SPPI Test: Solely Payments of Principal and Interest Under IFRS 9

Under IFRS 9, the SPPI test asks a single question about a financial asset’s contractual terms: do the cash flows amount to solely payments of principal and interest on the principal amount outstanding? If yes, the asset can be measured at amortized cost or at fair value through other comprehensive income, provided the business model test is also met. If no, the asset goes to fair value through profit or loss, and every change in fair value hits earnings.¹

Where the SPPI Test Fits in Classification

IFRS 9 applies two filters together. The business model test looks at how the entity manages a group of assets. The SPPI test looks at the contractual terms of the individual instrument. Both must be satisfied for amortized cost or FVOCI classification.

Amortized cost requires a hold-to-collect business model plus SPPI cash flows. FVOCI requires a hold-to-collect-and-sell business model plus SPPI cash flows. An asset that passes the business model test but fails SPPI cannot fall back to either category. It goes straight to fair value through profit or loss.¹

Business model assessments involve judgment about portfolio management. SPPI, by contrast, is a close read of contract language. That is where most classification disputes surface.

What Principal and Interest Mean Under IFRS 9

Principal is the fair value of the financial asset at initial recognition. It can change over the life of the instrument as the borrower repays or as any original discount accretes. Treat it as the amount the lender actually put at risk, not necessarily the face value of the instrument.

Interest is limited to a defined list of components: consideration for the time value of money, credit risk on the outstanding principal, other basic lending risks such as liquidity risk, administration costs, and a profit margin consistent with a basic lending arrangement.¹ Anything outside these categories raises doubt about whether the return reflects genuine lending.

Which Assets Get Tested

The SPPI test applies to debt instruments: corporate bonds, government bonds, term loans, revolving credit facilities, trade receivables, and similar assets that pay cash flows in a lending pattern. Equity investments fall outside the test entirely because their returns are not structured as repayment of principal plus interest. Equity instruments follow a separate fair value path with no cash flow characteristic testing.¹

Demand loans and intercompany loans need the assessment too. A loan repayable on demand can pass if the prepayment amount substantially represents unpaid principal and interest, potentially including reasonable compensation for early termination.² Interest-free intercompany loans are harder. Because IFRS 9 defines interest as consideration for time value, credit risk, and basic lending costs, a loan that provides none of that consideration does not fit the framework of a basic lending arrangement and generally fails.

Contractual Features That Cause Failure

The most common failures come from terms that link cash flows to variables unrelated to lending. A bond coupon tied to the price of gold, the performance of a stock index, or the revenue of the borrower’s business fails because the volatility does not come from credit risk or the time value of money.

Leverage features also fail. A term that multiplies the effect of interest rate changes on cash flows produces a derivative-like payoff, not compensation for lending.

Prepayment and Extension Options

A prepayment feature passes if the prepayment amount substantially represents unpaid principal and interest on the amount still outstanding, which may include reasonable compensation for early termination. A make-whole provision compensating the lender for lost interest is a typical example of reasonable compensation.² Where the prepayment amount is driven by something unrelated to the debt, such as the fair value of a building or a commodity index, the asset fails.

Extension options follow the same logic. During the extended term, the cash flows must still represent payments of principal and interest. If the extension resets the rate to something that does not reflect current market conditions for a comparable lending arrangement, the instrument will likely fail.

Non-Recourse Loans

A non-recourse loan limits the lender’s recovery to specific collateral. That structure alone does not cause failure, but the lender must look through to the underlying assets or cash flows securing the instrument. If the look-through reveals cash flows inconsistent with principal and interest, such as returns tied to the equity performance of the collateral rather than debt-service cash flows, the asset fails. Whether the collateral is financial or non-financial does not change the analysis.¹

Tranched Structures

Structured transactions create tranches with different levels of credit risk carved from an underlying pool. A tranche has SPPI cash flows only if all of the following are met:

The contractual terms of the tranche itself, assessed without looking through to the pool, produce cash flows that are solely payments of principal and interest.
The pool of financial instruments beneath the tranche has cash flow characteristics consistent with the SPPI framework.
The credit risk in the tranche is equal to or lower than the credit risk of the underlying pool as a whole.

The entity has to look through layers of structuring until it identifies the pool that actually generates the cash flows. If it cannot assess these conditions at initial recognition, or if the underlying pool can change over time in ways that would violate them, the tranche goes to fair value through profit or loss.¹ Many securitizations and collateralized loan obligations trip on the ongoing-condition point because the underlying pool revolves.

De Minimis and Non-Genuine Features

Not every problematic term kills the test. A feature that could have only a de minimis effect on contractual cash flows, assessed in each reporting period and cumulatively over the life of the instrument, does not affect classification.¹

A feature whose effect exceeds de minimis but is not genuine also gets a pass. A cash flow characteristic is not genuine if it affects the instrument only on the occurrence of an event that is extremely rare, highly abnormal, and very unlikely to occur.¹ These carve-outs stop immaterial boilerplate from forcing instruments into fair value through profit or loss.

The Benchmark Test for Modified Time Value of Money

Sometimes an interest rate’s reset frequency does not match the tenor of the rate itself. A loan carrying a one-year rate that resets every month is the classic example. The mismatch means the time value of money element is modified, and the entity must run a benchmark test.¹

The test compares the actual instrument’s undiscounted contractual cash flows to those of a hypothetical benchmark with identical terms, the same credit quality, and no modification. For the monthly-reset-to-one-year-rate loan, the benchmark would reset monthly to a one-month rate. If the two sets of cash flows could be significantly different, the instrument fails.

The entity has to consider both single-period and cumulative differences. A snapshot at the assessment date is not enough. Even where today’s yield curve shows little difference between the two rates, the entity must weigh whether that relationship could change over the remaining life.¹ IFRS 9 sets no numeric threshold for “significantly different.” Sometimes a qualitative view is enough; sometimes a full quantitative comparison is needed.

Negative Rates and ESG-Linked Features

A negative interest rate, where the lender effectively pays the borrower to hold funds, is consistent with a basic lending arrangement, provided the contractual terms do not introduce exposure to variables unrelated to lending, such as equity or commodity price movements.

Sustainability-linked loans, where the spread tightens or widens depending on whether the borrower meets carbon or other ESG targets, created real classification difficulty under the original IFRS 9 text. The rate change is tied to something other than credit risk or time value, and the safe conclusion was often fair value through profit or loss.

Amendments to IFRS 9 effective for annual reporting periods beginning on or after January 1, 2026, address this.³ They add a further SPPI test for financial assets with contingent features unrelated to basic lending risks or costs. An asset with an ESG-linked feature can pass if the cash flows resulting from the contingent event would themselves be SPPI when considered in isolation, and the fair value of the contractual feature at initial recognition is insignificant. “Insignificant” is not numerically defined, and a qualitative assessment can suffice. The amendments also require additional disclosures for assets and liabilities with these contingent features that are not measured at fair value through profit or loss.

What Happens When an Asset Fails

A failing asset must be measured at fair value through profit or loss, regardless of the business model. There is no fallback to amortized cost or FVOCI. Every change in fair value flows through the income statement.¹

The assessment happens at initial recognition and does not change afterward unless the contractual terms are modified. An entity cannot reclassify an asset out of fair value through profit or loss because market conditions shifted or the original conclusion looks inconvenient. Reclassification is only permitted when the entity changes its business model, and even then the original SPPI result still applies. The measurement path is effectively locked in for the life of the instrument, so the first read of the contract carries most of the weight.

1
IFRS Foundation. IFRS 9 Financial Instruments
2
IFRS Foundation. IFRS 9 Financial Instruments – Prepayment Features
3
IFRS Foundation. Changes in This Edition – 2026 Required IFRS Standards