This free, guided checker walks your finance team through the key decision points for IFRS 9 Prepayment Features and Negative Compensation. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
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.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
A prepayment feature is any contractual right of either party to settle the instrument before its stated maturity, including call options, put options, and mandatory prepayment on defined events. Locate the clause in the loan or note agreement and confirm it changes the timing (and possibly the amount) of contractual cash flows. A common trap is overlooking embedded call rights in intercompany or related-party notes that are documented only in side letters.
No prepayment feature is present; assess classification under the ordinary SPPI criterion in IFRS 9.4.1.2(b) and B4.1.7 without the B4.1.11 to B4.1.12 prepayment analysis.
Official guidance: IFRS issued standards
Model the settlement amount on representative prepayment dates and compare it with outstanding principal plus accrued interest. Reasonable additional compensation for early termination (for example a make-whole based on foregone interest) is permitted under IFRS 9.B4.1.11(b); a charge that includes a lender profit element beyond compensation is not. The frequent misstep is treating any make-whole clause as automatically SPPI-compliant without quantifying it.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
Negative compensation arises when, on early termination, the lender receives less than outstanding principal and accrued interest - in effect the borrower is compensated for prepaying, which is common where market rates have risen. Trace each prepayment scenario in the contract and identify whether settlement can drop below par plus accrued interest. Do not assume a symmetric make-whole is always positive; a two-way break clause can produce negative compensation.
Negative compensation is present; confirm the instrument meets all three conditions of the IFRS 9.B4.1.12 exception before concluding SPPI, including that the fair value of the prepayment feature was insignificant at initial recognition.
Official guidance: IFRS issued standards
Test whether the negative amount is confined to reasonable compensation for early termination measured against par and accrued interest, or whether it introduces exposure to risks beyond a basic lending arrangement (for example equity, commodity, or leverage). Under IFRS 9.B4.1.12 the exception is available only where the prepayment amount substantially represents par plus accrued interest, may include reasonable additional compensation, and the feature's fair value is insignificant at initial recognition. The trap is confusing a large-but-reasonable make-whole with a non-SPPI exposure.
The prepayment amount can deviate from par plus accrued interest beyond reasonable early-termination compensation; SPPI fails and the asset is measured at fair value through profit or loss under IFRS 9.4.1.4.
Official guidance: IFRS issued standards
Support the judgement that additional compensation is reasonable by comparing the clause with prepayment or make-whole terms customary for similar instruments in the same market or jurisdiction. Gather examples of comparable loan or bond terms and document the observed range. The common misapplication is asserting reasonableness by reference to the entity's own prior deals rather than an external market benchmark.
The reasonableness benchmark under IFRS 9.B4.1.11(b) is incomplete; do not finalize the SPPI conclusion until the additional compensation is evidenced against comparable market terms.
Official guidance: IFRS issued standards
Assess the instrument as a whole: interest must be consideration for the time value of money, credit risk, other basic lending risks (such as liquidity), and a profit margin, per IFRS 9.B4.1.7A. Combine the prepayment analysis with the pricing of the ongoing coupon and any interest resets. The frequent trap is passing the prepayment clause in isolation while overlooking a leverage or equity-linked feature in the coupon.
The contractual cash flows are not solely payments of principal and interest; measure the asset at fair value through profit or loss under IFRS 9.4.1.4.
Official guidance: IFRS issued standards
Once SPPI is confirmed, the measurement category turns on the business model: hold-to-collect gives amortized cost, hold-to-collect-and-sell gives FVOCI, and other models give FVTPL. Confirm the documented business model supports the category recorded. A common error is defaulting an SPPI-passing instrument to FVTPL out of convenience, or ignoring a fair-value-option election under IFRS 9.4.1.5.
Classification does not follow the SPPI and business-model outcome; unless the fair value option in IFRS 9.4.1.5 was elected, correct the measurement basis under IFRS 9.4.1.2 to 4.1.2A.
Official guidance: IFRS issued standards
A modification is a change to the contractual cash flows agreed by the parties after initial recognition. Determine first whether the change is substantial enough to cause derecognition (a new asset assessed for SPPI afresh) or a non-substantial modification remeasured under IFRS 9.5.4.3 with a gain or loss. The trap is booking revised cash flows prospectively through the effective interest rate without testing whether derecognition and a fresh SPPI assessment were required.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
Where a modification does not result in derecognition, reassess whether the revised prepayment terms still satisfy SPPI and whether the original classification remains appropriate. Recompute the modification gain or loss by discounting the revised cash flows at the original effective interest rate under IFRS 9.5.4.3. The common misapplication is assuming classification is frozen at origination and never revisiting SPPI after a renegotiation.
SPPI on the modified terms is unresolved; complete the reassessment under IFRS 9.B4.1.11 to B4.1.12 and recompute any modification gain or loss under IFRS 9.5.4.3 before concluding.
Official guidance: IFRS issued standards
For a modified financial asset that is not derecognized, reassess whether credit risk has increased significantly by comparing the risk of default at the reporting date, based on the modified terms, with the risk at initial recognition, per IFRS 9.5.5.12. Move the asset between stages and remeasure the loss allowance accordingly. The trap is treating a distressed renegotiation as automatically curing credit risk and returning the asset to 12-month ECL prematurely.
The staging consequence of the modification is unaddressed; reassess significant increases in credit risk under IFRS 9.5.5.12 and remeasure the loss allowance under IFRS 9.5.5.3 before period close.
Official guidance: IFRS issued standards
Disclose the significant judgements made in classifying financial assets, including how the SPPI conclusion on the prepayment feature was reached, under IAS 1.122. For modified assets that were not derecognized, disclose the amortized cost before modification and the modification gain or loss under IFRS 7.35J. The frequent gap is a boilerplate accounting-policy note that never explains the entity-specific prepayment judgement.
SPPI, prepayment, and modification analysis is complete with IAS 1.122 judgement disclosures and IFRS 7.35J modification disclosures drafted. The SPPI classification-judgement and modification disclosures under IAS 1.122 and IFRS 7.35J are outstanding; complete them before finalizing the financial statements.
Official guidance: IFRS issued standards
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