Business model hold to collect and sell

This Business model hold to collect and sell test is part of the decision model for the classification and measurement of financial assets, that started in the IFRS 9 Framework for financial assets. But you can also read it without doing the test …. off course?

An entity’s business model for managing financial assets: Business model hold to collect and sell

  • reflects how financial assets are managed to generate cash flows Business model hold to collect and sell
  • is determined by the entity’s key management personnel
  • does not depend on management’s intentions for individual instruments but is based on a higher level of aggregation that reflects how groups of financial assets are managed together to achieve a particular business objective. Business model hold to collect and sell

Ok so the financial instrument to classify and measure is a debt instrument and the business model is not to hold to collect.

The business model test is based on the overall business, not instrument-by-instrument and centers on whether financial assets are held to collect contractual cash flows:

  • How the entity is run Business model hold to collect and sell
  • The objective of the business model as determined by key management personnel (KMP) (per IAS 24 Related Party Disclosures).

This applies when key management personnel have made a decision that both collecting contractual cash flows and selling financial assets are integral to achieving the objective of the business model.

In determining whether this is so, entities will need to exercise an element of judgement. This is because there is no threshold for the frequency or value of sales that must occur in this business model. However, this business model will typically involve greater frequency and value of sales than a hold to collect model. This is because selling financial assets is integral to achieving the business model’s objective instead of being only incidental to it.

There are various objectives that may be consistent with this type of business model. For example, the objective of the business model may be to manage everyday liquidity needs, to maintain a particular interest yield profile or to match the duration of the financial assets to the duration of the liabilities that those assets are funding.

Example

Entity Z operates in the entertainment industry. Its operations include a sports stadium. Entity Z has a long-term plan for renovating the stadium involving significant investment at set points three, seven and ten years in the future.

In anticipation of this expenditure, Entity Z invests surplus cash in bond assets. Many of the bonds have maturity dates that substantially exceed the points at which the stadium expenditure is expected to take place.

Entity Z holds these bonds to collect the contractual cash flows until it needs the cash to invest in the stadium. It may also make opportunistic sales if management considers that market prices rise to levels that significantly exceed their own assessment of the bonds’ fundamental valuation. Accordingly the bonds held by Entity Z would be accounted for under a hold to collect and sell business model.

Under the Business model hold to collect and sell , the objective is to both collect the contractual cash flows and sell the financial asset. In contrast to the business model ‘hold to collect’, sales are integral rather than incidental, and consequently this business model typically involves a greater frequency and volume of sales. Here are two examples of the Business model hold to collect and sell: Business model hold to collect and sell

Example 

Analyses

An entity anticipates capital expenditure in a few years. The entity invests its excess cash in short and long-term financial assets so that it can fund the expenditure when the need arises. Many of the financial assets have contractual lives that exceed the entity’s anticipated investment period.

The entity will hold financial assets to collect the contractual cash flows and, when an opportunity arises, it will sell financial assets to re-invest the cash in financial assets with a higher return.

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

Business model hold to collect and sell

The objective of the business model is achieved by both collecting contractual cash flows and selling financial assets. The entity will make decisions on an ongoing basis about whether collecting contractual cash flows or selling financial assets will maximise the return on the portfolio until the need arises for the invested cash.

In contrast, consider an entity that anticipates a cash outflow in five years to fund capital expenditure 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 time the entity uses the proceeds from the maturing financial assets to fund the capital

expenditure. Only sales that are insignificant in value occur before maturity (unless there is an increase in credit risk). The objective of this contrasting business model is to hold financial assets to collect contractual cash flows.

Example 

Analyses

A financial institution holds financial assets to meet its everyday liquidity needs. The entity seeks to minimise the costs of managing those liquidity needs and therefore actively manages the return on the portfolio. That return consists of collecting contractual payments as well as gains and losses from the sale of financial assets.

As a result, the entity holds 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 significant in value. This activity is expected to continue in the future.

The objective of the business model is to maximise the return on the portfolio to meet everyday liquidity needs and the entity achieves that objective by both collecting contractual cash flows and selling financial assets. In other words, both collecting contractual cash flows and selling financial assets are integral to achieving the business model’s objective.

Business model hold to collect and sell

Business model hold to collect and sell

Business model hold to collect and sell

See more examples of business models to hold to collect and sell.

The question is: Is the business model ‘Hold to collect and sell’?

Yes / No

See also: The IFRS Foundation

Business model hold to collect and sell

Business model hold to collect and sell