In a paper for the September issue of ‘IFRS in Practice’, Stanislav Antonov, Director of Audit for High-Tech Companies at FBK, looks into the amendments to IFRS 9 and IFRS 7 clarifying the procedure for conducting the SPPI test for financial instruments with variable terms linked to the achievement of sustainable development goals.
The author explains how the approach to assessing contracts with ‘variable’ terms has changed and what new requirements have emerged for analysing all possible scenarios and assessing the materiality of cash flow deviations.
Three complex practical scenarios are dwelt on in the article: multi-component linking of the rate to an ESG metric and the borrower’s financial indicators, penalties for failure to achieve ESG goals, and the presence of limiting factors when linked to market indices.
‘The amendments to IFRS 9 have brought clarity to the classification of financial instruments with ESG linkage, but they have not given exceptions from the SPPI test rules for them. The key innovation was an additional test for instruments with contingent events, which allows assessing the materiality of the impact of such events on cash flows,’ the author emphasizes.
For more on how to conduct the SPPI test in practice, what ‘grey areas’ arise when analysing ESG loans, and how to document professional judgment properly, go to msfo-practice.ru/1208740.
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