instrument. The tentative agenda decision stated that the proposed accounting treatment for modified financial liabilities is consistent with the requirements for modifications of financial assets that do not result in derecognition. However, we believe that the spread between these returns is reasonable in light of (i) the current leverage which the holders of the OCEANEs 2022 have, and (ii) the intrinsic risk level of each category of financial instrument. Derecognition of financial instruments upon modification (IAS 39 Financial Instruments: ... modification of a financial asset results in derecognition, applying IAS 8 requires judgement to develop and apply an accounting policy. The IFRS Interpretations Committee and the IASB have recently considered this issue and tentatively concluded that, in cases where a modification or exchange of a financial liability does not result in derecognition, IFRS 9 requires that the difference between the original and modified amortised cost be recognised in profit or loss immediately. A team of passionate and dedicated experts ready to provide the insight and knowledge that will help your... Our Retail and Wholesale team plays a key role by providing the High Street Sales Tracker and other leading reports. Our Manufacturing team have the skills, experience and insight to help you overcome these challenges and thrive. These words serve as exceptions. Two issues stood out from the feedback received: (1) the structuring opportunities presented by the different treatment of transaction costs and modified cash flows, and (2) the lack of transition relief. Accordingly, this principle is equally applicable to modified financial assets and modified financial liabilities that are measured at amortised cost. Hold to collect business model 15 3.1.2. The IC received 13 comment letters. A couple of respondents asked the IC to clarify whether the assessment of what constitutes a ‘substantial modification’ and ‘substantially different terms’ for the purpose of derecognising a financial liability requires only a quantitative assessment or whether qualitative factors should also be considered. The IC previously concluded that this is a principle that underlies amortised cost measurement. Some respondents suggested that specific transition provisions be provided for this issue because retrospective application may be complex, and that the existing transition provisions in s7.2 of IFRS 9 may not be applicable in practice. contractual cash flows or terms is a substantial modification of a financial instrument and the accounting requirements for modifications that are not substantial (ie do not result in derecognition of a financial instrument when applying IFRS 9 Financial Instruments). IFRS Update June 2018 Financial Reporting Faculty, 19 June 2018 This webinar provides a summary of new and revised standards applicable in 2018 and beyond. financial instruments take the legal form of equity but are liabilities in substance, and others may combine features associated with equity instruments and features associated with financial liabilities. The Staff and the IC Chairlady held their ground and noted that the respondents did not raise any new issues that the IC had not considered when reaching its tentative agenda decision. We work with the biggest brands in the industry and our success is down to the quality of our dedicated partner-led team. The SPPI contractual cash flow characteristics test 15 3.1.2.1. An exchange of debt instruments with substantially different terms between an existing borrower and lender of debt, or a substantial modification to the terms of an existing financial liability shall be accounted for as an extinguishment of the original financial liability … Financial instruments outside the scope of FRS 139 The financial instruments outside the scope of FRS 139 are listed in FRS 139.2. This article summarizes the McKelvey decision and reviews other US cases and rulings regarding the modification of contractual rights. It presents the rules for derecognition of financial instruments, with focus on financial assets. In other words, IFRS 9.B5.4.6 should be applied in both cases. Introduction 5 2. The Chairlady also reminded the IC that the Board had looked at this issue and concluded that the requirements in IFRS 9 clearly supported the Staff’s technical conclusion. The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. These respondents were concerned that such a difference would allow for structuring opportunities, i.e. 1. Financial Instruments: Recognition and Measurement where applicable) and IFRS 7 are applied to certain contracts to buy or sell non-financial items (including those that can be settled net). The Staff acknowledge that there are differing views in practice, but considered that the issue is beyond the scope of the original submission and should not be addressed in the agenda decision. Furthermore, on the issue of transaction costs versus modified cash flows, the Staff noted that this issue exists under IAS 39, entities have handled it and it has not been raised to the IC thus far. Paragraph 40 sets out that such a change can be effected by the exchange of debt instruments or by modification of the terms of an existing instrument. They believe that this paragraph applies to a revision of the estimated cash flows according to the, The Staff believe that the key to addressing these concerns is an acknowledgement of the fact that a modified financial liability that is not derecognised is regarded as a, IFRS Interpretations Committee meeting — 13 June 2017, IFRS Foundation publishes IFRS Taxonomy update, European Union formally adopts IFRS 4 amendments regarding the temporary exemption from applying IFRS 9, Educational material on applying IFRSs to climate-related matters, IASB officially adds PIR of IFRS 9 to its work plan, EFRAG endorsement status report 16 December 2020, A Closer Look — Financial instrument disclosures when applying Interest Rate Benchmark Reform – Phase 1 amendments to IFRS 9 and IAS 39 and Phase 2 amendments to IFRS 9, IAS 39, IFRS 4 and IFRS 16, EFRAG endorsement status report 6 November 2020, EFRAG endorsement status report 23 October 2020, IAS 39 — Financial Instruments: Recognition and Measurement, IFRIC 10 — Interim Financial Reporting and Impairment, Different effective dates of IFRS 9 and the new insurance contracts standard, Financial instruments — Effective date of IFRS 9, Financial instruments — Limited reconsideration of IFRS 9. IFRS 9 Financial Instruments is one of the most challenging standards because it’s sooo complex and sometimes complicated. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. We can help you meet and overcome those challenges because we are the leading accountancy firm for AIM listed companies. Change brings challenges but also opportunity. bank borrowings). Participate in in-depth discussions and exchange good practices and lessons learned. The IASB recently discussed the accounting for modifications of financial liabilities under IFRS 9 Financial instruments. 3051, • • in paragraphs 3856.37 • instruments, both issued and held • investments; and • or equity . Ind AS 32 contains a broad definition of the term financial instruments to mean – any contract that gives rise to a financial asset of one entity and a financial liability or equity of another entity. 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