Early prepayment of a financial asset before maturity can sometimes jeopardise the instrument being measured at amortised cost (if business model is ‘hold to collect’) or fair value through other comprehensive income (FVTOCI) (if 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 early repayment may include a reasonable amount for additional compensation for the early termination of the contract.
This narrow-scope amendment to IFRS 9, issued by the International Accounting Standards Board in October 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 amendments are effective for annual periods beginning on or after 1 January 2019, and can be adopted early, once approved as an Australian amendment by the Australian Accounting Standards Board.