IFRS 9 The Business Model Test

Under IFRS 9, a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable at Amortized Cost or FVOCI is 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 (Amortized Cost), or to both collect contractual cash flows and to sell (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 may eliminate the need to apply the more detailed SPPI test, which is applied at a more granular level.

Read more

The IFRS 9 Framework for financial assets

IFRS 9 recognises three different accounting policies for financial instruments. These principles determine the value of the financial instruments on the balance sheet.

The initial measurement is based on amortised costs, this is the amount for which an asset or liability is initially recognised in the balance sheet less principal repayments, plus or minus the cumulative amortisation of the difference between that initial amount and the redemption amount calculated by using the effective interest method and less any write-downs (directly or through the use of a provision) arising from impairment or un-collectibility.

The second measurement basis is the fair value through other comprehensive incomeRead more

Do the SPPI contractual cash flow characteristics test

A typical example of an instrument where the contractual cash flows would not meet SPPI would be a debt instrument with an interest rate that is linked to the issuer’s share price. Similarly, a debt instrument with an equity conversion feature, under which the holder has an option to convert the debt instrument into a fixed number of the issuer’s equity shares on maturity, would not meet the SPPI test. Do the SPPI contractual cash flow characteristics test

However, if an issuer uses its own shares as a ‘currency’ to settle a convertible debt instrument, then this might meet the SPPI test. This could be in circumstances in which the equity conversion feature is for a variable number of … Read more

Equity investments at FVOCI

IFRS 9 requires all equity investments to be measured at fair value. The default approach is for all changes in fair value to be recognised in profit or loss.

However, for equity investments that are neither held for trading nor contingent consideration recognised by an acquirer in a business combination, entities can make an irrevocable election at initial recognition to classify the instruments as at FVOCI, with all subsequent changes in fair value being recognised in other comprehensive income (OCI). This election is available for each separate investment.

Under this new FVOCI category, fair value changes are recognised in OCI while dividends are recognised in profit or loss (unless they clearly represent a recovery of Read more

Instruments that fail(ed) the SPPI test

The following financial instruments in IFRS 9 have be carefully judged by the IASB and fail(ed) the Solely Payment of Principal and Interest test.

[IFRS 9 B4.1.9D, IFRS 9 B4.1.14] Instruments that fail(ed) the SPPI test

Contract description

Considerations

A bond that is convertible into a fixed number of equity instruments of the issuer.

The SPPI test is not met because the return on the bond is not just consideration for the time value of money and credit risk, but also reflects the value of the issuer’s equity.

An inverse floating interest rate loan – e.g. the interest rate on the loan increases if an interest rate index decreases.

The SPPI test is not met

Read more

Instruments that may fail the SPPI test

Careful consideration and a documented decision regarding the Solely Payment of Principal and Interest test is needed in the following cases:IFRS 9-The SPPI test explained by example!!!

[IFRS 9 B4.1.13, IFRS 9 BC4.186, IFRS 9 BC4.190]

Contract description

Considerations

A bond with a stated maturity and payments of principal and interest linked to an unleveraged inflation index of the currency in which the instrument is issued. The principal amount is protected. This linkage resets the time value of money to the current level.

Linking payments of principal and interest to an unleveraged inflation index resets the time value of money to a current level, so the interest rate on the instrument reflects ‘real’ interest. Therefore, the interest amounts are consideration for the time value

Read more