IFRS 9 Amendments: ESG-Linked Loans, Power Purchase Agreements, and Electronic Payments

• Standards: IFRS 9 — Financial Instruments (Classification & Measurement); IFRS 7 — Financial Instruments: Disclosures
• Effective Date: 1 January 2026
• Scope: ESG-linked loans, power purchase agreements (PPAs), electronic payment derecognition, equity-settled instruments

Green finance has grown fast. The accounting standards? Not quite as fast. The amendments to IFRS 9 and IFRS 7, effective for annual periods beginning on or after 1 January 2026, address three practical issues that have been causing real headaches for preparers.

ESG-Linked Loans: Do They Break the SPPI Test?

This was the big question. Many modern loan agreements include ESG-linked features—interest rates that adjust based on sustainability KPIs like carbon emissions or diversity targets. The concern: do these features cause the loan to fail the SPPI (solely payments of principal and interest) test under IFRS 9?

If a loan fails SPPI, it can’t be classified at amortised cost. That’s a problem for both lenders and borrowers who want straightforward accounting for what is essentially a standard lending arrangement with a sustainability incentive bolted on.

The answer: no, not automatically. The amendments clarify that variable payments tied to ESG performance indicators do not fail SPPI if they compensate for credit risk and are not leveraged. New application guidance provides a framework for assessing whether an ESG-linked feature constitutes a modification to the instrument’s main elements.

Welcome relief for the growing sustainability-linked bond and loan market.

Nature-Dependent Electricity Contracts

Virtual power purchase agreements (VPPAs) and contracts referencing solar or wind-generated electricity were being accounted for inconsistently. The challenge: the volume of electricity generated is variable and depends on weather—making it difficult to apply standard derivative accounting or the “own use” exemption.

The amendments provide targeted guidance on:

• When such contracts qualify for the own-use exemption under IFRS 9
• How to apply hedge accounting when these contracts are designated as hedging instruments
• Documentation requirements for entities relying on these exemptions

If your entity has PPA positions, review your contracts against the updated criteria.

Electronic Payment Derecognition

A more technical but practically important change: entities can now elect to derecognise a financial liability earlier than the settlement date when payment is made through electronic payment systems, provided certain criteria are met.

This reflects how modern payments actually work—the transfer is initiated before it’s finalised by the banking system. The amendment removes an artificial timing mismatch that was creating unnecessary complexity in the books.

Equity-Settled Instruments

The amendments also address financial instruments settled in an entity’s own equity, particularly where there’s a choice of settlement method. Updated guidance clarifies classification as a financial liability or equity depending on whether the entity has an unconditional right to avoid delivering cash.

What to Do Now

For entities with ESG-linked instruments, the key task is developing methodologies to assess whether sustainability-linked features modify the instrument’s main elements. This requires finance and sustainability teams working together.

These amendments take effect 1 January 2026. Preparation should be well underway.

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This article is for informational purposes only and does not constitute professional accounting or legal advice.