Transaction price vs fair value

[IFRS2020]

A scenario is that the instrument is measured at amortised cost. As per IFRS 9, on initial recognition, the instrument needs to be measured at fair value, and it is established that the transaction price is not equal to fair value, so according to IFRS 9.B.5.1.2A(b), the transaction price will be adjusted to defer the difference between the fair value at initial recognition and the transaction price.

After initial recognition, how would the deferred difference be treated - IFRS 9.B.5.1.2A(b) says that 'the entity shall recognise the deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability'. If the instrument is subsequently measured at amortised cost, how would the deferred difference be treated? From the wording of the Standard, it seems one has to continually measure the instrument at fair value to determine the extent to which the deferred difference should be released to P&L.

Any thoughts or comments would be welcome.

[Marek Muc]

What's the reason for the difference between the price and fair value? What are key characteristics of this instrument?

[IFRS2020]

A loan may use a rate booked in advance, so it may not be based on the rate that would have applied on initial recognition.

[JakobLavrod]

What it clear when booking in the rate that there was a loan connected to it? In such case, it could still be classified as fair value, since it was a fair value off-balance item when the booking rate was set. However, more details here are needed on the loan arrangement.

[Marek Muc]

This appears to be more of an embedded interest rate derivative, which probably should have been recognised by now, but I'm not 100% on this.

[DJP]

Isn't this just a loan commitment? Loan commitments are embedded derivatives, but they are specifically excluded from the scope of IFRS 9 (to avoid this kind of accounting complexities). If the rate was the market rate at the time it was agreed, you just use that rate for the amortised cost measurement (no fair value difference is booked at the time you recognise the loan). However, if you agreed on a rate that was below the market rate, then you must refer to paragraph 4.2.1(d)

[Marek Muc]

Good point.
Can you share more details, IFRS2020?

[IFRS2020]

Yes, it will be a loan commitment.

Does this mean when the loan draws down (which will be the initial recognition point for the loan), it will meet the requirement of the Standard that the financial asset should initially be recognised at its fair value if the rate agreed in advance was the market rate?

It is possible that the market rate at the time of initial recognition could differ from what was agreed. Therefore, should the current market rate at the time of initial recognition not be factored in to determine the loan's fair value?

[JakobLavrod]

I think the relevant question is to ask: Why would there be a difference from market rates? If the answer is due to for example risk or other commercial consideration, one could argue the deal is on fair value, it is just that there are some other factors involved.

[DJP]

Hi IFRS2020,

Yes, for loan commitments it is most likely the case that the rate at the time of recognition (drawdown date) will be different from the rate agreed (rate will have changed in the meantime).

Loan commitments meet the definition of derivatives, but the IASB excluded them from the scope of IFRS 9 to simplify their accounting (you only need to consider them for ECL impairment purposes though).

So, to answer your question, at the drawdown date you will consider the agreed rate as the market rate (no fair value adjustment is needed). (I am assuming here that the rate agreed was the market rate at the time the loan commitment was entered into.)

Hope this helps.