Changes to NZ IFRS 9 – Prepayment features with negative compensation to be considered SPPI

Early prepayment of a financial asset before maturity can sometimes jeopardise the instrument being measured at amortised cost (if the business model is ‘hold to collect’) or fair value through other comprehensive income (FVTOCI) (if the business model is ‘hold to collect and sell’) because the settlement amount may include compensation other than solely payments of principal and interest (SPPI test), including negative compensation.

IFRS 9 Financial Instruments currently permits financial assets with early prepayment options to be measured at amortised cost or FVTOCI, if:

• The business model is ‘hold to collect’, and
• The contractual terms permit early repayment by either party before maturity, at an amount that represents substantially the unpaid amounts of principal and interest.

The early repayment may include a reasonable amount for additional compensation for the early termination of the contract.

This narrow-scope amendment to NZ IFRS 9, issued by the New Zealand Accounting Standards Board in November 2017, extends the exemption for early repayment to cases where, regardless of the event or circumstance that caused the early repayment, reasonable compensation could be a variable amount (more or less than unpaid amounts of principal and interest), such as:

• The instrument’s current fair value, or
• An amount that reflects the remaining contractual cash flows discounted at the current market interest rate.

The amendments are effective for annual periods beginning on or after 1 January 2019, and can be adopted early.

For more on the above, please contact your local BDO representative.