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The Interpretations Committee tentatively decided not to add the issue to its agenda

 08 September 2015

The Interpretations Committee received a request to clarify the application of the embedded derivative requirements of IAS 39 Financial Instruments: Recognition and Measurement in a negative interest rate environment. Specifically, the Interpretations Committee considered: whether paragraph AG33(b) of IAS 39 should apply to an embedded interest rate floor in a floating rate host debt contract in a negative interest rate environment; and how to determine the ‘market rate of interest’ referred to in that paragraph.

The Interpretations Committee observed that:

  • paragraph AG33(b) of IAS 39 should be applied to an interest rate floor in a negative interest rate environment in the same way that it would be applied in a positive interest rate environment; and
  • in order to determine the appropriate market rate of interest when the contract is issued for the purposes of applying paragraph AG33(b) of IAS 39, an entity is required to consider the specific terms of the contract, including the relevant credit or other spreads appropriate for the counterparty and the market in which it is operating.

In drawing this conclusion, the Interpretations Committee noted the following:

  • paragraph AG33(b) of IAS 39 makes no distinction between positive and negative interest rates and, therefore, the requirements of that paragraph should be applied consistently in both cases; and
  • the term market rate of interest is linked to the concept of fair value as defined in IFRS 13 Fair Value Measurement and is described in paragraph AG64 of IAS 39 as the rate of interest ‘for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating’.

In the light of the existing IFRS requirements, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee [decided] not to add this issue to its agenda.

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