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A perpetual instrument can be called by the issuer at any time at par + accrued interest. Interest is at a market rate, but payment requires the issuer to remain solvent immediately afterwards; deferred interest does NOT accrue additional interest. Under Ind AS 109's SPPI test:
ACannot be tested — perpetual instruments are FVTPL by definition
BFAILS SPPI — interest amounts deferred without further accrual mean the holder is not compensated for the time value of money on deferred interest
CPASSES SPPI — interest is at market rate, satisfying time-value compensation
DPASSES SPPI — the issuer's call right and solvency clause are normal lending terms
Answer & Solution
Correct answer: B. FAILS SPPI — interest amounts deferred without further accrual mean the holder is not compensated for the time value of money on deferred interest
When deferred interest does NOT accrue further interest, the holder is uncompensated for time value of money on the deferred amounts. SPPI fails. If deferred interest accrued at market rates, SPPI could pass. Perpetuality alone doesn't disqualify SPPI — perpetual interest-bearing instruments can pass SPPI if interest is contractually solid.
Related questions
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