1 Best Complete Test Business model hold to collect

Business model hold to collect

This Business model hold to collect 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?

Ok so the financial instrument to classify and measure is a debt instrument.

The business model test is based on the overall business model, 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
  • The objective of the business model as determined by key management personnel (KMP) (per IAS 24 Related Party Disclosures).
    • collect contractual payments over life of the instrument
    • entity manages the assets held within the portfolio to collect those particular contractual cash flows

The objective of the ‘hold to collect’ business model is to hold financial assets to collect their contractual cash flows, rather than with a view to selling the assets to generate cash flows. However, there is no requirement that financial assets are always held until their maturity, and IFRS 9 identifies some sales that are considered consistent with the ‘hold to collect’ business model irrespective of their frequency and significance.

Business model hold to collect

Sales in themselves however do not determine the business model and should not be considered in isolation. It is not necessary then for an entity to hold all of the instruments until maturity. Rather, information about past sales and expectations about future sales provide evidence related to how the entity’s stated objective for managing the financial assets is achieved and, specifically, how cash flows are realised. When assessing past sales, an entity considers the reasons for those sales, their timing, frequency and value. The entity also considers how the conditions that existed at that time compare to current conditions.

This is in contrast to the held to maturity category under IAS 39 which penalised entities for sales in all but exceptional circumstances (commonly known as ‘tainting rules’). Nevertheless, it is expected that sales would be incidental to this business model and consequently an entity will need to assess the nature, frequency and significance of any sales occurring. Here are two examples:

Example 1 Business model hold to collect

Analyses Business model hold to collect

An entity holds investments to collect their contractual cash flows. The funding needs of the entity are predictable and the maturity of its financial assets is matched to the entity’s estimated funding needs.

The entity performs credit risk management activities with the objective of minimising credit losses.

In the past, sales have typically occurred when the financial assets’ credit risk has increased such 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 unanticipated funding needs.

Reports to key management personnel focus on the credit quality of the financial assets and the contractual return. The entity also monitors fair values of the financial assets, among other information.

Although the entity considers, among other information, the financial assets’ fair values from a liquidity perspective (ie the cash amount that would be realised if the entity needs to sell assets), the entity’s objective is to hold the financial assets in order to collect the contractual cash flows.

Sales would not contradict that objective if they were in response to an increase in the assets’ credit risk, for example if the assets no longer meet the credit criteria specified in the entity’s documented investment policy.

Infrequent sales resulting from unanticipated funding needs (eg in a stress case scenario) also would not contradict that objective, even if such sales are significant in value.

Business model hold to collect Business model hold to collect 

Business model hold to collect Business model hold to collect

Example 2 Business model hold to collect

Analyses Business model hold to collect

A financial institution holds financial assets to meet liquidity needs in a ‘stress case’ scenario (eg, a run on the bank’s deposits). The entity does not anticipate selling these assets except in such scenarios.

The entity monitors the credit quality of the financial assets and its objective in managing the financial assets is to collect the contractual cash flows. The entity evaluates the performance of the assets on the

basis of interest revenue earned and credit losses realised.

However, the entity also monitors the fair value of the financial assets from a liquidity perspective to ensure that the cash amount that would be realised if the entity needed to sell the assets in a stress case scenario would be sufficient to meet the entity’s liquidity needs. Periodically, the entity makes sales that are insignificant in value to demonstrate liquidity.

Business model hold to collect Business model hold to collect

The objective of the entity’s business model is to hold the financial assets to collect contractual cash flows.

The analysis would not change even if during a previous stress case scenario the entity had sales that were significant in value in order to meet its liquidity needs. Similarly, recurring sales activity that is insignificant in value is not inconsistent with holding financial assets to collect contractual cash flows.

In contrast, if an entity holds financial assets to meet its everyday liquidity needs and meeting that objective involves frequent sales that are significant in value, the objective of the entity’s business model is not to hold the financial assets to collect contractual cash flows.

Similarly, if the entity is required by its regulator 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 contractual cash flows. Whether a third party imposes the requirement to sell the financial assets, or that activity is at the entity’s discretion, is not relevant to the analysis.

See more examples of business models to hold and collect.

Sales that may be consistent with a business model of holding assets to collect cash flows

An entity’s business model can be ‘hold to collect’ even when some sales occur or are expected to occur in the future. This part looks at some examples:

1 Sales due to an increase in the assets’ credit risk Business model hold to collect

Sales due to an increase in the assets’ credit risk are not inconsistent with a hold to collect business model because the Recognise the identifiable assets acquiredcredit quality of financial assets is relevant to the entity’s ability to collect contractual cash flows. Business model hold to collect

It will be easiest to demonstrate this when there is a documented investment policy that is aimed at minimising potential credit losses due to credit deterioration. However where such a policy does not exist, it may still be possible to show in other ways that a sale has occurred due to an increase in credit risk and is therefore consistent with the hold to collect business model.

Example Business model hold to collect

Entity A holds investments to collect their contractual cash flows but will sell investments with the objective of minimising credit losses. A formal policy documents Entity A’s credit risk requirements and when sales are to be made. Provided that sales are made in response to conditions that are set out in the documented policy, they will be consistent with the hold to collect business model.

2 Sales for other reasons Business model hold to collect

Other sales which are not due to an increase in credit risk may still be consistent with a hold to collect business model. This is the case if those sales are incidental to the overall business model.

Examples of such sales could include: Business model hold to collect

  • sales that are insignificant in value both individually and in aggregate, even when such sales are frequent.
  • sales that are infrequent, even when the sales are significant in value
  • sales made close to the maturity of the financial assets when the proceeds from the sales approximate the collection of the remaining contractual cash flows.

Where sales occur that are more than infrequent and they are more than insignificant in value, an entity will need to assess whether and how those sales are consistent with the objective of a hold to collect business model. Business model hold to collect

An increase in the frequency or value of sales in a particular period is not in itself necessarily inconsistent with a hold to collect business model, if an entity can explain the reasons for those sales and demonstrate why those sales do not reflect a change in the entity’s business model. Business model hold to collect

For example an entity may sell some assets whose credit risk has not deteriorated in order to manage credit concentration risk. In such a situation, judgement will need to be applied in determining whether the sales are consistent with the hold to collect business model. No ‘bright-lines’ are given in the Standard to help entities in making this assessment.

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

Yes / No

Business model hold to collect test Business model hold to collect test Business model hold to collect test Business model hold to collect test

Business model hold to collect test Business model hold to collect test Business model hold to collect test Business model hold to collect test

Business model hold to collect test

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Business model hold to collect

Business model hold to collect