Careful consideration and a documented decision regarding the Solely Payment of Principal and Interest test is needed in the following cases:
[IFRS 9 B4.1.13, IFRS 9 BC4.186, IFRS 9 BC4.190]
A bond with a stated maturity and payments of principal and interest linked to an unleveraged inflation index of the currency in which the instrument is issued. The principal amount is protected. This linkage resets the time value of money to the current level.
Linking payments of principal and interest to an unleveraged inflation index resets the time value of money to a current level, so the interest rate on the instrument reflects ‘real’ interest. Therefore, the interest amounts are consideration for the time value of money on the principal amount outstanding.
It appears that the SPPI test would be met even when there is no principal protection clause – i.e. the principal amount repayable is reduced in line with any cumulative reduction in the inflation index – because this would merely indicate that a component of the time value of money associated with the period during which the instrument is outstanding could be negative.
An instrument with a stated maturity and variable interest for which the borrower can choose a market interest rate that corresponds to the reset period on an ongoing basis.
The fact that the interest rate is reset during the life of the instrument does not disqualify the instrument from meeting the SPPI test.
However, if the borrower was able to choose to pay the one-month LIBOR rate for a three-month term without reset each month, then the time value of money element would be modified and an appropriate assessment would have to be made.
A bond with variable interest that is subject to an interest cap.
The instrument is a combination of a fixed- and floating-rate bond, as the cap reduces the variability of cash flows.
A full-recourse loan secured by collateral.
The fact that a full-recourse loan is secured by collateral does not affect the analysis.
A fixed interest rate bond, all of whose contractual cash flows are non-discretionary, but whose issuer is subject to legislation that permits or requires a national resolving authority to impose losses on holders of particular instruments (including this instrument) in particular circumstances – e.g. if the issuer is having severe financial difficulties or additional regulatory capital is required.
The holder analyses the contractual terms of the instrument to determine whether it meets the SPPI test. This analysis does not consider the payments that result from the national resolving authority‘s power to impose losses on the holders of the instrument, because these powers, and the resulting payments, are not contractual terms of the financial instrument.
Accordingly, such powers do not impact the analysis of whether the asset meets the SPPI test.
However, a contractual feature that specifies that all or some of the principal and interest should or may be written off if a specified event occurs – e.g. if the issuer has insufficient regulatory capital or is at a point of non-viability – would be relevant to the SPPI assessment; accordingly, a contractual bail-in feature could cause an instrument to fail to meet the SPPI test.
Instruments that may fail the SPPI test Instruments that may fail the SPPI test Instruments that may fail the SPPI test Instruments that may fail the SPPI test