Preparing for changes affecting green bonds classification and measurement

Piyanat Suanapai
PwC Thailand Spotlight, insights on business and industry trends in Thailand and beyond.

Hello, I’m Piyanat Suanapai, your podcast host.

As you know, accounting standards help listed companies’ accountants prepare consistent, accepted and reliable financial reports. When amendments are made to these standards – the International Financial Reporting Standards (IFRS) and the Thai Financial Reporting Standards (TFRS) – finance teams at listed companies must acknowledge them and consider their impact on financial statements.

Recently, amendments were made to IFRS 9 – Financial Instruments, and the classification of financial assets under the Solely Payments of Principal and Interest (SPPI) criteria. These amendments may have an impact on the financial statements of companies investing in green bonds.

We have Sinsiri Thangsombat, Assurance Partner, PwC Thailand on our podcast to explain IFRS 9 – Financial Instruments amendments, how they’ll affect financial reporting in Thailand, and how companies can manage these effects. Let’s start our conversation.

Hello Sinsiri.

Sinsiri Thangsombat
Hello.

Piyanat
Can you explain the key amendments to IFRS 9 that accountants and those working in companies’ finance departments should be aware of?

Sinsiri
Last May, the International Accounting Standards Board (IASB), made amendments to IFRS 9 – Financial Instruments. Whilst there were many changes made, a relevant one to Thailand concerns the evaluation and analysis of financial assets’ contractual cash flow characteristics to determine whether they meet the SPPI criteria.

The revisions provide additional guidance and clarification to determine whether financial assets meet the SPPI criteria or not. What is the SPPI criteria? It helps assess whether financial asset cash flows are solely payments of principal or interest, and whether they account for risks or not, as risks may have an impact on financial statements.

The amendments provide clarity so that everyone is on the same page.

Piyanat
Why is further clarification needed on the SPPI assessment?

Sinsiri
The amendments are intended to provide additional examples and guidance because there are new financial instruments on the market. Sometimes, different interpretations of their application cause confusion or inconsistent reporting.

As such, it’s not that the standards were unclear, but the amendments are meant to align use when there are similar financial instruments.

Piyanat
To have a better understanding of these amendments, can you share what the differences are between the previous and current IFRS 9 standards?

Sinsiri
First of all, let me explain the concept of financial instrument classification. In addition to considering the business model, we must study cash flows generated by the contracts. Allow me to highlight the specific amendments mentioned previously. We must consider the principal and interest. The standard attempts to explain further what principal and interest payments are by looking at whether they reflect the debtor or issuer’s risk. If risk is reflected, the financial instrument passes the SPPI test. It’s consistent with a ‘basic lending arrangement’ where new features’ interest payments linked to other factors reflect the issuer’s risk.

Looking at new financial instruments that are also popular, such as green loans, principal and interest payments are linked to the issuer’s ESG (Environmental, social and governance) performance indicators. If they reflect the issuer’s risk, they meet the SPPI criteria.

Once financial instruments meet the SPPI criteria, investments can be measured using business models, classified at amortised cost or fair value through other comprehensive income (FVOCI), depending on the investor. If financial instruments linked to ESG don’t reflect basic lending arrangements or the issuer’s risk, they must be measured at fair value through profit or loss (FVTPL). This means the financial instruments must be measured at fair value in the financial statements.

For example, if on 31 December 2024, the value measured is THB100, and on 31 December 2025 the value measured is THB120, the difference of THB20 would be recorded in the income statement. If the financial instrument doesn’t meet the SPPI criteria, then it will be measured at FVTPL in the financial statements.

Piyanat
When will the amendments to IFRS 9 come into effect in Thailand?

Sinsiri
The amendments will be effective as of 1 January 2027. The Federation of Accounting Professions of Thailand provided an article on the classification of green loans on their website. For more information, you can visit their website and look for the article published on 23 July 2024. It has translated details on the amendments and green loans.

Piyanat
It sounds like the amendments to IFRS 9 will affect how company investments are measured. When the amendments come into effect, how will this affect financial reporting for businesses, or are there other aspects businesses should be aware of?

Sinsiri
For companies that publish full financial reports or PAEs (Publicly Accountable Entities), they should evaluate these financial instruments’ impact, and especially consider whether they meet the SPPI criteria or not.

The reason for this is, if public companies invest in financial instruments that don’t meet the SPPI criteria and must be measured at fair value, would income statement differences be an indication of the organisation’s management? If there is concern about income statement fluctuations, some people may have to avoid these financial instruments and consider others instead.

As such, much consideration is needed before investing.

Piyanat
Other than those investing in green bonds, should businesses take into account the amendments to IFRS 9?

Sinsiri
From a public company’s perspective, financial statements clearly reflect business performance. Many places have done research and discovered that fluctuations in financial statements affect stock prices, so keeping up with standards, whether it’s IFRS 9 or other standards such as S1 and S2, is vital. Accountants and CFOs should stay up to date so they can foresee impacts to financial statements and improve their management strategy.

Piyanat
After understanding the amendments to IFRS 9 and assessing their impact, how should businesses adapt?

Sinsiri
First, they should make adjustments to see what impact there would be on the income statement and statement of financial position.

Second, they should disclose information. Is there sufficient information to disclose in the income statement? They should determine whether the company has a way to manage or process amounts in time for publishing financial statements.

Third, the readiness of staff should be considered, specifically of those in charge of investments. Having assessed the investment impact, will the income statement reflect what the treasury department requires? Communication is vital. An impact assessment must be done. There should also be communication with departments so that they can be prepared to make decisions that allow accurate amounts to be reflected in the financial statements.

Fourth, is the system good enough to calculate correct amounts following accounting standards, within a set timeframe? 

Do they have the correct amounts and the required system? Further review is needed to assess the impact from accounting standard updates. I must emphasise that this doesn’t apply to just IFRS 9, but all standards. Staying up to date on revisions and understanding their impact before they’re in effect is important.

Piyanat
Lastly, can you share some key takeaways to help guide listed companies and businesses that may be impacted by current and future amendments to IFRS 9 and other standards?

Sinsiri
First, follow updates and keep yourself informed on how the standards have changed.

Second, perform an impact assessment. Following updates alone doesn’t mean taking action, but assessing their impact on financial statements, work processes and governance does.

Third, have a good understanding of changes so that you can communicate their impact and implications to relevant parties, whether they be board members, management or the working team. If there’s significant impact to your business, think it through properly and prepare in advance. Adapting strategies doesn’t happen in a day, time is needed. It’s better to be aware and be prepared early.

Piyanat
From this podcast, you’ve learnt why staying up to date with accounting standards allows businesses to communicate plans with stakeholders in advance. If amendments to accounting standards substantially affect a company’s profits and losses, or financial statements, preparation can reduce market panic.

Thank you so much Sinsiri for joining us today.

Sinsiri
Thank you, goodbye.

Piyanat
For more information, please visit our website at www.pwc.com/th or follow PwC Thailand social media channels – LinkedIn, X and Facebook for our latest updates.

Don’t forget to like and follow the PwC Thailand Spotlight podcast series so you don’t miss out on our new episodes.

That’s it for today, thank you and goodbye.

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