The May 2024 amendments to IFRS 9 and IFRS 7 clarify two questions that Gulf banks and corporates have been asking for three years. They apply from 1 January 2026.
Key takeaways
- Loans with margin adjustments linked to sustainability targets can meet the SPPI criterion where the contingent feature is consistent with a basic lending arrangement.
- A financial liability settled through an electronic payment system may be derecognised at the payment initiation date if specified conditions are met.
- New disclosures apply to contingent features and to investments in equity instruments at FVOCI.
In May 2024 the IASB issued Amendments to the Classification and Measurement of Financial Instruments, changing IFRS 9 and IFRS 7 with effect for annual periods beginning on or after 1 January 2026. Two of the changes answer questions that have generated repeated debate in the region.
Sustainability-linked and other contingent features
Gulf banks have written a growing volume of loans whose interest margin steps up or down depending on whether the borrower meets ESG targets, such as emissions reductions. The question was whether such a feature is consistent with "solely payments of principal and interest", given that the interest rate changes in response to something that is not credit risk, time value of money or other basic lending risks.
The amendments clarify that a contingent feature that changes the timing or amount of contractual cash flows is consistent with a basic lending arrangement where the resulting cash flows are not significantly different from those of an otherwise identical instrument without the feature, and where the feature is not related to a risk that is unrelated to basic lending. In practical terms, a modest margin adjustment linked to ESG targets, capped in size and not designed to expose the lender to the borrower's ESG performance as an investment, will generally pass, and the loan can be measured at amortised cost. Each product's terms still require analysis, and the assessment must be documented.
Derecognition of liabilities settled electronically
When a company instructs its bank to pay a supplier, the payment leaves the payer's account and reaches the payee at different times. The question was whether the payable is derecognised when the instruction is given or when the cash is delivered. The amendments confirm the general rule that a financial liability is derecognised on the settlement date, but permit an entity, as an accounting policy choice, to derecognise a liability settled through an electronic payment system before that date if the entity has no practical ability to withdraw, stop or cancel the instruction, no practical ability to access the cash, and the settlement risk associated with the system is insignificant. Corporates that cut off payables at year-end based on instructions issued should review the systems they use against these conditions and choose and disclose their policy.
Disclosures
IFRS 7 now requires disclosure about contingent features that could change contractual cash flows, including the nature of the events and the range of possible changes. Additional disclosures apply to equity investments designated at fair value through OCI, including the fair value gains and losses in the period and any transfers within equity. Preparers should build these into the 2026 disclosure checklist now, and consider whether early application is helpful where sustainability-linked products are already material.