Cash Flows Identification- Not-Only Principal And Interest – FAQ | IFRS

Cash flows identification- Not-Only Principal and interest

IFRS 10 Consolidated Financial StatementsThe following examples illustrate contractual cash flows that are not solely payments of principal and interest on the principal amount outstanding. For the context within IFRS 9: Financial Instruments, reference is made to IFRS 9 The Solely Payments of Principal and Interest Test .

This list of examples is not exhaustive:

Instrument

Analysis

Instrument F

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

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The holder would analyse the convertible bond in its entirety.

The contractual cash flows are not payments of principal and interest on the principal amount outstanding because they reflect a return that is inconsistent with a basic lending arrangement (see paragraph B4.1.7A); ie the return is linked to the value of the equity of the issuer.

Instrument G

Instrument G is a loan that pays an inverse floating interest rate (ie the interest rate has an inverse relationship to market interest rates).

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The contractual cash flows are not solely payments of principal and interest on the principal amount outstanding.

The interest amounts are not consideration for the time value of money on the principal amount outstanding.

Instrument H

Instrument H is a perpetual instrument but the issuer may call the instrument at any point and pay the holder the par amount plus accrued interest due.

Instrument H pays a market interest rate but payment of interest cannot be made unless the issuer is able to remain solvent immediately afterwards.

Deferred interest does not accrue additional interest.

Cash flows identification- Not-Only Principal and interest

Cash flows identification- Not-Only Principal and interest

Cash flows identification- Not-Only Principal and interest

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The contractual cash flows are not payments of principal and interest on the principal amount outstanding.

That is because the issuer may be required to defer interest payments and additional interest does not accrue on those deferred interest amounts. As a result, interest amounts are not consideration for the time value of money on the principal amount outstanding.

If interest accrued on the deferred amounts, the contractual cash flows could be payments of principal and interest on the principal amount outstanding.

The fact that Instrument H is perpetual does not in itself mean that the contractual cash flows are not payments of principal and interest on the principal amount outstanding.

In effect, a perpetual instrument has continuous (multiple) extension options. Such options may result in contractual cash flows that are payments of principal and interest on the principal amount outstanding if interest payments are mandatory and must be paid in perpetuity.

Also, the fact that Instrument H is callable does not mean that the contractual cash flows are not payments of principal and interest on the principal amount outstanding unless it is callable at an amount that does not substantially reflect payment of outstanding principal and interest on that principal amount outstanding. Even if the callable amount includes an amount that reasonably compensates the holder for the early termination of the instrument, the contractual cash flows could be payments of principal and interest on the principal amount outstanding. (See also paragraph B4.1.12.)

 

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