Modified time value, prepayment and contingent features

Learning objectives

• Assess the effect of a modified time value of money element or a prepayment feature on the contractual cash flow characteristics test (benchmark instrument, reasonable compensation, premium or discount exception).L3, L4

Normative references

• IFRS 9 §B4.1.9DIn assessing a modified time value of money element, the entity considers factors that could affect future cash flows and compares the undiscounted contractual cash flows with those of a benchmark instrument, considering only reasonably possible scenarios; if the cash flows could be significantly different from the benchmark cash flows, the asset does not meet the SPPI condition and can be measured neither at amortised cost nor at FVOCI.
• IFRS 9 §B4.1.12Exception for some prepayable assets that fail the SPPI test solely because of that feature: asset acquired or originated at a premium or discount to the contractual par amount, prepayment amount substantially representing the contractual par amount plus accrued interest (which may include reasonable compensation), and fair value of the feature insignificant at initial recognition; the asset may then remain at amortised cost or FVOCI.

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

1 question

• When the time value of money element of an asset is modified, how does the entity assess the contractual cash flows?L3