When repurchasing US Commercial Paper from investors, if the instrument is measured at fair value through profit or loss (FVTPL), the related accounting treatment involves multiple complex aspects. This article focuses on the accounting impact of a cross currency swap upon contract termination, including termination fees, interest calculations, and the recognition of one-time gains or losses, analyzed in accordance with IFRS 9 requirements.

I. Initial Background of the Commercial Paper Repurchase

Assume an entity issues US Commercial Paper and simultaneously enters into a cross currency swap to manage foreign exchange and interest rate risks. When the entity decides to repurchase the commercial paper early from investors, the swap contract is typically also terminated early. At that point, the entity needs to recognize the following:

  • The difference between the repurchase price and the carrying amount of the commercial paper (if measured at FVTPL, this is usually already reflected in fair value changes);
  • The "break fee" arising from the termination of the swap;
  • Interest accrued on the swap as of the termination date;
  • Any one-time gain or loss resulting from the termination of the swap.

II. Accounting Treatment of the Swap Termination Fee

The termination fee is compensation charged by the swap counterparty for early contract termination, typically calculated based on the interest rate differential or exchange rate differential over the remaining term. Under IFRS 9, this fee should be treated as part of the derecognition or modification of the financial liability. Specifically:

IFRS 9 paragraph 3.3.3 states that when a financial liability (or part of a financial liability) is derecognized, the difference between its carrying amount and the consideration paid (including any non-cash transfers or liabilities assumed) shall be recognized in profit or loss.

Therefore, the termination fee should be treated as part of the consideration paid, compared with the carrying amount of the swap (if previously recognized), and the difference recognized in profit or loss. If the swap was not previously separately recognized (e.g., as a cash flow hedging instrument), hedge accounting rules should apply.

III. Interest Calculation at the Swap Termination Date

At the contract termination date, the swap typically generates accrued interest up to the termination date. This interest should be calculated based on the interest rate and interest basis specified in the swap contract and treated as part of the termination settlement. For example, if the swap is a fixed-for-floating interest rate swap, the net interest between the fixed and floating legs from the last payment date to the termination date should be calculated.

This net interest should be recognized in profit or loss, unless it qualifies for deferred treatment under hedge accounting for effective hedges. Under FVTPL measurement, it is typically recognized directly in profit or loss.

IV. Recognition of One-Time Gains or Losses

Upon terminating the swap, the entity needs to compare the fair value (or carrying amount) of the swap with the termination settlement amount (including termination fees and accrued interest). The difference constitutes a one-time gain or loss, which should be recognized in profit or loss. For example:

  • If the swap was previously measured at fair value through other comprehensive income (FVTOCI), the cumulative fair value changes must be reclassified from other comprehensive income to profit or loss;
  • If the swap was designated as a cash flow hedging instrument, cumulative gains or losses should be handled in accordance with IFRS 9 hedge accounting requirements.

V. Applicability of IFRS 9 to "Held at Break Cost"

The question mentions "instrument held at break cost," which may refer to a financial instrument measured at amortized cost. However, in this case, the commercial paper is measured at FVTPL, so IFRS 9's amortized cost provisions do not directly apply. Nevertheless, IFRS 9 paragraph 5.7.1 requires that gains or losses on all financial assets and liabilities be recognized in profit or loss unless specific hedge relationships apply. Therefore, all fees and gains arising from the swap termination should be reflected in profit or loss.

VI. Illustrative Example

Assume an entity issues commercial paper with a face value of USD 1 million and enters into a cross currency swap, whose fair value at the termination date is +USD 20,000 (an asset). The entity decides to repurchase the paper and terminate the swap, paying a termination fee of USD 15,000 and receiving a net swap settlement of USD 5,000 (i.e., fair value of 20,000 minus termination fee of 15,000). Meanwhile, the carrying amount of the commercial paper (FVTPL) is USD 980,000, and the repurchase price is USD 990,000.

The journal entries are as follows:

  1. Repurchase of commercial paper: Debit: Financial liability at fair value through profit or loss 980,000; Investment loss 10,000; Credit: Bank deposits 990,000.
  2. Termination of swap: Debit: Bank deposits 5,000; Investment loss 15,000 (termination fee); Credit: Derivative instruments 20,000.

If the swap had previously accumulated fair value changes in other comprehensive income, those should be reclassified to profit or loss.

VII. Conclusion

When repurchasing US Commercial Paper and terminating a cross currency swap, the termination fee, accrued interest, and one-time gains or losses should all be recognized in profit or loss, unless hedge accounting provides otherwise. IFRS 9 requires that the difference be recognized in profit or loss upon derecognition of financial instruments. Entities should ensure all calculations are based on contractual terms and disclose the nature of the relevant transactions.