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What is a Business Model?

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?

A business model refers to how an entity manages its financial assets in order to generate cash flows. It is determined at a level that reflects how groups of financial assets are managed rather than at an instrument level. IFRS … Read more

IFRS 9 Reclassification of financial instruments

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 circumstance for a
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IFRS 9 Financial Instruments Measurement

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

Both of these … Read more

IFRS 9 The Business Model Test

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 test because this

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The Risk and Rewards Test and the Control Test

The Risk and Rewards Test and the Control Test are used to validate the accounting for a transfer of a financial asset under IFRS 9 Financial instruments.

Based on criteria in previous steps it has been concluded that an entity has transferred a financial asset (see IFRS 9 B3.2.1).

The central questions here are:

1) has the entity transferred or retained substantially all risks and rewards?

and The Risk and Rewards Test and the Control Test

2) has the entity retained control of the asset(s)? 

Which leads to 3 possible outcomes, or in a diagram:

The Risk and Rewards Test and the Control Test

The risk and rewards test and the Control Test

These steps are set out in paragraphs IFRS 9 3.2.6(a)-(b). The three potential outcomes … Read more

Pass-through testing

Here are some examples to learn which types of financial instruments/transactions qualify for accounting for a pass-through arrangement. An explanation of a pass-through arrangement and the three conditions a vehicle has to meet in qualifying for a pass-through are provided in ‘Pass-through arrangements‘  If the originator/transferor meets these three conditions the assets transferred are derecognised by the transferor.

Transfer of disproportionate share in pass-through

Question

Can the transfer of a disproportionate share of the cash flows from a loan meet the conditions for a pass-through arrangement?

Background

Entity M originates a five-year interest-bearing loan of 100. M then enters into an agreement with entity N in which, in exchange for a cash payment of 85, M agrees to Read more