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The Australian Accounting Standards Board (AASB) has issued amendments to AASB 7 “Financial Instruments: Disclosures” and AASB 9 “Financial Instruments”, which will come into effect for annual reporting periods beginning on or after 1 January 2026, with earlier application permitted.
These amendments, set forth in AASB 2024-2, aim to enhance the requirements for settling financial liabilities using electronic payment systems and assessing the contractual cash flow characteristics of financial assets with ESG and similar features. Additionally, it modifies disclosure requirements for equity instruments investments designated at fair value through other comprehensive income and introduces new disclosure requirements for financial instruments with contingent features not directly related to basic lending risks and costs.
Amendments to AASB 7
1. Enhanced Disclosure Requirements for Fair Value Gains and Losses in Equity Instruments Designated at Fair Value Through Other Comprehensive Income
Under the new amendment, AASB 7 now requires the disclosure of the fair value gain or loss presented in other comprehensive income, showing separately the fair value gain or loss related to investments derecognised during the reporting period and those held at the end of the reporting period. This amendment aims to enhance transparency regarding investments in equity instruments designated at fair value through other comprehensive income.
It also adds the requirement to disclose any transfers of cumulative gain or loss within equity during the reporting period related to investments in equity instruments measured at fair value through other comprehensive income derecognised.
2. New Disclosure Requirements for Financial Assets and Liabilities with Contingent Terms
Under the new amendments, entities must disclose the effect of contractual terms that could change the amount of contractual cash flows based on contingent events not directly related to changes in basic lending risks and costs (e.g. the time value of money or credit risk). This includes a qualitative description of the nature of the contingent event, quantitative information about the possible change to contractual cash flows, and the gross carrying amount of financial assets and amortized cost of financial liabilities subject to those contractual terms.
For example, if an entity's contractual cash flows change is based on achieving a reduction in its carbon emissions. The required disclosures must be applied in such scenarios.
Entities are required to disclose this information by class of financial assets measured at amortised cost or fair value through other comprehensive income, and by class of financial liabilities measured at amortised cost. The level of detail and aggregation must be sufficient to enable users to understand the information disclosed.
3. Effective Date and Transition
The amendments highlighting that entities shall apply these amendments when it applies the amendments to AASB 9 but need not provide disclosures for periods before the initial application of the amendments.
In the reporting period when an entity first applies AASB 2024-2, it is not required to disclose the information required by paragraph 28(f) of AASB 108.
Amendments to AASB 9
1. Recognition and Derecognition of Financial Assets and Liabilities with Electronic Payment Settlements
A financial asset is recognised on the date the entity becomes a party to the contractual provisions and is derecognised when the rights to the cash flows expire or the asset is transferred. A financial liability is generally derecognised on the settlement date, which is when the liability is extinguished.
However, if an entity settles a financial liability using an electronic payment system and has initiated a payment instruction that makes it impossible to withdraw or cancel the payment, and if the settlement risk is minimal, the entity can recognise the liability as settled before the actual settlement date. This option must be applied consistently for all similar electronic payments.
2. Evaluation of Contractual Cash Flows for Financial Assets: Consistency with Basic Lending Arrangements
In classifying financial assets, entities need to evaluate whether the contractual cash flows are consistent with a basic lending arrangement, which involves only principal and interest payments. Contractual cash flows are not consistent if they are linked to variables unrelated to basic lending risks or costs, such as equity values or commodity prices, or if they represent a share of revenue or profit.
When a financial asset includes terms that can alter cash flows, such as prepayment options or contingent features, the entity must assess whether, under all scenarios, the cash flows remain solely principal and interest payments. Features like carbon emission-linked adjustments or non-recourse elements may complicate this assessment, requiring careful evaluation of how these features impact the nature of the cash flows.
A contingent feature may still result in cash flows consistent with basic lending arrangements if, in all scenarios, they closely match those of a similar financial instrument without the feature. For example, if a loan adjusts interest rates based on carbon emission reductions, it remains consistent with principal and interest payments if the changes do not significantly alter the cash flows. Entities may use qualitative or quantitative assessments to determine this, but if it's obvious that cash flows are not significantly different, detailed analysis may not be needed.
A financial asset may have cash flows labelled as principal and interest, but if these do not actually represent payments on the principal amount outstanding, it may not meet the basic lending arrangement criteria. For instance, non-recourse features, where an entity’s ultimate right to receive cash flows is contractually limited to the cash flows generated by specified assets, may also not meet these criteria.
However, non-recourse features do not automatically disqualify a financial asset from meeting the principal and interest condition. The creditor must assess if the asset’s cash flows truly represent principal and interest payments, considering how other contractual arrangements affect these cash flows. If the terms result in cash flows that do not align with principal and interest payments, the asset does not meet the condition.
3. Effective Date and Transition
Entities can apply the amendments for annual reporting periods beginning on or after 1 January 2026, with the option for earlier application. If entities choose to apply these amendments earlier, they must either apply all amendments simultaneously or only the amendments to the Application Guidance to Section 4.1 of AASB 9 (Classification of financial assets).
Entities must apply AASB 2024-2 retrospectively in line with AASB 108, starting from the beginning of the annual reporting period in which the amendments are first applied. While restating prior periods is not required, entities may choose to do so if feasible without hindsight. If prior periods are not restated, the effects of applying the amendments should be recognised as adjustments to the opening balances of financial assets, financial liabilities, and retained earnings or other equity components. Additionally, at the date of initial application, entities must disclose the measurement categories and carrying amounts of financial assets that changed as a result of the amendments before and after the amendment.
The amendments to AASB 7 and AASB 9 introduced by AASB 2024-2 seek to provide users of financial statements with more relevant and transparent information. Entities are encouraged to familiarise themselves with these changes and consider the implications for their financial reporting practices ahead of the 2026 effective date.