Prepayment features with negative compensation:
Publication date: 17 May 2017
EBF advisor: Denisa Mularova
- The EBF welcomes the proposed amendments to IFRS 9
- The EBF agrees with the first eligibility criterion proposed by the IASB. However, the Basis for conclusions for the amendment introduces implicitly some new guidance beyond the scope of the amendment which could undermine the current interpretation of IFRS 9, at a very late stage of implementation of IFRS 9.
- The EBF disagreess with the second eligibility criterion as it would lead to different conclusions regarding the eligibility for amortised cost whether the
instrument contains positive or negative compensation. The demonstration that the fair value of the prepayment feature is insignificant could be challenging, if not impossible, even if in practise these options are rarely exercised, as such prepayment option has some value for the borrower since it allows benefiting from better credit spread conditions. Moreover, it could sharply limit the scope of the financial instruments concerned.
- The effective date of the amendment should be January 2018 to avoid banks will have to change the classification and measurement of financial instruments
- The European endorsement process will therefore have to be accelerated.