PwC Thailand warns of IFRS 9 updates affecting green bonds classification and measurement

PwC Thailand indicates that amendments to International Financial Reporting Standard 9 (IFRS 9) - Financial Instruments, effective from 1 January 2026, concerning the classification of financial assets under the Solely Payments of Principal and Interest (SPPI) criteria, may impact the profit or loss in the financial statements of companies investing in green bonds.

Investments that don't meet the SPPI criteria will need to be measured at fair value through profit or loss. The amended Thai Financial Reporting Standard 9 (TFRS 9) is expected to be implemented in Thailand after 1 January 2027.

Wandee Leevorawat, Assurance Partner at PwC Thailand, said that the International Accounting Standards Board (IASB) has recently revised the International Financial Reporting Standard 9 Financial Instruments (IFRS 9), concerning the classification and measurement of financial assets. The updated guidelines now provide additional direction on evaluating and analysing the contractual cash flow characteristics of financial assets to determine whether they meet the SPPI criteria.

Furthermore, there are also clarifications on assessing SPPI for financial assets with terms that allow cash flows to change based on potential future events. This could affect the classification and measurement of green bonds, whose interest rates are often linked to the issuers' environmental, social and governance (ESG) performance indicators.

Initially, IFRS 9 lacked clear principles. It only specified that if an entity's investment in debt instruments met the SPPI criteria, the investment could be measured in three ways depending on the asset management model:

1. Amortised cost
2. Fair value through other comprehensive income (FVOCI)
3. Fair value through profit or loss (FVTPL)

However, if the debt instruments invested in don't meet the SPPI criteria, the investment must be measured solely at FVTPL. Measuring at FVTPL and FVOCI can lead to significantly different figures appearing in a company's financial statements.

"The key factor determining which method to use is whether the debt instrument invested in meets the SPPI criteria," explained Wandee.

"In the past, many entities opted to measure assets that meet the SPPI criteria and have an asset management model focused on both collecting contractual cash flows and selling financial assets using the FVOCI method. However, if the assets do not meet the SPPI criteria, they must be measured at FVTPL.

"These two methods will have a different impact on the company's profit and loss. Additionally, FVTPL may introduce unwanted volatility into a company's profit or loss, leading some companies to avoid investing in such assets altogether," she said.

Wandee continued that the latest amendments to IFRS 9 provide additional guidance on assessing SPPI for financial assets, with terms that allow changes in the timing and amount of cash flows based on potential future events. The assessment now includes three criteria:

1. Are the contractual cash flows, both before and after the potential future events, consistent with a basic lending arrangement?
2. Is the nature of the contingent event directly related to a change in basic lending risks and costs?
3. In any contractually possible scenario, could the cash flows be significantly different from those of an identical asset without the contingent feature?

These amendments to IFRS 9 will be effective as of 1 January 2026.

Amended TFRS 9 expected in Thailand after 1 January 2027

In Thailand, Wandee anticipates that the amended TFRS 9 will be applied to financial statements starting on or after 1 January 2027. However, entities may choose to adopt it earlier.

"Even though the amended TFRS 9 will become effective after the updated IFRS 9, it's expected that many Thai companies will start adopting IFRS 9 guidelines in their financial statements before it is officially enforced. This will impact companies with investments in green bonds that have contractual conditions where cash flows payable by issuers change based on ESG indicators. If companies investing in these instruments interpret their investments in a way that is inconsistent with the amended IFRS 9, the figures in their financial statements will be impacted and require adjustments. This is true for companies that choose to measure at FVOCI and need to switch to measuring at FVTPL, as it will impact their operating results," Wandee said.

"In this case, companies interested in investing in green bonds should thoroughly analyse these investment assets before committing. If such investments do not meet the SPPI assessment criteria, profits or losses in the financial statements could be impacted due to changes in fair value," she added.