Realised cash flows differ from expectations

Realised cash flows differ from expectations Realised cash flows differ from expectations – The business model assessment is forward-looking, so cash flows may sometimes be realised in a way that differs in a way that differs from the entity’s expectations at the time of the original assessment.

For example, the entity might sell more assets from the portfolio than had been anticipated at the time of making the original assessment for various reasons. 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 Realised cash flows differ from expectations
  • 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]

Neither does it change the classification of the remaining assets that continue to be held within the business model (unless the entity changes its business model in a manner that meets IFRS 9’s requirements on reclassification). However in such an example the increased level of sales and the reasons for them may be relevant in terms of assessing the business model for new financial assets that have been acquired or originated. Realised cash flows differ from expectations

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. Realised cash flows differ from expectations

EXAMPLE

Entity Y has operated a hold to collect business model for many years. Its portfolio of assets has for many years consisted of investment grade bonds issued by utility companies. Entity Y’s investment policies attach importance to both the yield and the stability afforded by such investments, and result in sales only in response to significant deteriorations in the credit risk of individual assets within the portfolio. Recently however there has been a wave of takeovers in the utility sector fuelled by overseas interest in the sector.

As a result, Entity Y has sold a number of the bonds within its portfolio in response to unsolicited offers that have been made to it. Continuing interest in this sector means that such sales are likely to continue in the future.

Can Entity Y’s portfolio continue to be accounted for under a held to collect business model?

Changes in the way that assets are managed within the business model (such as the increased frequency of sales that has taken place) do not result in the reclassification of existing assets, but may result in new assets being classified differently.

As a result the portfolio may need to be sub-divided going forward, with the existing bonds continuing to be accounted for within a hold to collect business model at amortised cost and the new bonds accounted for either at fair value through profit or loss or under a ‘hold to collect and sell’ business model at fair value through other comprehensive income.

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. Realised cash flows differ from expectations

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 have not been met. Realised cash flows differ from expectations

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 Realised cash flows differ from expectations

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]

Realised cash flows differ from expectations

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