A company renegotiates a loan.

The interest rate changes. The repayment period is extended. New fees are charged. Perhaps the currency changes or the lender agrees to concessions because the borrower is struggling financially.

The accounting question sounds straightforward.

Is this still the same financial liability, or has the old debt effectively been replaced by a new one?

For years, much of the practical focus has fallen on the IFRS 9 “10 per cent test”. If the discounted cash flows under the new terms differ sufficiently from those under the original liability, the modification is treated as substantial and the old liability is derecognised.

The problem is that a percentage cannot always tell you whether the economics of a financial instrument have fundamentally changed.

That is why the IASB is revisiting the area.

Its Amortised Cost Measurement project is considering targeted improvements to IFRS 9, including a broader approach to deciding when a modification is substantial. The direction of travel is towards considering the whole change in contractual cash flows rather than allowing the 10 per cent calculation to decide the answer by itself.

For candidates preparing with an ACCA SBR tutor, this is a particularly useful current issue because it combines technical calculation with professional judgement.

What the 10 per cent test is trying to achieve

When the terms of a financial liability are changed significantly, treating the instrument as though nothing important happened can give a misleading result.

Suppose a company owes £20 million under an existing loan.

The lender agrees to replace the arrangement with substantially different repayment terms.

If the economic substance is that the old debt has been extinguished and replaced, the accounting should reflect that.

IFRS 9 therefore requires an exchange between an existing borrower and lender, or a substantial modification of an existing liability, to be accounted for as an extinguishment of the original liability and recognition of a new one.

The 10 per cent test provides a quantitative way to help determine whether the terms are substantially different.

Broadly, the present value of cash flows under the modified terms is compared with the present value of the remaining original cash flows, using the original effective interest rate.

If the difference reaches at least 10 per cent, the terms are substantially different.

The old liability is derecognised.

That gives accountants a clear numerical threshold.

It is also where the difficulty begins.

A number can become too comfortable

Bright-line tests are attractive.

They make accounting decisions look objective.

Calculate 9.8 per cent and the answer appears to be one thing. Calculate 10.2 per cent and the answer appears to be another.

But economically, those two transactions may be almost identical.

Worse, a modification producing an 8 per cent numerical difference might completely change an important characteristic of the debt.

The currency could change.

The borrower could change.

An ordinary loan could acquire unusual contractual features.

A refinancing could reset the instrument completely to current market terms.

If those changes fundamentally alter the economic substance, should a result below 10 per cent automatically mean that the original instrument continues?

That is the question behind the current IASB work.

The IASB is moving towards a holistic assessment

The Board tentatively decided in June 2026 that determining whether a financial instrument modification is substantial should involve a holistic analysis.

Quantitative information would still matter.

The 10 per cent test would still have a role.

But it would supplement the analysis rather than decide the outcome in isolation.

That is a significant shift in emphasis.

Management would need to understand what has actually changed in the contract.

Several qualitative factors may indicate that a modification is substantial, including:

  • changing the currency in which principal or interest is denominated
  • altering cash flow characteristics in a way that changes the relevant IFRS 9 classification assessment
  • changing the borrower, except potentially within a common-control arrangement
  • commercially renegotiating the instrument to reset it to current market terms

The reason for the modification also matters.

A lender renegotiating debt because the borrower is experiencing financial difficulty may represent a very different economic event from two commercially strong parties replacing an old loan with a new market-rate financing arrangement.

The calculation remains useful.

It simply stops being the entire analysis.

Commercial refinancing is different from financial distress

Consider two companies.

Company A has performed strongly. Interest rates have changed and it renegotiates an old borrowing arrangement with its bank to obtain completely new market terms.

Company B is struggling to meet repayments. Its lender extends the maturity and reduces payments because otherwise the borrower may default.

Both contracts have been modified.

The commercial substance is different.

Company A’s transaction may resemble replacing one financing arrangement with another.

Company B’s transaction may represent a concession made within the existing lending relationship because of credit deterioration.

The IASB’s tentative direction recognises that the reason behind a modification can provide useful evidence about whether the instrument has fundamentally changed.

For an SBR candidate, this is a valuable lesson.

Do not jump straight to the calculator.

Understand why the contract was renegotiated.

Currency changes demonstrate the weakness of a pure threshold

Imagine a sterling loan becoming a dollar-denominated loan.

The present value difference calculated on a particular date might fall below 10 per cent.

Yet the borrower is now exposed to a completely different currency risk.

That is not a minor drafting change.

The nature and uncertainty of future cash flows have changed.

The same principle can apply where contractual terms alter the fundamental characteristics of the instrument.

A numerical test may identify changes in amount.

It is much less effective at describing a change in nature.

That is why qualitative assessment matters.

The test itself has also produced practical questions

Even if everyone agrees that the 10 per cent calculation should continue to play a supporting role, companies still need to know how to perform it.

That has not always been consistent.

Questions arise when instruments contain options or contingent terms.

Suppose a loan contains an early repayment option.

Should management assume that the option will be exercised?

Should it estimate the probability of exercise?

Should it ignore the option unless exercise is expected?

Different approaches can produce different cash flows and therefore different outcomes under the test.

The September 2026 IASB papers considered clarifying this area by focusing on the contractual terms rather than management’s prediction of what will happen.

That would help make the test more comparable.

Contractual options make the calculation less mechanical

Consider a modified loan that now allows the borrower to repay the debt early.

If management believes early repayment is unlikely, it may be tempting to ignore the option when calculating the cash flows.

However, the purpose of the modification assessment is to understand how the contractual rights and obligations have changed.

The option itself has changed those rights.

The current IASB work has therefore examined an approach that would reflect an option at the earliest date permitted by the contract rather than probability-weighting management’s expectations.

The attraction is consistency.

Two companies with identical contracts would be less likely to produce different 10 per cent test results merely because their management teams have different expectations about whether an option will be exercised.

Again, the underlying theme is clear.

The test should analyse the contractual modification, not become another forecasting model.

Revolving credit facilities create an even stranger problem

The traditional test becomes particularly awkward for revolving credit arrangements.

Think about an undrawn facility.

The current carrying amount may be nil because the borrower has not drawn any funds.

Yet the contractual facility can still be economically significant.

If the terms are modified, simply comparing the current outstanding cash flows may tell you almost nothing.

The September project papers therefore considered looking at the facility in its entirety, including maximum credit capacity over the remaining contractual term.

This illustrates why the IASB project is broader than changing one percentage calculation.

Financial instruments have become varied enough that a rule designed around a straightforward loan may not work neatly for every arrangement.

Derecognition changes more than the label on the loan

Whether a modification results in derecognition has important accounting consequences.

If the original liability is extinguished, the old carrying amount is removed and a new liability is recognised.

Any difference arising from extinguishment is generally recognised in profit or loss.

A new effective interest rate applies to the new instrument.

If the modification does not result in derecognition, the accounting follows a different path.

The existing instrument continues.

Changes in cash flows and relevant costs or fees have to be reflected within that continuing amortised cost measurement.

This means a borderline judgement can affect current profit and future finance costs.

The decision deserves more than a mechanical spreadsheet.

Fees make the calculation more complicated

Debt renegotiations often involve fees.

Some are paid directly between borrower and lender.

Others go to lawyers, advisers, arrangers or other third parties.

Which fees belong in which part of the accounting has generated application questions.

Current IFRS 9 guidance already distinguishes particular fees for the 10 per cent test. The IASB’s wider project is also examining how costs and fees should be treated when modifications do not result in derecognition.

This is important because transaction costs do not disappear merely because the loan remains recognised.

They can affect the carrying amount and the subsequent pattern of finance expense.

For candidates, the key is to avoid throwing every fee into the same calculation.

Identify who received the fee, why it was incurred and which accounting stage is being considered.

The effective interest rate creates another judgement

Amortised cost depends heavily on the effective interest rate.

That rate spreads relevant interest, fees and other amounts across the expected life of the instrument.

Modifications create a difficult question.

If the instrument remains recognised but its contractual interest rate changes, should the original effective interest rate remain untouched?

The IASB has been considering circumstances in which the effective interest rate would be adjusted where changes in contractual interest provide consideration for the time value of money or credit risk.

This may sound highly technical, but the principle is commercially important.

An amortised cost model needs to reflect the economics of the modified instrument without drifting into a partial fair value model.

That balance is one reason the project has required careful work.

Why this matters for SBR

Financial instruments questions can tempt candidates into calculation mode.

They see a percentage test and immediately start discounting cash flows.

A stronger candidate pauses first.

What changed?

Why was the debt renegotiated?

Has the currency changed?

Has the borrower changed?

Have the contractual cash flow characteristics fundamentally changed?

Does the transaction resemble a new commercial financing arrangement or a concession caused by financial difficulty?

Only then does the quantitative test sit in the right context.

That is exactly the type of professional judgement SBR increasingly rewards.

A simple exam scenario

Imagine a company has a £30 million loan.

The lender agrees to extend maturity, change the interest rate and charge a modification fee.

The 10 per cent calculation produces a difference of 8 per cent.

Management concludes immediately that the liability cannot be derecognised.

However, the new agreement also changes the debt from sterling to US dollars and resets the financing to current commercial terms.

A weak answer would stop at 8 per cent.

A stronger answer would explain that the quantitative result is relevant but may not be decisive under the IASB’s proposed direction.

The currency change fundamentally alters the contractual cash flow exposure.

The commercial reset may also suggest that the new terms are substantially different.

Management should therefore consider the modification holistically rather than relying solely on the percentage.

That is a far better professional answer.

Do not present tentative changes as current mandatory rules

This point matters in current issues answers.

The IASB’s Amortised Cost Measurement project is still a standard-setting project.

The next major milestone is an Exposure Draft.

Candidates should therefore distinguish existing IFRS 9 requirements from proposed improvements.

Do not write that IFRS 9 already requires the complete new holistic approach as though the amendments have been issued.

Explain the current requirement first.

Then describe the IASB’s tentative direction and why it may improve financial reporting.

That shows technical accuracy and an understanding of the standard-setting process.

The broader problem is false precision

The most interesting lesson from the project may not be about debt at all.

Accounting frequently uses numerical thresholds and calculations because they create discipline.

The danger comes when a calculation replaces judgement.

A result of 9.9 per cent does not prove that two financial instruments are economically the same.

A result of 10.1 per cent does not explain why they are different.

Numbers provide evidence.

They still need interpretation.

That is particularly important when financial instruments contain options, contingent features or contractual changes that affect the nature rather than simply the amount of cash flows.

What finance teams should take from the project

Companies should already be reviewing how they assess significant debt modifications.

A process that simply calculates the 10 per cent difference and stops may need more thought even before any future amendments become mandatory.

Management should understand the economic reason for the renegotiation.

Material qualitative changes should be documented.

The assumptions used in quantitative calculations should be consistent.

Options, contingent terms and fees should be analysed carefully.

Audit committees should also understand significant refinancing transactions where the derecognition judgement materially affects profit.

A good accounting paper should explain the conclusion rather than simply attach a spreadsheet showing 9.7 per cent.

What candidates should remember

You do not need to memorise every IASB agenda paper.

Understand the problem.

The 10 per cent test provides useful quantitative evidence, but a percentage alone can miss significant changes in contractual terms.

The IASB is therefore developing a more holistic approach in which qualitative and quantitative factors work together.

For candidates following an ACCA SBR course, the most useful practice is to work through scenarios where the numerical result points one way but the contractual facts introduce another consideration.

That forces you to exercise judgement rather than simply perform a calculation.

The calculation is no longer the whole story

Debt modification accounting asks a fundamental question.

Is this really the same financial instrument after the renegotiation?

The 10 per cent test can help answer that.

It cannot always answer it alone.

Currency, counterparties, contractual characteristics, commercial purpose and financial distress can all change the economic story even where the numerical difference falls below a bright-line threshold.

That is why the current IASB project matters.

It does not make the calculation irrelevant.

It puts the calculation back where it belongs.

As evidence supporting a professional judgement, rather than a substitute for one.