IFRIC Spotlight: Emerging Guidance on Financial Instruments

 

Financial instruments are among the most complex areas of IFRS, and IFRS 9 — Financial Instruments remains one of the most heavily debated standards. From classification and measurement to impairment and embedded derivatives, it continues to raise application challenges for preparers, auditors, and regulators worldwide.

In June 2025, the IFRS Interpretations Committee (IFRIC) issued two tentative agenda decisions (TADs) related to IFRS 9:

1. Transaction Costs and Effective Interest Rate (EIR) Calculations

2. Embedded Prepayment Options in Debt Instruments

Additionally, the IFRIC updated guidance to reflect alignment with IFRS 18 (Presentation and Disclosure), ensuring consistency in financial statement presentation.

These developments are open for comment until 6 October 2025 and will likely shape future practice in accounting for financial instruments. For Caribbean businesses, particularly those in banking, insurance, energy, and capital markets, the implications are significant.

Background: Why IFRIC Matters

The IFRS Interpretations Committee (IFRIC) is tasked with:

• Addressing widespread application issues that arise under IFRS.

• Providing clarification where diversity in practice exists.

• Ensuring consistent global application of standards.

While IFRIC agenda decisions are not new standards, they are highly influential. Regulators and auditors expect entities to align their practices with IFRIC clarifications.

Tentative Agenda Decision 1: Transaction Costs and EIR Calculations

The Issue

When calculating the effective interest rate (EIR) under IFRS 9, entities include transaction costs. But diversity has arisen on:

• Which costs qualify as transaction costs;

• How they are allocated over the life of the instrument;

• Treatment when instruments are prepaid or modified.

IFRIC Clarification

• Transaction costs are incremental costs directly attributable to acquiring or issuing a financial instrument.

• These costs are included in the EIR calculation and amortized over the expected life of the instrument.

• When instruments are prepaid, unamortized transaction costs must be recognized immediately in profit or loss.

Implications

• Banks and lenders must reassess how loan origination fees and costs are treated.

• Corporates issuing debt must carefully track transaction costs to avoid misstatements.

• Auditors will scrutinize EIR models more closely.

Tentative Agenda Decision 2: Embedded Prepayment Options

The Issue

Many debt instruments include prepayment options that allow borrowers to repay early, sometimes with compensation to lenders. Questions have arisen about whether such options meet the “solely payments of principal and interest (SPPI)” test under IFRS 9.

IFRIC Clarification

• Embedded prepayment options can meet the SPPI test if compensation paid or received for early termination is reasonable.

• If the option significantly alters cash flows beyond compensation for time value and credit risk, the instrument may fail SPPI and require fair value through profit or loss (FVTPL) measurement.

Implications

• Caribbean banks and corporates with early repayment clauses must reassess classification.

• Potential reclassifications may impact financial ratios, covenants, and investor communications.

IFRS 18 Alignment

The June 2025 IFRIC Update also included changes to ensure consistency with IFRS 18, which redefines subtotals and presentation. This means:

• Financial instrument income and expense items must now be classified under the new operating, investing, and financing categories.

• Disclosure notes must align with IFRS 18’s disaggregation principles.

For Caribbean companies preparing for IFRS 18 adoption in 2027, this early integration is a warning sign: systems must be updated well in advance.

Implications for Caribbean Businesses

Banks and Financial Institutions

• Loan origination fees and transaction costs under EIR will be under greater scrutiny.

• Embedded derivatives in loan contracts must be carefully evaluated.

Corporate Borrowers and Issuers

• Transaction cost accounting impacts effective interest and borrowing costs.

• Prepayment clauses may shift instruments into FVTPL, creating P&L volatility.

Regulators

• Regional regulators (e.g., Bank of Jamaica, Central Bank of Trinidad & Tobago) will likely expect early alignment with IFRIC clarifications.

Auditors

• Greater focus on testing EIR models and evaluating embedded features in contracts.

Hypothetical Case Studies

Case 1: Jamaican Commercial Bank

• Origination fees previously excluded from EIR are now required to be included.

• Leads to higher deferred income recognition and impacts reported net interest margins.

Case 2: Trinidad Corporate Issuer

• Issues a bond with a prepayment clause linked to commodity prices.

• IFRIC guidance: clause may fail SPPI, requiring FVTPL measurement. This creates earnings volatility that must be disclosed.

Case 3: Guyanese SME Borrower

• Takes out a USD loan with prepayment option.

• IFRS 9 classification shifts reporting treatment, requiring reassessment of accounting policies.

Action Plan for Businesses

1. Review Contracts

   • Reassess loan and debt agreements for transaction costs and prepayment features.

2. Update EIR Models

   • Ensure transaction costs are included correctly and amortized over expected terms.

3. Classification Testing

   • Apply the SPPI test to instruments with embedded prepayment options.

4. Enhance Disclosures

   • Prepare for IFRS 18-driven changes to financial instrument presentation.

5. Engage with Regulators and Auditors

   • Discuss interpretations and transition timelines.

How Dawgen Global Can Help

At Dawgen Global, we bring together deep IFRS expertise and regional insight to help clients navigate complex financial instrument accounting. Our services include:

• Contract Reviews: Assessing transaction costs and embedded options under IFRS 9.

• Model Testing: Validating EIR calculations and assumptions.

• Classification Advisory: Determining appropriate measurement categories for debt instruments.

• Disclosure Alignment: Preparing financial statements consistent with IFRIC guidance and IFRS 18.

• Training & Workshops: Equipping finance teams with practical knowledge of IFRIC agenda decisions.

Conclusion

The June 2025 IFRIC agenda decisions provide critical clarity on IFRS 9 application, particularly regarding transaction costs and embedded prepayment options. For Caribbean businesses, the implications are far-reaching, from bank lending practices to corporate borrowing strategies.

By acting early, companies can avoid misstatements, reduce audit risk, and prepare for the future integration of IFRS 18 and IFRS 19.

📣 Call to Action

At Dawgen Global, we help Caribbean businesses align with IFRS 9 guidance and prepare for IFRIC-driven changes. Contact our team to review your financial instruments, test your EIR models, and ensure compliance with emerging standards.

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