Consider the accounting impact of any change in timing and/or amount of cash flows of a financial liability.
During the COVID-19 crisis, companies may be granted a certain period of deferral of interest and/or principal payments, a payment holiday. A question arises: how to account for contractually agreed deferral of payments (change in timing of cash flows) for loans at amortised cost under Dutch GAAP?
The financial statements must reflect the economic reality of transactions. Consequently, an asset or liability will continue to be recognised on the balance sheet if a transaction does not lead to a significant change in the economic reality of these items.
The Dutch accounting requirements are silent on the question when a deferral of cash flows is categorised as a significant change. For financial instruments it is generally accepted that a change is considered to be significant if the present value of the modified cash flows differs more than 10% from the present value of the original cash flows at the time of the modification (substantial modification). The present value is determined using the original effective interest rate. The accounting consequences can then be summarised as follows:
|Change in present value||Modification||Accounting treatment|
|> 10%||Substantial||Derecognise original loan and recognise new loan||Recognise the difference between the amortised cost of the original loan and the market value of the ‘new’ loan in profit and loss|
|< 10%||Non-substantial||Retain original loan||Recognise any difference between the amortised cost of the loan before the modification and the present value of the modified cash flows in profit and loss|
It is unlikely that a deferral of interest and/or principal payments for a limited period will result in a substantial modification, i.e. the 10% criterion is not met. The deferral of the cash flows will thus be accounted normally as a non-substantial modification. Whether or not there will be a modification gain or loss to be recognised in profit and loss depends on the question whether or not interest will accrue during the period of the cash flow deferrals, which would compensate for the decrease in the net present value caused by the deferral.
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