NFRA Approves Amendments to Ind AS 109 on Derecognition & Classification

In a significant regulatory development, the National Financial Reporting Authority (NFRA) has approved amendments to seven Indian Accounting Standards, with the most notable changes introduced in Ind AS 109, India’s principal accounting standard for financial instruments. The proposals were unanimously approved at NFRA’s board meeting held on June 10, 2025, and are now set to be forwarded to the Ministry of Corporate Affairs (MCA) for final notification. If notified, the revised standards will become effective from April 1, 2026.

The meeting, held at NFRA’s New Delhi headquarters, was attended by key stakeholders including NFRA Chairperson, ICAI President, and representatives from the SEBI, RBI, and CAG. While the complete set of amendments spans several standards, the most impactful revisions in Ind AS 109 pertain to:

(1) derecognition of financial liabilities through electronic payment systems, and

(2) classification of financial assets under the amortised cost measurement category.

As outlined in the Exposure Draft on Amendments to the Classification and Measurement of Financial Instruments issued by ICAI, the first amendment, covered under newly inserted paragraph B3.3.8, allows entities to derecognise a financial liability before the settlement date when payment is made through an electronic system, provided specific criteria are met. These include:

(a) the entity has initiated an irrevocable payment instruction,

(b) the funds are no longer accessible to the entity, and

(c) the settlement risk is insignificant.

The second amendment clarifies the criteria for determining whether financial assets qualify for amortised cost classification. Through additions such as paragraphs B4.1.8A and B4.1.10A, the Exposure Draft addresses cases where contractual cash flows are linked to contingent events not directly tied to basic lending risks. For instance, if a loan’s interest rate varies based on the borrower’s carbon emission reductions, the entity must assess, qualitatively or quantitatively, whether such a feature results in cash flows that are significantly different from those of a typical lending arrangement. The amendment emphasises that even where such contingent terms exist, the financial asset may still meet the “solely payments of principal and interest” (SPPI) criterion if the resulting cash flows are economically equivalent to those of a basic loan structure under all possible scenarios.

These amendments are designed to improve interpretive clarity, reduce inconsistencies in application, and further align Indian standards with global practices under IFRS 9. Once formally notified, entities across sectors, financial and non-financial alike, will need to carefully evaluate their financial instruments to ensure compliance with the revised classification and derecognition requirements under Ind AS 109.

Click here to access the Exposure Draft

Source – The Economic Times CFO

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