Instruments that fail(ed) the SPPI test

The following financial instruments in IFRS 9 have be carefully judged by the IASB and fail(ed) the Solely Payment of Principal and Interest test.

[IFRS 9 B4.1.9D, IFRS 9 B4.1.14] Instruments that fail(ed) the SPPI test

Contract description

Considerations

A bond that is convertible into a fixed number of equity instruments of the issuer.

The SPPI test is not met because the return on the bond is not just consideration for the time value of money and credit risk, but also reflects the value of the issuer’s equity.

An inverse floating interest rate loan – e.g. the interest rate on the loan increases if an interest rate index decreases.

The SPPI test is not met because interest has an inverse relationship to market rates and so does not represent consideration for the time value of money and credit risk.

A perpetual instrument that is callable at any time by the issuer at par plus accrued interest, but for which interest is only payable if the issuer remains solvent after payment and any deferred interest does not accrue additional interest.

The SPPI test is not met because the issuer may defer payments and additional interest does not accrue on the amounts deferred. As a result, the holder is not entitled to consideration for the time value of money and credit risk. However, the fact that an instrument is perpetual does not preclude it from meeting the SPPI test.

Financial instruments failing the SPPI test are valued at fair value through profit or loss (Reference is made to Classification of financial assets).

Fair value through profit or loss means: Instruments that fail(ed) the SPPI test

  • measurement at fair value at balance sheet date and re-measurement at the next balance sheet date, and
  • recognition of the difference of these two measurements as profit or loss in profit or loss.

IFRS 9: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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