11.11 Modifications – Changes in contractual cash flows
Modification – understood as a change in the contractual cash flows in respect of a financial asset based on an annex to the contract, may be significant or insignificant. A change in the contractual cash flows resulting from execution of the terms of the contract is not a modification.
If the contractual cash flows associated with a financial asset are renegotiated or otherwise modified based on an annex to the agreement, and such renegotiation or modification does not lead to such a financial asset no longer being recognized (“an insignificant modification”), the gross carrying amount of the financial asset is recalculated and gain or loss arising from such modification is recognized in the financial result. An adjustment of the carrying amount of a financial asset resulting from the modification is recognized in interest income/ expenses over time using the effective interest rate method. The carrying amount of a financial asset is calculated as the present value of renegotiated or modified contractual cash flows, discounted using the original effective interest rate on the financial asset (or, in the case of credit-impaired financial assets purchased or issued, the effective interest rate adjusted for credit risk) or, if applicable (e.g. with respect to gain or loss on a hedged item resulting from hedging), the updated effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortized over the remaining part of the life of the modified financial asset.
In certain circumstances, renegotiation or modification of contractual cash flows associated with a financial asset may lead to derecognition of the financial asset. If an existing financial asset is derecognized due to its modification, and a modified asset is subsequently recognized, the modified asset is treated as a “new” financial asset (“a significant modification”). The new asset is recognized at the fair value and a new effective interest rate applicable to the new asset is calculated. If the characteristics of a modified new financial asset (after signing an annex) comply with the arm’s length conditions, the carrying amount of that financial asset is equal to its fair value.
The assessment whether a given modification of financial assets is a significant or an insignificant modification depends on the satisfaction of certain quantitative and qualitative criteria.
The following qualitative criteria have been adopted:
- Currency translation;
- Change of debtor, other than caused by the debtor’s death;
- Introducing or removing a contractual characteristic that adversely affects the test of cash flow characteristics (SPPI test) or removal of these features;
The occurrence of at least one of these criteria results in a significant modification.
- The quantitative criterion consists of a 10% test analysing the change in the contractual terms of a financial asset resulting in a difference between the amount of future cash flows arising from the changed financial asset discounted using the original effective interest rate and the amount of the future cash flows that would arise from the original financial asset discounted using the same interest rate.
In the event of the occurrence of a quantitative criterion (a difference) of more than 10%, the modification is considered significant, whereas a quantitative criterion of 10% or less means that the modification is considered insignificant.