New BDO Comment Letter – Prepayment Features with Negative Compensation

BDO has submitted its comment letter in response to the International Accounting Standard Boards exposure draft ED/2017/3 Prepayment Features with Negative Compensation (Amendment to IFRS 9) issued I April 2017.

Below are some key quotes from the comment letter:

We agree with the Board’s decision to address the accounting for financial assets that contain prepayment features under which the prepayment amount might include a penalty (referred to in the ED as ‘negative compensation’).  We also agree that amortised cost measurement provides more relevant information than fair value, because this results in the recording of interest income using the effective interest rate method and brings those financial assets within the scope of the impairment requirements of IFRS 9.  We believe that this information is relevant for investors and other users of financial statements.

However, we disagree with a number of the proposals.  In particular, we believe that the proposed requirement in paragraph B4.1.12A(b) is unnecessary, and is inappropriate as it could result in economically similar financial assets being accounted for differently (for example, because one is originated by an entity and another is acquired as part of a business combination some time after its origination).  We also disagree with the inclusion of additional guidance for the determination of what constitutes ‘reasonable additional compensation’ in the basis for conclusions, and consider that this should be removed.

Assuming that the Board finalises its proposal, we believe that an associated amendment should be made to IFRS 7 to require disclosure of a comparison of the amortised cost carrying amount and the fair value of those financial assets at each reporting date (that is, to treat these assets as a separate class), together with separate disclosure of gains and losses arising from the exercise of those prepayment features.

We also encourage the Board to move forward quickly in finalising the amendments, in order that they are included in IFRS 9 in time for its adoption in reporting periods beginning on or after 1 January 2018.

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