Parent A advances €1m to Subsidiary B on 1 January 2018 with the following terms:
- 5% interest;
- 30% of the annual appreciation in the property value;
- €1m repayable in 5 years – December 2022.
As the loan is in a ‘hold to collect’ business model, the key classification question is whether the loan meets the Solely Payments of Principal and Interest test (the SPPI test).
Despite the fact that the loan has contractual payments of principal and interest, the additional contingent payment linked to the appreciation in the property value must be considered in order to determine whether the loan meets the SPPI test. This because IFRS 9 requires the loan to be assessed in its entirety i.e. as one unit of account and specifies that contractual terms can only be ignored if the potential impact on the contractual cash flows is considered ‘de minimis’ or if the feature is ‘non-genuine’.
When determining whether a feature is de minimis entities must consider the ‘possible effect’ that the feature could have on the contractual cash flows in each reporting period (and cumulatively). Non-genuine features are those that are only triggered upon the occurrence of a rare or highly abnormal event (that is, the potential for the event to occur is at or very close to zero) and are therefore not expected to be common. In this example, the contingent feature is clearly genuine and in addition, it could have a substantially more than de minimis effect on the contractual cash flows of the loan. This feature therefore introduces property price risk, which is inconsistent with a basic lending arrangement.
Based on the above analysis, Parent A concludes that the loan fails the SPPI test and would be classified at fair value through profit or loss (FVPL). On an ongoing basis, the loan would be measured at fair value in accordance with IFRS 13 Fair Value Measurement with all movements in fair value going through profit or loss. IFRS 9 Profit participating loan
IFRS 9 Profit participating loan IFRS 9 Profit participating loan IFRS 9 Profit participating loan IFRS 9 Profit participating loan