What CFOs and Finance Teams Need to Know Before the January 2026 Effective Date
Prepared by Hafsa Research and Analysis Company
The Core Shift: ESG-Linked Loans Can Now Qualify for Amortised Cost
The IASB’s May 2024 amendments to IFRS 9 resolve a critical uncertainty that has frustrated preparers since ESG-linked lending began to scale. The question was simple but consequential: do ESG-linked features in a loan’s contractual cash flows satisfy the SPPI (Solely Payments of Principal and Interest) criterion?
The answer, now clarified, is that they can—provided the cash flows are not significantly different from an identical financial asset without the ESG-linked feature . This is a more permissive outcome than many practitioners initially expected, and it opens the door for ESG-linked loans to be measured at amortised cost or FVOCI rather than FVTPL.
IASB Chair Andreas Barckow framed the urgency: “Loans with ESG-linked features are becoming more prevalent. The IASB responded to requests to clarify the measurement of such instruments in a timely manner” .
The amendments are effective for annual reporting periods beginning on or after 1 January 2026, with earlier application permitted .
Solution 1: Apply the New SPPI Test to ESG-Linked Features
The amendments introduce an additional test for financial assets with contingent features that are not directly related to changes in basic lending risks or costs—such as an interest rate reduction tied to a borrower meeting a greenhouse gas emissions target .
Under the new guidance, such features can satisfy SPPI if the contractual cash flows are not significantly different from those of an identical financial asset without the contingent feature . The assessment requires judgment and additional work to demonstrate compliance.
The amendments include two illustrative examples in IFRS 9 (paragraphs B4.1.13 and B4.1.14) :
Example 1 (passes SPPI): A loan’s interest rate decreases if the borrower achieves a contractually specified reduction in greenhouse gas emissions. The contingent event is specific to the debtor, and the cash flows arising from its occurrence remain solely payments of principal and interest.
Example 2 (fails SPPI): A loan’s interest rate adjusts when a market-determined carbon price index reaches a threshold. This fails because the contractual payments are based on a market factor that is not a basic lending risk or cost.
Action step: Review every ESG-linked loan in your portfolio. Determine whether the trigger is borrower-specific (potentially SPPI-compliant) or market-linked (likely FVTPL). Document your assessment with reference to the new illustrative examples.
Solution 2: Prepare for the New Disclosure Requirements
The amendments to IFRS 7 introduce disclosure requirements for financial instruments with contingent features—including ESG-linked targets—that are not measured at FVTPL .
Required disclosures include:
- Qualitative information about the nature of the contingent feature
- Quantitative information about the range of possible changes to contractual cash flows
- Gross carrying amount of financial assets and amortised cost of financial liabilities subject to those terms
The disclosure objective is to help investors understand the effect of contractual terms that could change the timing or amount of cash flows based on contingent events not directly related to basic lending risks and costs .
Action step: Begin collecting data now on the range of possible interest rate adjustments for each ESG-linked instrument. If the maximum rate adjustment is material, quantify it in basis points and its impact on annual interest expense or income.
Solution 3: Address the Retrospective Application Challenge
The amendments apply retrospectively from 1 January 2026, but entities are not required to restate prior periods if doing so would require hindsight .
The practical challenge is significant. If you previously classified an ESG-linked loan as FVTPL because you concluded it failed SPPI, the amendments may now permit amortised cost classification. Retrospective adjustment would require:
- Recalculating amortised cost
- Recalculating expected credit losses for prior periods
- Collecting additional data that may not have been maintained
The IASB acknowledged this burden. Entities may restate prior periods only if possible without hindsight.
Action step: Identify any ESG-linked financial assets currently measured at FVTPL. Assess whether the amendments would change their classification. If so, determine whether restatement is feasible or whether you will apply the modified retrospective approach.
Solution 4: Extend the Assessment Beyond ESG Features
The amendments apply to all contingent features that are not directly related to basic lending risks and costs—not just ESG-linked features . This broader scope means the new SPPI test and disclosure requirements may capture instruments you haven’t considered.
Examples of other contingent features that may now qualify for SPPI treatment include:
- Interest rate adjustments tied to borrower-specific operational metrics
- Contractual terms linked to non-market performance indicators
The amendments also clarify the assessment of non-recourse features and contractually linked instruments (CLIs) . For non-recourse financial assets, entities must extend the “look-through” test to assess the link between underlying asset cash flows and the financial asset’s contractual cash flows.
Action step: Expand your review beyond ESG-labeled instruments. Any loan with a contingent feature not directly tied to credit risk or time value of money should be assessed under the new guidance.
Executive Checklist: IFRS 9 Amendment Readiness
Assessment:
- □ Identify all financial assets with contingent features (ESG-linked and other)
- □ Apply the new SPPI test: borrower-specific vs. market-linked triggers
- □ Document conclusions with reference to IFRS 9 B4.1.13–B4.1.14
Data & Disclosures:
- □ Quantify the range of possible cash flow changes for affected instruments
- □ Collect gross carrying amounts and amortised cost data
- □ Prepare qualitative descriptions of contingent feature terms
Transition:
- □ Assess whether any FVTPL-classified instruments would now qualify for amortised cost
- □ Determine restatement feasibility and data availability
- □ Consult auditors on retrospective application approach
Systems & Governance:
- □ Update classification policies and procedures
- □ Train finance teams on the new SPPI assessment framework
- □ Incorporate the new test into loan origination and acquisition processes
Closing Thought
The IFRS 9 amendments represent a pragmatic response to financial innovation. The IASB recognized that ESG-linked lending is here to stay and that accounting standards must adapt rather than impede its growth.
The amendments are more permissive, but they are not automatic. Judgment is required, and additional work will be necessary to demonstrate that ESG-linked cash flows are not significantly different from identical instruments without such features .
For CFOs and finance teams, the message is clear: 1 January 2026 is Crossed and now its September 2026. The assessment, data collection, and transition planning should begin now—not in the First quarter 2027.
Prepared by Hafsa Research and Analysis Company
