Debt Restructuring Under IFRS 9: Changes You May Have Missed

IFRS 9 has now been applicable for over a year, but some of its changes have often been either overseen or neglected—even when they could have a material impact on the accounts. One of these is the treatment of non-substantial modifications of financial assets or financial liabilities when amending contractual terms within a restructuring transaction. There is actually an essential change compared to the old requirements—or, let's rather say, IFRS 9 now provides guidance on how to treat such modifications whereas IAS 39 did not.

How do you determine if a modification is substantial or not?

Both IAS 39 and IFRS 9 refer to the so called "10% test". In other words, if the net present value of the cash flows under the modified terms including net fees—which are not specified yet—is at least 10% different from the net present value of the remaining cash flows under the old terms, with the original effective interest rate (EIR) discounted for both, then the modification is considered to be substantial. If the modification is indeed substantial, then the asset or liability must be derecognized and again recognized under the modified terms. The International Accounting Standards Board (IASB) is currently preparing a proposal to amend IFRS 9, with the aim of clarifying which fees should be included in the calculation for the assessment if a financial asset or liability is derecognized or not.

Although there was no guidance prior to IFRS 9, there was a best practice related to accounting for gains or losses on non-substantial contract modifications. Under that best practice, any non-substantial difference is amortized over the remaining term of the instrument by amending the EIR accordingly, but not directly recognized in the profit or loss account. It seems that entities were free to decide on how to account for those kinds of modifications. This practice differed significantly to IFRS 9, under which gains or losses on non-substantial...