|

What is a Business Model?

Last update

What is a Business Model? The business model test is about whether the asset is part of a group or portfolio that is being managed within a business model whose objective is to collect contractual cash flows from the non-equity financial asset (Amortised Cost), or to both collect contractual cash flows from the non-equity financial asset and sell the non-equity financial asset (FVOCI). Otherwise, the asset is measured at FVPL. What is a Business Model?

An entity’s business model for managing financial assets:

  • reflects how financial assets are managed to generate cash flows
  • is determined by the entity’s key management personnel
  • does not depend on management’s intentions for individual instruments but is
Read more

IFRS 9 Reclassification of financial instruments

Last update

IFRS 9 Reclassification of financial instruments

For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if and only if the entity’s business model objective for its financial assets changes so its previous model assessment would no longer apply. [IFRS 9, paragraph 4.4.1]

If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first day of the first reporting period following the change in business model. An entity does not restate any previously recognised gains, losses, or interest.

IFRS 9 does not allow reclassification: IFRS 9 Reclassification of financial instruments

  • for equity investments measured at FVTOCI, or
  • where the fair value option has been exercised in any
Read more

Setting the scene the Expected Credit Losses model

Last update

Setting the scene the Expected Credit Losses model, start here to get a good understanding of ECL loss allowances or continue, you decide……

The Expected Credit Losses model (ECL) should be applied to:Setting the scene: the Expected Credit Losses model

  • investments in debt instruments measured at amortized cost;
  • investments in debt instruments measured at fair value through other comprehensive income (FVOCI);
  • all loan commitments not measured at fair value through profit or loss;
  • financial guarantee contracts to which IFRS 9 is applied and that are not accounted for at fair value through profit or loss; and
  • lease receivables that are within the scope of IFRS 16 Leases, and trade receivables or contract assets within the scope of IFRS 15 that give
Read more

Curing of a credit-impaired financial asset

Last update

Curing of a credit-impaired financial asset presents the explanation of what a credit-impaired financial asset is, how to account for a credit-impaired asset as long as it is credit-impaired and how to account for a credit-impaired asset that is no longer credit-impaired (i.e. curing of a credit-impaired financial asset which means the borrower has, for example, restructured its business and cash flow recovered sufficiently to return paying all interest and principal as per the original contract). Curing of a credit-impaired financial asset

Credit-impaired assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is … Read more

IFRS 9 Financial Instruments Measurement

Last update

IFRS 9 Financial Instruments Measurement uses the following criteria for determining the classification and measurement of financial assets at Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL):

IFRS 9 Financial Instruments Measurement

The critical issues for classifying and measuring financial assets are whether:

  • The objective of the entity’s business model is to hold assets only to collect cash flows, or to collect cash flows and to sell (“the Business Model test”), and

  • The contractual cash flows of an asset give rise to payments on specified dates that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding (“the SPPI test”). IFRS 9 Financial Instruments Measurement

Read more

IFRS 9 The Business Model Test

Last update

IFRS 9 The Business Model Test is a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable at Amortized Cost or FVOCI. The test is about whether the asset is part of a group or portfolio that is being managed within a business model whose objective is to collect contractual cash flows from the non-equity financial asset (Amortized Cost), or to both collect contractual cash flows from the non-equity financial asset and sell the non-equity financial asset (FVOCI). Otherwise, the asset is measured at FVPL. The key elements of this test are listed below.

Observe: IFRS 9 recommends applying the Business Model test before applying the SPPI

Read more

Summary impairment of financial assets

Last update

Summary impairment of financial assets is the centre text to quickly understand all IFRS aspects to recording loss allowances, when, how much, how often?

Impairment requirements

The impairment requirements are applied to: Summary impairment of financial assets

  • Financial assets measured at amortised cost (originated, purchased, reclassified or modified debt instruments incl. trade receivables),
  • Financial assets measured at fair value through other comprehensive income,
  • Loan commitments except those measured at fair value through profit or loss,
  • Financial guarantees contracts except those measured at fair value through profit or loss,
  • Lease receivables.

Impairment model

The impairment model follows a three-stage approach based on changes in expected credit losses of a financial instrument that determine:

  • The recognition of impairment, and
Read more

Property development intercompany finances

Last update

Property development intercompany finances Interest bearing term loan

Senior interest-bearing bank term debt

THE CASE

Parent C operates in the UK real estate sector and purchases land for development into residential units for public sale. Each potential development proposal is supported by a detailed business case which includes a due diligence report in respect of the expected Gross Development Costs (GDC) as well as an independent third party valuation of the Gross Development Value (GDV) of the completed site both of which are undertaken in order to secure bank financing. Management assesses each proposal in accordance with a number of key investment criteria, including for example, the minimum yield required on each development.

Once the proposal has … Read more

Do the SPPI contractual cash flow characteristics test

Last update

Do the SPPI contractual cash flow characteristics test summarises the classification of financial assets. A typical example of an instrument where the contractual cash flows would not meet SPPI would be a debt instrument with an interest rate that is linked to the issuer’s share price. Similarly, a debt instrument with an equity conversion feature, under which the holder has an option to convert the debt instrument into a fixed number of the issuer’s equity shares on maturity, would not meet the SPPI test. Do the SPPI contractual cash flow characteristics test

However, if an issuer uses its own shares as a ‘currency’ to settle a convertible debt instrument, then this might meet the SPPI testRead more

Equity investments at FVOCI

Last update

Equity investments at FVOCI – IFRS 9 requires all equity investments to be measured at fair value. The default approach is for all changes in fair value to be recognised in profit or loss.

However, for equity investments that are neither held for trading nor contingent consideration recognised by an acquirer in a business combination, entities can make an irrevocable election at initial recognition to classify the instruments as at FVOCI, with all subsequent changes in fair value being recognised in other comprehensive income (OCI). This election is available for each separate investment. Equity investments at FVOCI

Under this new FVOCI category, fair value changes are recognised in OCI while dividends are recognised in profit or loss Read more