Once it has been determined that a loan receivable is within the scope of IFRS 9, it must be classified into one of three categories:
- Amortised cost; Loan receivable classification and measurement
- Fair Value through Profit or Loss (FVPL); or Loan receivable classification and measurement
- Fair Value through Other Comprehensive Income (FVOCI).
The classification decision is based on (i) the business model within which the loan is held and (ii) whether its contractual cash flows meet the ‘solely payments of principal and interest’ (SPPI) test, as illustrated below:
|Business model >||Hold to collect||Hold to collect and sell||Other|
|Cash Flow Characteristic||SPPI||Amortised costs||FVOCI||FVPL|
All related company loan receivables that are classified at amortised cost or at FVOCI are subject to the ECL model which means that impairment losses are recognised in profit or loss. Loan that are classified at FVPL are not subject to the ECL model because all fair value changes must be recognised in profit or loss. Fair values must be determined in accordance with the requirements in IFRS 13 Fair Value Measurement.
In short the three categories are:
a. Amortised cost Loan receivable classification and measurement
IFRS 9 Definition: The amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
b. Fair Value through Profit or Loss (FVPL) Loan receivable classification and measurement
This is part of the classification of financial assets. At each balance sheet date, the financial asset, classified and measured at fair value through profit or loss, is re-measured at fair value. Changes in fair value from reporting date to reporting date are recognized in profit and loss as they arise.
This is part of the classification of financial assets. A financial asset is classified as subsequently measured at fair value through other comprehensive income (FVOCI) if:
- the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (the SPPI test, see Solely Payments of Principal and Interest); and
- is held in a business model (see business model test) in which assets are managed both in order to collect contractual cash flows and for sale (see Hold to collect and sell). [IFRS 9 4.1.2A]