Realised cash flows differ from expectations

If cash flows are realised in a way that is different from the expectations at the date on which the entity assessed the business model – e.g. if more or fewer financial assets are sold than was expected when the assets were classified – then this does not:
  • give rise to a prior-period error in the entity’s financial statements; or
  • change the classification of the remaining financial assets held in that business model – i.e. those assets that the entity recognised in prior periods and still holds,

as long as the entity considered all relevant and objective information that was available when it made the business model assessment. [IFRS 9 B4.1.2A]

However, when an entity assesses the business model for newly acquired financial assets, it considers information about the way cash flows were realised in the past, along with other relevant information.

Change of management’s intention for a portfolio

Company K has a portfolio of financial assets that it has previously determined to be subject to a held-to-collect business model. Previously, there were insignificant sales of assets to manage concentrations of credit risk. However, the portfolio has grown much larger than was previously expected, and considerable merger and acquisition activity among issuers in the portfolio is now anticipated.

As a result, K now expects that there will be significant sales activity in the future to manage concentrations of credit risk, and concludes that its management of the portfolio is no longer consistent with a held-to-collect business model. K concludes that the reclassification criteria for existing assets LIINNK have not been met. However, when new financial assets are acquired for the portfolio after the change, these new financial assets will not meet the held-to-collect criterion. This may lead to the portfolio being sub-divided, with existing financial assets in the portfolio being measured at amortised cost, and others acquired after the change being measured at fair value.

The ’tainting’ notion

IAS 39 has a ‘tainting’ notion for the held-to-maturity measurement category. There is no similar notion under IFRS 9 – i.e. subsequent sales do not result in the reclassification of existing assets measured at amortised cost, as long as an entity considered all relevant and objective information that was available when it made the business model assessment. The reclassification of assets takes place only when the business model has changed. [IFRS 9 4.4.1]

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