De minimis or non-genuine features

De minimis or non-genuine features – A contractual cash flow characteristic does not affect the classification of a financial asset if it could have only a de minimis effect on the contractual cash flows of the financial asset. To make this determination, an entity considers the possible effect of the contractual cash flow characteristic in each reporting period and cumulatively over the life of the financial asset.

Additionally, if a contractual cash flow characteristic could have an effect on the contractual cash flows that is more than de minimis (either in a single reporting period or cumulatively), but that cash flow characteristic is not genuine, then it does not affect the classification of a financial asset.

IFRS 9 does not expand on the meaning of de minimis but does make it clear that, in the case of contingent cash flows, this relates to the amount of the cash flows not the probability that they will occur.

A cash flow characteristic is not genuine if it affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur. [IFRS 9 B4.1.18] It is apparent from this wording that cash flow characteristics that are not genuine implies much more than the possibility of a cash flow characteristic being remotely close to a real cash flow characteristic.

However, in practice it will require judgement (see below) to assess whether a contractual feature could be considered non-genuine, and therefore be disregarded when assessing whether cash flows are SPPI. De minimis or non-genuine features

In summary – Contract terms/cash flows that are not genuine or de minimis should not be considered in applying the SPPI test.

Example: Cash flow characteristics with a ‘de minimis’ effect

A financial asset contains a contractual provision that requires the issuer to comply with applicable regulatory requirements, including filing its financial statements with a regulatory body on a timely basis. If the issuer fails to do so, it is required to pay a small fixed fee for each day until the financial statements are filed. De minimis or non-genuine features

Analysis: The existence of a fee that could be triggered if the issuer fails to file its financial statements on time is not inconsistent with the SPPI condition, because its impact on the asset’s contractual cash flows is always ‘de minimis’. This would apply to any feature regardless of its nature or trigger, as long as its impact on the asset’s contractual cash flows is always ‘de minimis’.


ANALYSIS > Judgement needed De minimis or non-genuine features

Many instruments have features that are not in line with the “solely payments of principal and interest” condition. The standard makes it clear that such features are disregarded if they are ‘non-genuine’ (extremely rare, highly abnormal, and very unlikely) or ‘de minimis’ (the magnitude of the impact is too trivial or minor to merit consideration). In all other cases, such instruments would fail the contractual cash flow characteristics test and would be measured at FVPL. De minimis or non-genuine features

The standard describes interest as the return on a basic lending arrangement to the holder, which generally includes consideration for the time value of money, credit risk, liquidity risk, a profit margin and consideration for costs associated with holding the financial asset over time (such as servicing costs).

The time value of money component of interest represents just the consideration for the passage of time. The standard addresses other features that may be included in the time value of money, such as any mismatch between interest rate reset periods and tenors, or average or lagging interest rates. De minimis or non-genuine features

These will result in an instrument failing the contractual cash flow characteristics test if the resulting undiscounted contractual cash flows could be ‘significantly different’ from the undiscounted cash flows of a benchmark instrument that does not have such features. De minimis or non-genuine features

Although the ‘de minimis’ and ‘non-genuine’ thresholds are low, allowing entities to disregard such features will results in more debt instruments qualifying for the amortised cost or FVOCI measurement categories than in IFRS 9 (2009). The terms, ‘de minimis’, ‘non-genuine’, and ‘significantly different’ are judgemental in their core nature.

Preparers of financial statements should carefully document the impact of the clarified contractual cash flow characteristics test for the debt instruments they are reporting in the financial statements. De minimis or non-genuine features


De minimis or non-genuine features

De minimis or non-genuine features

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