This regulation modifies the IFRS 9 standard regarding financial instruments by clarifying the treatment of early repayable assets with negative compensation. The amendments, published by the IASB, will come into effect on January 1, 2019, with early application allowed. Companies must apply these amendments no later than the opening of their first financial year starting on or after January 1, 2019.
The document is Regulation (EU) 2018/498 of the European Commission, published on March 22, 2018. It amends Regulation (EC) No 1126/2008 adopting international accounting standards, in particular IFRS 9 relating to financial instruments. The scope concerns early repayment terms with negative compensation in IFRS 9. The amendment applies to companies in the European Union, for periods beginning on or after January 1, 2019, with early application permitted. The document comprises 5 pages and aims to clarify the accounting classification of certain financial assets repayable early (p. 1-4).
Regulation (EU) 2018/498 amends IFRS 9 to incorporate clarifications published by the IASB in October 2017 regarding early repayment terms with negative compensation. This topic is important as it impacts the accounting classification of financial assets repayable early, notably their measurement at amortized cost or fair value. The main amendments add specific paragraphs (7.1.7, 7.2.29 to 7.2.34, B4.1.12A) and remove certain former paragraphs (B4.1.11 b) and B4.1.12 b)). They specify that entities must apply these amendments retrospectively from January 1, 2019, with early application permitted. The regulation also allows adjustments in the designation of financial assets and liabilities measured at fair value through profit or loss under the new conditions. Finally, it imposes disclosure requirements at the date of initial application. These measures aim to ensure better consistency and transparency in the accounting treatment of financial instruments with early repayment clauses, especially when early compensation is negative. The Commission recommends companies apply these amendments for periods beginning on or after January 1, 2019, considering transitional provisions and associated disclosure obligations (p. 1-5).
The regulation responds to the IASB’s publication on October 12, 2017, of IFRS 9 amendments aiming to clarify the accounting classification of financial assets repayable early with negative compensation. These clarifications were necessary to resolve ambiguities in IFRS 9 application, notably regarding recognition at amortized cost or fair value. After consultation with EFRAG, the European Commission considered these amendments met adoption criteria. The regulation aims to amend Regulation (EC) No 1126/2008 to incorporate these changes, with an effective date set at January 1, 2019, while allowing early application. The objective is to ensure harmonized and consistent application of IFRS 9 within the European Union, improving clarity and comparability of financial statements of affected companies (p. 1-2).
1. IFRS 9 Amendments and Effective Date:
- Addition of paragraph 7.1.7 and paragraphs 7.2.29 to 7.2.34, removal of paragraphs B4.1.11 b) and B4.1.12 b).
- Mandatory application for periods beginning on or after January 1, 2019, with early application permitted (p. 3).
2. Transitional Provisions:
- Retrospective application of amendments according to IAS 8, subject to certain exceptions (7.2.29 to 7.2.34).
- Possibility to revoke or designate fair value through profit or loss under new conditions (7.2.32).
- Option not to restate prior periods, with recognition of differences in equity at the date of initial application (7.2.33).
- Detailed disclosure requirements at the date of initial application regarding valuation categories and carrying amounts before and after amendment, as well as reasons for designations or revocations (7.2.34).
3. Characteristics of Early Repayment Terms with Negative Compensation:
- Clarification that contractual terms modifying the timing or amount of cash flows must be assessed to determine if they relate solely to principal and interest repayments (B4.1.10).
- Examples of terms compatible with classification at amortized cost or fair value through other comprehensive income, including early repayments with a reasonable amount compensating early termination (B4.1.11 and B4.1.12).
- Introduction of paragraph B4.1.12A specifying that reasonable compensation may be paid or received regardless of the reason for early termination (p. 4-5).
4. Consistency with Previous Regulations:
- The regulation continues Regulation (EU) 2016/2067, enabling consistent application of IFRS 9 (p. 1-2).
Findings:
- The IASB published precise IFRS 9 amendments in October 2017 on early repayment terms with negative compensation.
- The European Commission adopted these amendments via Regulation (EU) 2018/498, effective January 1, 2019.
- The amendments include transitional provisions allowing retrospective application and adjustments in designation of financial assets and liabilities (p. 1-5).
Assumptions:
- Early application is permitted, subject to explicit indication by the entity.
- Entities may choose whether or not to restate prior periods according to their ability to do so without hindsight.
Interpretations:
- These amendments clarify that the presence of negative compensation in an early repayment clause should not systematically prevent measurement at amortized cost or fair value through other comprehensive income.
- Recognition of reasonable compensation, even if negative, is allowed regardless of the reason for early termination.
Uncertainties:
- Assessment of contractual cash flows and the nature of contingencies remains at the entity’s discretion, which may lead to interpretation differences.
- The measure of “reasonable compensation” is not quantified, leaving room for interpretation in its application (p. 3-5).
The European Commission concludes that IFRS 9 amendments relating to early repayment terms with negative compensation must be integrated into the European regulatory framework to ensure uniform and consistent application. It recommends European companies apply these amendments for periods beginning on or after January 1, 2019, while allowing early application. Entities must comply with transitional provisions, notably regarding restatement of prior periods and disclosure at the date of initial application. These measures aim to improve transparency and comparability of financial statements by clarifying the accounting treatment of financial assets with early repayment clauses. The regulation is directly applicable in all Member States, thus ensuring regulatory harmonization within the European Union (p. 1-5).
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