IFRS 9 Business model Examples- For both collecting contractual cash flows and selling financial assets

List of examples when the objective of the entity’s business model (under IFRS 9) may be achieved by both collecting contractual cash flows and selling financial assets:-

Example 1

An entity anticipates capital expenditures in a few years. The entity invests its excess cash in short and long-term financial assets in order to finance the expense when the need arises. Many of the financial assets have contractual lives that exceed the entity's intended investment period.

The entity will hold financial assets to collect the contractual cash flows and, when an opportunity arises, will sell financial assets to reinvest the cash into higher yielding financial assets.

The managers responsible for the portfolio are remunerated based on the overall performance generated by the portfolio.

 

Analysis

The objective of the business model is achieved by compiling contractual cash flows and selling financial assets. The entity will continuously make decisions about whether to collect contractual cash flows or sell financial assets will maximize the return on the portfolio until the need for invested cash arises.

In contrast, consider an entity that anticipates a cash outflow in five years to finance capital expenditures and invests excess cash in short-term financial assets. When the investments mature, the entity reinvests the cash in new short-term financial assets. The entity maintains this strategy until the funds are needed, at which point the entity uses the income from the maturing financial assets to finance capital expenditure. Only sales that are insignificant in value occur before expiration (unless there is an increase in credit risk). The objective of this contrasting business model is to maintain financial assets to collect contractual cash flows.

 

Example 2

A financial institution owns financial assets to meet its daily liquidity needs. The entity seeks to minimize the costs of managing those liquidity needs and, therefore, actively manages the performance of the portfolio. That return consists of collecting the contractual payments, as well as the gains and losses from the sale of financial assets.

As a result, the entity owns financial assets to collect contractual cash flows and sells financial assets to reinvest in higher-yielding financial assets or to better match the duration of its liabilities. In the past, this strategy has resulted in frequent sales activity and such sales have been of significant value. This activity is expected to continue in the future.

 

Analysis

The objective of the business model is to maximize portfolio performance to meet daily liquidity needs, and the entity achieves that objective by collecting contractual cash flows and selling financial assets. In other words, both the collection of contractual cash flows and the sale of financial assets are essential to achieve the objective of the business model.

 

Example 3

An insurer owns financial assets to finance insurance contract liabilities. The insurer uses the proceeds from the contractual cash flows in the financial assets to settle the liabilities of the insurance contract as they mature. To ensure that the contractual cash flows from financial assets are sufficient to settle those liabilities, the insurer conducts a buy and sell activity on a regular basis to rebalance its portfolio of assets and meet cash flow needs as they arise.

 

Analysis

The objective of the business model is to finance the liabilities of the insurance contract. To achieve this objective, the entity collects contractual cash flows as they mature and sells financial assets to maintain the desired profile of the asset portfolio. Therefore, both the collection of contractual cash flows and the sale of financial assets are essential to achieve the objective of the business model.

 

Refer following for more detail on business model and IFRS 9:-

IFRS 9 Business Model and SPPI Testing

IFRS 9