Regulatory updates

The IASB has issued an Exposure Draft (ED), Amendments to the Classification and Measurement of Financial Instruments: Proposed amendments to IFRS 9 and IFRS 7. The ED has proposed the following amendments to IFRS 9 and IFRS 7, Financial Instruments: Disclosures:

Amendments to IFRS 9

• Clarifying the classification of financial assets with Environmental, Social and Governance (ESG)-linked features: : ESG-linked features in loans could affect whether the loans are measured at amortised cost or fair value and determine whether such loans have cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). The proposed amendments clarify how a company would assess SPPI condition for contractual cash flows arising from financial assets with contingent features. The proposals address a specific call for clarification on how to classify financial assets with an ESG-linked feature – for example, a feature that adjusts the interest rate on an asset by a specified number of basis points depending on whether the borrower achieves a pre-determined ESG or sustainability-related target(s). However, the proposals address all contingent features, not just ESG linked features.

• Classifying contractually linked instruments: To address questions on applying the SPPI requirements to contractually linked instruments, the proposals clarify their key characteristics and how they differ from financial assets with non-recourse features. The proposals also provide factors a company could consider when assessing the cash flows underlying a financial asset with non-recourse features (the ‘look through’ test).

• Settlement of liabilities through electronic payment systems: The IASB proposes to:

• Clarify that an entity uses settlement date accounting when recognising or derecognising financial assets and financial liabilities, and
• Develop new requirements to permit an entity to deem a financial liability that is settled using an electronic payment system to be discharged before the settlement date if specified criteria are met.

Amendments to IFRS 7

• Investments in equity instruments designated at fair value through other comprehensive income: For investments in equity instruments for which subsequent changes in fair value are presented in other comprehensive income, the ED has proposed that:

• Disclosure of an aggregate fair value of equity instruments should be provided instead of the fair value of each instrument at the end of the reporting period, and
• An entity should disclose the changes in the fair value presented in other comprehensive income, during the period.

• Contractual terms that could change the timing or amount of contractual cash flows: The ED has proposed amendments to the disclosure requirements for contractual terms that could change the timing or amount of contractual cash flows on the occurrence (or non-occurrence) of a contingent event. These requirements would be applicable to each class of financial asset measured at amortised cost or fair value through other comprehensive income and each class of financial liability measured at amortised cost.

The ED is open for comments up to 19 July 2023.

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To access the text of the ED, please click here