The International Accounting Standards Board (IASB) has issued narrow scope amendments to IFRS 9 Financial Instruments and to IAS 28 Investments in Associates and Joint Ventures.
Certain financial assets are measured at fair value through profit or loss (FVPL) in accordance with IFRS 9, including where a financial asset includes contractual cash flows that are not solely payments of principal and interest (SPPI). IFRS 9 includes an exception to the FVPL measurement for instruments with prepayment features that meet certain conditions. Previously, the exception did not apply to a debt instrument with contractual terms which permitted prepayment of the instrument at a variable amount that meant the party terminating the contract received compensation rather than paying a penalty (called ‘negative compensation’).
The amendments to IFRS 9 allow companies to measure certain pre-payable financial assets with so-called negative compensation at amortised cost or at fair value through other comprehensive income (depending on the business model) provided they meet the other conditions in IFRS 9.
IAS 28 identifies the interest in an associate or a joint venture as the carrying amount of the investment determined using the equity method, plus any long-term interests that, in substance, form part of the entity’s net investment. Such interests include preference shares and long-term receivables or loans for which settlement is neither planned nor likely to occur in the foreseeable future.
The amendments to IAS 28 clarify that companies should apply IFRS 9 (including its impairment requirements) to account for long-term interests in an associate or a joint venture to which the equity method is not applied. The IASB has also published an example that illustrates how to apply the amendment.
The amendments to IFRS 9 and IAS 28 apply retrospectively (subject to some exceptions) and are effective from 1 January 2019, with early application permitted.