Modification of financial assets and liabilities under IFRS 9

Interest rate cuts, payment holidays, extended terms and debt restructurings all change a loan's cash flows. IFRS 9 decides whether the old loan is gone and a new one has started, or whether the old loan simply carries on with an adjusted balance. This guide explains the 10% test, how to calculate the modification gain or loss, and works an example.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

A modification of financial assets or liabilities happens when the contractual cash flows are renegotiated. Under IFRS 9, a substantial modification is treated as derecognising the old instrument and recognising a new one. For a financial liability, it is substantial if the present value of the new cash flows, discounted at the original effective interest rate, differs by at least 10% from the carrying amount, or if qualitative factors say so. Otherwise the carrying amount is recalculated at the original rate and the difference is a modification gain or loss in profit or loss.

At a glance

Substantial
Derecognise old, recognise new
Liabilities
10% test plus qualitative factors
Discount rate
Original effective interest rate
Not substantial
Recalculate, gain or loss to profit
Fees
Adjust the carrying amount
Excel
Effective interest calculator
Modification of financial assets and liabilities under IFRS 9Substantial: Derecognise old, recognise new; Liabilities: 10% test plus qualitative factors; Discount rate: Original effective interest rate; Not substantial: Recalculate, gain or loss to profit; Fees: Adjust the carrying amount; Excel: Effective interest calculator.KEY FACTS AT A GLANCEModification of financial assets and liabilitiesunder IFRS 9SubstantialDerecognise old,recognise newLiabilities10% test plus qualitativefactorsDiscount rateOriginal effectiveinterest rateNot substantialRecalculate, gain or lossto profitFeesAdjust the carryingamountExcelEffective interestcalculatorChecked against official sourcesTax BakersModification of financial assets and liabilities under IFRS 9Substantial: Derecognise old, recognise new; Liabilities: 10% test plus qualitative factors; Discount rate: Original effective interest rate; Not substantial: Recalculate, gain or loss to profit; Fees: Adjust the carrying amount; Excel: Effective interest calculator.KEY FACTS AT A GLANCEModification of financial assetsand liabilities under IFRS 9SubstantialDerecognise old, recognise newLiabilities10% test plus qualitative factorsDiscount rateOriginal effective interest rateNot substantialRecalculate, gain or loss to profitFeesAdjust the carrying amountExcelEffective interest calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What is a modification?

A change to the contractual cash flows agreed between lender and borrower: a lower or higher interest rate, a longer or shorter term, a change in currency, a payment holiday or the conversion of part of the debt. Changes that were already provided for in the contract, such as a floating rate resetting, are not modifications.

Financial liabilities: the 10% test

For a borrower, the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of fees received, and discounted at the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original liability. Qualitative factors can also make a modification substantial, such as a change of currency or the addition of an equity conversion feature, even if the 10% test is not met.

A worked example: a rate cut

A company has the five-year CU 1,000,000 loan from the effective interest method guide: a 5% coupon, an arrangement fee of CU 30,000 and an effective interest rate of 5.7065%. At the end of year 2, with three years left, the bank agrees to cut the coupon to 3%. No fees are paid.

StepCU
Carrying amount at the end of year 2, before the change981,012
Present value of the new cash flows (three coupons of CU 30,000 and CU 1,000,000 at the end) at 5.7065%927,260
Difference for the 10% test5.5%
ResultBelow 10%: not substantial
Modification gain, recognised in profit or loss53,752

The entry is Dr Loan liability CU 53,752, Cr Modification gain CU 53,752. The liability continues at CU 927,260, and interest is still charged at the original rate of 5.7065%. Had the coupon been cut to zero, the difference would exceed 10%: the old liability would be derecognised and a new one recognised at fair value, with fees expensed. The modification sheet of the Effective interest calculator (Excel) runs both the 10% test and the gain or loss.

Modification of financial assets: gains and losses

IFRS 9 does not give a numeric test for assets; whether a modification is substantial is judged on the facts, and many companies use the 10% test by analogy alongside qualitative factors. If the modification does not lead to derecognition, the lender recalculates the gross carrying amount as the present value of the modified cash flows at the original effective interest rate and recognises a modification gain or loss in profit or loss. For a lender that has granted the rate cut above, that is a loss.

Modifications also matter for expected credit losses: the company compares credit risk on the modified asset with credit risk at original recognition to decide its stage.

How are fees treated?

For a modification that is not substantial, fees and costs adjust the carrying amount of the modified liability and are spread over its remaining term through the effective interest rate. For a substantial modification, they are part of the gain or loss on extinguishing the old liability.

Summary

Substantial modificationNot substantial
Old instrumentDerecognisedContinues
New carrying amountFair value of the new instrumentPresent value of new cash flows at the original rate
Gain or lossDifference between old carrying amount and new fair valueDifference between old carrying amount and recalculated amount
Effective interest rate afterwardsNew rateOriginal rate

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Questions people ask

What is the 10% test under IFRS 9?

For a financial liability, a modification is substantial if the present value of the new cash flows, at the original effective interest rate and including fees, differs by at least 10% from the carrying amount.

How is a modification gain or loss calculated?

As the difference between the carrying amount before the change and the present value of the modified cash flows discounted at the original effective interest rate.

What happens if a modification is substantial?

The original instrument is derecognised and a new one is recognised at fair value, with a gain or loss in profit or loss.

Does the 10% test apply to financial assets?

IFRS 9 states it for liabilities only, but many companies apply it to assets by analogy, together with qualitative factors.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 9Amortised cost and the effective interest method under IFRS 9IFRS 9Derecognition of financial assets under IFRS 9IFRS 9Expected credit losses under IFRS 9: the three stages

More in IFRS 9

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This guide is general information. It is not tax or legal advice for your situation.