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

Hold to collect is a business model defined under IFRS 9. This is part of the classification of financial assets. The objective of the ‘hold to collectbusiness 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 collectbusiness model irrespective of their frequency and significance. This is in contrast to the held to maturity category under IAS 39 which penalized 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. 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
* Equity investments, not held for trading, can elect for fair value through other comprehensive income

Only financial assets that meet the SPPI test and are held in a ‘hold to collectbusiness model can be classified at amortised cost. A typical example would be trade receivables or intercompany loans where the entity intends to collect the contractual cash flows and has no intention of selling those financial assets. Hold to collect

IFRS 9 gives the following examples of sales that may be consistent with the held-to-collect business model. [IFRS 9 B4.1.3A–B] Hold to collect

– The sales are due to an increase in the credit risk of a financial Hold to collect

Irrespective of their frequency and value, sales due to an increase in the assets’ credit risk are not inconsistent with a held-to-collect objective. This is because the credit quality of financial assets is relevant to the entity’s ability to collect contractual cash flows.

One example of such a sale is the sale of a financial asset because it no longer meets the credit criteria specified in the entity’s documented investment policy. However, in the absence of such a policy, the entity may demonstrate in other ways that the sale occurred due to an increase in credit risk.

– The sales are infrequent (even if significant), or are insignificant individually and in aggregate (even if frequent). Hold to collect

– The sales take place close to the maturity of the financial asset and the proceeds from the sales approximate the collection of the remaining contractual cash

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

Sales made in managing concentrations of credit risk (without an increase in the asset’s credit risk) are assessed in the same way as any other sales made in the business model. Also, it is irrelevant to the assessment whether a third party imposes the requirement to sell the financial assets, or whether the sale is at the entity’s discretion.

Example: Sales in a held-to-collect business model

Company L has a portfolio of financial assets that it has determined to be part of a held-to-collect business model. A change in the regulatory treatment of these assets has caused L to undertake a significant rebalancing of its portfolio in a particular period. However, L does not change its assessment of the business model, as the selling activity is considered an isolated – i.e. one-time – event. Hold to collect

By contrast, suppose that L were required by its regulator to routinely sell financial assets from a portfolio to demonstrate that the assets were liquid, and that the value of the assets sold was significant. In this case, L’s business model for managing that portfolio would not be held-to-collect. [IFRS 9 B4.1.4, IFRS 9 BC4.145]

Example: Held-to-collect business model – factors considered in the assessment: [IFRS 9 B4.1.4 Example 1]Hold to collect

IFRS 9 includes examples of circumstances in which the objective of a business model may be to hold financial assets to collect the contractual cash flows. One of these examples can be summarised as follows. Hold to collect

Company J holds investments to collect their contractual cash flows. The maturities of the investments are matched to J’s estimated, and generally predictable, funding needs.

In the past, sales of investments have typically occurred when the financial assets’ credit risk has increased such that the assets no longer meet J’s documented investment policy. In addition, infrequent sales have occurred as a result of unanticipated funding needs.

Reports to management focus on the credit quality of the instruments and contractual returns. However, management also considers the financial assets’ fair values from a liquidity perspective.

The following factors are relevant to the assessment of J’s business model. Hold to collect

  • The stated objective of the business model is to hold assets to collect contractual cash flows. The fact that maturities of the investments match the generally predictable funding needs supports this objective. Hold to collect
  • Sales in response to an increase in the investments’ credit risk because the investments no longer meet the entity’s documented investment policy, and infrequent sales resulting from unanticipated needs, are not inconsistent with the held-to-collect business model. Hold to collect
  • Although management considers fair value information, it does so from a liquidity perspective, and the main focus of its review of financial information is on the credit quality and contractual returns, which is consistent with the held-to-collect business model. Hold to collect

Example: Impact of securitisation on the business model assessment [IFRS 9.B4.1.4 Example 3]Hold to collect

IFRS 9 also gives an example of a business model where the objective is to originate loans to customers and subsequently sell those loans to a securitisation vehicle. Hold to collect

A securitisation vehicle, which is consolidated by the entity originating the loans, issues notes to investors. The vehicle receives the contractual cash flows on the loans from the originating entity (its parent) and passes them on to investors in the notes. Hold to collect

IFRS 9 concludes that, from the consolidated group’s perspective, the loans are originated with the objective of holding them to collect contractual cash flows. The fact that the consolidated group entered into an arrangement to pass cash flows to external investors, and so does not retain cash flows from the loans, does not preclude a conclusion that the loans are held in a held-to-collect business model. Hold to collect

The standard also concludes that the originating entity has an objective of realising cash flows on the loan portfolio by selling the loans to the securitisation vehicle, so for the purposes of the separate financial statements it would not be considered to be managing this portfolio in order to collect the contractual cash flows. Hold to collect

Example: Financial assets sold under sale and repurchase agreements

Company M holds financial assets to collect the contractual cash flows through to maturity; however, its objectives include selling some of those financial assets as part of sale and repurchase agreements (repos). Under these agreements, M agrees to repurchase the financial assets at a later date before their maturity. During the term of the repos, the transferee is required to remit immediately to M an amount equal to any payments the transferee receives from the transferred assets.

It appears that this scenario is consistent with a held-to-collect business model, based on:

  • M’s continuing recognition of the assets for accounting purposes; and
  • the terms of the repo transactions in regard to remitting income payments and reconveying the transferred assets back to M before their maturity.

Hold to collect

Hold to collect

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