IFRS 9 Business model Examples- To collect the contractual cash flows
List of examples to
explain when the objective of an entity’s business model may be to hold
financial assets to collect the
contractual cash flows:
Example
1
An
entity maintains investments to collect its contractual cash flows. The
entity's financing needs are predictable and the maturity of its financial
assets corresponds to the entity's estimated financing needs.
The
entity carries out credit risk management activities with the aim of minimizing
credit losses. In the past, sales generally occur when the credit risk of
financial assets has increased so that the assets no longer meet the credit
criteria specified in the entity's documented investment policy. In addition,
infrequent sales have occurred as a result of unforeseen financing needs.
Reports
to key management personnel focus on the credit quality of financial assets and
contractual performance. The entity also monitors the fair values of
financial assets, among other information.
Analysis
While
the entity considers, among other information, the fair values of financial
assets from a liquidity perspective (i.e. the amount of cash that would be
obtained if the entity needs to sell assets), the entity's objective is to
maintain the assets financial receivable Contract cash flows. Sales would not
contradict that objective if they responded to an increase in the credit risk
of the assets, for example, if the assets no longer meet the credit criteria specified
in the entity's documented investment policy. Infrequent sales resulting from
unforeseen financing needs (for example, in a case of stress) would also not
contradict that goal, even if such sales are of significant value.
Example
2
An
entity's business model is to buy portfolios of financial assets, such as
loans. Those portfolios may or may not include credit-impaired financial
assets.
If the
payment of the loans is not made in a timely manner, the entity attempts to
carry out the contractual cash flows through various means, for example, by
contacting the debtor by mail, telephone or other methods. The entity's
objective is to collect contractual cash flows and the entity does not manage
any of the loans in this portfolio in order to realize the cash flows by
selling them.
In some
cases, the entity performs interest rate swaps to change the interest rate of
particular financial assets in a portfolio from a floating interest rate to a
fixed interest rate.
Analysis
The
objective of the entity's business model is to maintain financial assets to
collect contractual cash flows.
The
same analysis would apply even if the entity does not expect to receive all
contractual cash flows (for example, some of the financial assets have a credit
impairment at initial recognition).
Furthermore,
the fact that the entity subscribes derivatives to modify the portfolio's cash
flows does not in itself change the entity's business model.
Example
3
An
entity has a business model with the objective of originating loans to clients
and subsequently selling those loans to a securitization vehicle. The
securitization vehicle issues instruments to investors.
The
originating entity controls the securitization vehicle and, therefore,
consolidates it.
The
securitization vehicle collects the contractual cash flows from the loans and
passes them on to its investors.
For the
purposes of this example, it is assumed that the loans continue to be
recognized in the consolidated statement of financial position because they are
not written off by the securitization vehicle.
Analysis
The
consolidated group originated the loans with the objective of maintaining them
to collect the contractual cash flows.
However,
the originator has the objective of making cash flows in the loan portfolio by
selling the loans to the securitization vehicle, so for the purposes of its
separate financial statements it would not be considered that it is managing
this portfolio to collect the cash flow contract.
Example
4
A
financial institution owns financial assets to meet liquidity needs in a
"stress case" scenario (for example, a run on bank deposits). The
entity does not anticipate the sale of these assets, except in such scenarios.
The
entity monitors the credit quality of financial assets and its objective in
managing financial assets is to collect contractual cash flows. The entity
evaluates the performance of assets based on interest income earned and
realized credit losses.
However,
the entity also monitors the fair value of financial assets from a liquidity
perspective to ensure that the cash amount that would be obtained if the entity
needed to sell the assets in a stress scenario was sufficient to meet the
liquidity needs of the entity. Periodically, the entity makes insignificant
sales to demonstrate liquidity.
Analysis
The
objective of the entity's business model is to maintain financial assets to
collect contractual cash flows.
The
analysis would not change even if during a previous stress case scenario the
entity had significant value sales to satisfy its liquidity needs. Similarly,
recurring sales activity that is insignificant in value is not inconsistent
with holding financial assets to collect contractual cash flows.
Conversely,
if an entity owns financial assets to meet its daily liquidity needs and
meeting that objective involves frequent sales that have significant value, the
objective of the entity's business model is not to maintain the financial
assets to collect cash flows contractual.
Similarly,
if your regulatory entity requires the entity to routinely sell financial
assets to demonstrate that the assets are liquid, and the value of the assets
sold is significant, the entity's business model is not to hold financial
assets to collect flows. contractual cash. If a third party imposes the
requirement to sell the financial assets, or if the activity is at the entity's
discretion, it is not relevant to the analysis.
Refer following for more detail on business model and IFRS 9:-
IFRS 9 Business Model and SPPI Testing
Post a Comment