This free, guided checker walks your finance team through the key decision points for IFRS 9 Financial Liability Modification. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Modifications include changes to interest rate, maturity, covenant, or principal; exchanges replace the original instrument with a new one that may or may not have substantially different terms. Informal concessions such as payment holidays or waived fees can be modifications even without a signed amendment. Derecognition otherwise occurs only when the obligation is discharged, cancelled, or expires (IFRS 9.3.3.1).
No modification accounting applies; continue amortised cost measurement of the existing liability (IFRS 9.3.3.1; IFRS 9.4.2.1).
Official guidance: IFRS issued standards
IFRIC 19 applies when a financial liability is extinguished by issuing equity instruments to the creditor; it does not apply to transactions with shareholders in that capacity or common-control capital contributions.
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Official guidance: IFRS issued standards
Equity instruments are measured at fair value at extinguishment date; if equity fair value cannot be measured reliably, use the fair value of the liability extinguished per IFRIC 19.7.
Recognise the extinguishment gain or loss in profit or loss and measure the equity instruments issued at fair value at the extinguishment date (IFRIC 19.6; IFRIC 19.9). Complete the IFRIC 19 measurement, using the fair value of the liability extinguished if the equity fair value is not reliably measurable, before recognising the extinguishment gain or loss (IFRIC 19.7; IFRIC 19.9).
Official guidance: IFRS issued standards
Terms are substantially different when the discounted present value of new cash flows including borrower-lender fees differs by at least 10% from remaining original cash flows at the original EIR.
Perform the 10% test at the original effective interest rate before deciding between modification and derecognition accounting (IFRS 9.B3.3.6).
Official guidance: IFRS issued standards
Failure of the 10% test requires derecognition of the original liability and recognition of a new liability at fair value with any difference recognised in profit or loss. Many entities layer a qualitative assessment over the numeric result for changes the calculation cannot capture, such as a currency switch or a newly inserted conversion option.
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Official guidance: IFRS issued standards
On derecognition the gain or loss equals the difference between the carrying amount of the old liability and the fair value of consideration paid including the new liability recognised.
Recognise extinguishment gain or loss in profit or loss and measure the new liability at fair value with a new effective interest rate (IFRS 9.3.3.2; IFRS 9.3.3.3). Derecognise the original liability and recognise the replacement at fair value, with the difference in profit or loss (IFRS 9.3.3.2; IFRS 9.3.3.3).
Official guidance: IFRS issued standards
For a non-substantial modification the liability is not derecognised: recompute amortised cost as the present value of the revised cash flows discounted at the original effective interest rate and recognise the difference immediately in profit or loss as a modification gain or loss (IFRS 9.B5.4.6). Qualifying costs and fees adjust the carrying amount and are amortised over the remaining term of the modified liability, which updates the effective interest rate (IFRS 9.B3.3.6A). A common misapplication is deferring the catch-up adjustment by simply resetting the EIR, an IAS 39-era practice that is not acceptable under IFRS 9.
Restate the carrying amount to the present value of the modified cash flows at the original effective interest rate and recognise the modification gain or loss immediately in profit or loss (IFRS 9.B5.4.6).
Official guidance: IFRS issued standards
The May 2020 IFRS 9 amendment limits 10% test fees to those paid or received between borrower and lender or paid on the other's behalf; third-party fees adjust carrying amount but are excluded from the test.
Reperform the 10% test excluding third-party fees from the cash flow comparison (IFRS 9.B3.3.6).
Official guidance: IFRS issued standards
IFRIC 19.8 requires allocating consideration between the part extinguished and the part remaining when only part of the liability is settled or modified in a combined transaction. The consideration allocated to the remaining liability then feeds the assessment of whether its terms have been substantially modified (IFRIC 19.10).
Allocate the consideration between the extinguished portion and the remaining liability before applying the 10% test to the remaining balance (IFRIC 19.8; IFRIC 19.10).
Official guidance: IFRS issued standards
IFRIC 19 requires separate disclosure of the gain or loss when a liability is extinguished through equity issuance or when derecognition accounting applies to a debt exchange. Present the amount as a separate line item in profit or loss or in the notes (IFRIC 19.11), and include amortised cost gains and losses within the IFRS 7.20 income statement disclosures. Do not net the extinguishment result against ongoing interest expense.
Finalise modification accounting with revised EIR and required IFRS 7 disclosures (IFRS 9.B3.3.6A; IFRS 7.20). Add separate gain or loss disclosure before finalising the accounting (IFRIC 19.11).
Official guidance: IFRS issued standards
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