Hold to collect and sell – How 2 best account it in IFRS 9 classification of financial assets

Hold to collect and sell – this is part of the classification of financial assets. Classification determines how financial assets and financial liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis. IFRS 9 introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements that are considered to be overly complex and difficult to apply. The new model also results in a single impairment model being applied to all financial instruments, thereby removing a source of complexity associated with previous accounting requirements.

Under the ‘hold to collect and sell’ business model, the objective is to both collect the contractual cash flows and sell the financial asset. In contrast to the ‘hold to collectbusiness model, sales are integral rather than incidental, and consequently, this business model typically involves a greater frequency and volume of sales. Also remember the fair value option in financial instruments can be elected (designated) to apply the classification and measurement into ‘Fair value through profit or loss‘ and equity instrument can elect to use the ‘fair value through other comprehensive income‘. Hold to collect and sell

Hold to collect and sell
* Equity investments can elect for fair value through other comprehensive income

Only financial assets that meet the SPPI test and are held in a ‘hold to collect and sell’ business model can be classified at fair value through other comprehensive income for debt. One example would be government or corporate bonds that are held with the dual objective of holding those bonds to earn interest and selling those bonds before their maturity in order to generate cash for investment or liquidity purposes. Hold to collect and sell

It is worth noting that this business model could also apply to trade receivables in cases where an entity has a practice of factoring subsequent to initial recognition. In these cases, further analysis would be required in order to determine whether the factoring arrangement constitutes a sale and if so whether a ‘hold to collect and sell’ business model or indeed one of the ‘other’ business models is more appropriate. Hold to collect and sell

Possible examples of such a business model, given by the new standard, include: Hold to collect and sell

A business model whose objective is achieved by both collecting contractual cash flows and selling financial assets will typically involve a greater frequency and value of sales than a held-to-collect business model. This is because selling financial assets is integral to achieving the business model’s objective, rather than only incidental to it. However, there is no threshold for the frequency or amount of sales that have to occur in this business model, because both of these activities are integral to achieving its objective. [IFRS 9 B4.1.4B]

Example: Holding investments in anticipation of capital expenditure [IFRS 9.B4.1.4C]

Company Z anticipates capital expenditure in five years. To be able to fund the expenditure, Z invests excess cash in short-term and long-term financial assets. Many of the financial assets have contractual lives that exceed Z’s anticipated investment period.

Z intends to hold the financial assets, but when an opportunity arises, it will sell them to invest in assets with a higher return. The portfolio’s managers are remunerated based on the overall return from the portfolio of assets.

Z’s objective for managing the financial assets is therefore achieved by both collecting contractual cash flows and selling financial assets.

Notice: Applying the business model criterion

IFRS 9 clarifies that collecting contractual cash flows, or selling financial assets, or both, may not be the objective of the business model in itself. In particular, for the held to collect and for sale category, the business model is often to hold a portfolio of liquid assets in order to meet expected or unexpected commitments, or to fund anticipated acquisitions. The classification of those financial assets focuses not on the business model itself but rather on the way that the assets are managed in order to meet the objectives of the business model. [IFRS 9 B4.1.4A – C]

Hold to collect and sell

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