Non-recourse assets and contractually linked instruments

Learning objectives

• Analyse, on a look-through basis, a non-recourse asset or a tranche of contractually linked instruments to decide whether its cash flows are SPPI.L4
• Support in writing, from the facts of the case, the judgement made on non-recourse assets and contractually linked instruments.L4

Normative references

• IFRS 9 §B4.1.16Cash flows described as principal and interest may not be such when the asset represents an investment in particular assets or cash flows; for example, cash flows that increase with the traffic on a toll road are inconsistent with a basic lending arrangement and the asset does not meet the SPPI condition. Non-recourse features and the look-through analysis are addressed in paras. B4.1.16A and B4.1.17.
• IFRS 9 §B4.1.17The fact that a financial asset has non-recourse features does not in itself preclude it from meeting the SPPI condition: the creditor looks through to the relationship between the underlying assets or cash flows and the cash flows of the asset being classified, taking into account other contractual arrangements (subordinated debt or equity issued by the debtor); if the terms give rise to other cash flows or limit the cash flows in a manner inconsistent with principal and interest, the condition is not met; whether the underlying assets are financial or non-financial does not in itself affect the analysis. Wording resulting from the May 2024 amendments (annual periods beginning on or after 1 January 2026, earlier application permitted), para. B4.1.16A now describing non-recourse features.
• IFRS 9 §B4.1.20Contractually linked instruments: in some transactions with non-recourse features, the issuer prioritises payments to the holders of multiple tranches using a waterfall that creates concentrations of credit risk and allocates cash shortfalls disproportionately; the holder of a tranche then applies paras. B4.1.21 to B4.1.26 (including the three conditions in para. B4.1.21) instead of para. B4.1.17. Para. B4.1.20A excludes lending arrangements structured to enhance a creditor's protection. Wording resulting from the May 2024 amendments (annual periods beginning on or after 1 January 2026, earlier application permitted).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

1 question

• Mu SA holds the whole of the single series of notes issued by a vehicle that holds loans with SPPI cash flows. It wonders whether it must apply the analysis of contractually linked instruments to these notes. Which answer applies?L4