IFRS 9 SPPI test and rising data needs: Sustainability Linked Bonds in focus

This article was written by Kate Lee, Global Head of Regulatory Data Solutions and Thomas Labbe, Regulatory Data Product Manager at Bloomberg.

Since the introduction of IFRS 9 in January 2018, financial institutions have been required to apply rigorous standards in the classification and measurement of financial instruments. At the heart of this framework lies the SPPI test—the “Solely for the Payment of Principal and Interest” test—which determines whether the contractual cash flows of a financial asset align with a basic lending arrangement.

This seemingly straightforward requirement has grown into a significant operational and data-driven challenge for firms, particularly as financial products evolve in complexity and incorporate features aligned with sustainability principles.

This article looks at how IFRS 9 changes impact the SPPI test for sustainability-linked bonds, and how risk, accounting, and data teams can navigate new data and compliance demands.

What is the SPPI test under IFRS 9?

Under IFRS 9, the classification of a financial asset depends on:

• The business model under which the asset is held, and
• The contractual cash flow characteristics of the asset—assessed through the SPPI test.

If the cash flows are solely payments of principal and interest on the principal amount outstanding, the asset may qualify for amortized cost or fair value through other comprehensive income (FVOCI) classification. Otherwise, it must be measured at fair value through profit or loss (FVTPL).

This test ensures that instruments with leverage, equity-like features, or embedded derivatives that alter basic lending characteristics are excluded from amortized cost or FVOCI treatment.

IFRS 9 amendments impact on the SPPI test and coupon features

On 30 May 2024, the International Accounting Standards Board (IASB) issued amendments to IFRS 9 and IFRS 7 following its Post-Implementation Review (PIR) of the classification and measurement requirements. One significant area of clarification was the treatment of financial instruments with coupon adjustment features—a topic that has gained tremendous relevance with the rise of sustainable finance.

These amendments aim to provide clarity on whether and how coupon adjustment features, such as sustainability-linked interest rates, affect the SPPI assessment. Importantly:

• The amendments emphasize that contractual terms that vary cash flows based on sustainability targets can still pass the SPPI test—provided they are consistent with a basic lending arrangement.
• This includes Sustainability-Linked Bonds (SLBs), even though the standard doesn’t explicitly address them by name.

These changes will become effective for annual reporting periods beginning on or after 1 January 2026, giving firms little time to adapt their systems and methodologies.

Data challenge in SPPI testing for sustainability-linked bonds

While the accounting guidance is now more refined, it introduces an intensified data challenge. In particular, firms must capture detailed contractual terms—often buried in documentation—to determine compliance with the SPPI criteria for a current universe of over 1,100 Sustainability Linked Bonds.

Consider the bond issued by Wienerberger AG on October 4, 2023 (FIGI BBG01JHDRVZ4). This bond offers a 4.875% coupon and matures on October 4, 2028. It incorporates two Key Performance Indicators (KPIs): KPI 1 tracks GHG emission scope 1 & 2 intensity, and KPI 2 measures revenue from building products that support net-zero buildings.

A failure to meet the Sustainability Performance Target (SPT) for KPI 1 will result in a 25 basis point (bps) per annum increase in the coupon, effective October 4, 2027. Similarly, missing SPT 2 will trigger a 50 bps per annum coupon increase on the same date.

The maximum possible coupon step-up of 75 bps is significant, particularly for a bond with a mid-single-digit coupon. This represents a substantial relative impact of approximately 15.4% (0.75%/4.875%), indicating a material change to the bond’s effective yield, which would likely lead to a failure of the SPPI test.

In contrast, the Capital Airport Group bond, issued on August 27, 2021 (FIGI BBG012C4X0K3), included a step-up margin of 10 bps on a 3.45% coupon at issuance. This would likely satisfy the SPPI criteria.

Beyond the initial assessment, a further challenge lies in accurately tracking the observation date and the effective date of any coupon step-up. Once these dates have passed, the securities will meet the SPPI test, as no further step-ups need to be considered.

How can we help?

To prepare for the 2026 implementation date, Bloomberg’s Enterprise Data Regulatory team is reviewing its rule engine for SPPI classification of all instruments with non credit step up features. It will also add new fields that aim to quantify the magnitude and materiality of non credit linked coupon step-ups, for example: 

• Cumulative basis point step-up that would occur if non-credit events are triggered.
• Cumulative coupon step-up as a percentage of the original coupon.
  Both figures should be viewed in combination with the SPPI test result (IFRS9_SPPI_TEST) and attribute (IFRS9_SPPI_ATTRIBUTE)
  

Notably, firms can automate and scale their SPPI determination not only at the time of issuance but also throughout its duration.

Bloomberg’s Regulatory Data Solutions are available via Data License for scalable enterprise-wide use through Bloomberg’s ready-to-use data website, data.Bloomberg.com and can be delivered via SFTP, REST API or into a cloud environment. 

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