Reclassification of financial assets – This section looks at the circumstances in which financial assets are reclassified, and their measurement on reclassification. Financial liabilities cannot be reclassified. [IFRS 9 4.4.2]
Reclassification of financial assets – requirements
Under IFRS 9, reclassification of financial assets is required if, and only if, the objective of the entity’s business model for managing those financial assets changes. [IFRS 9 4.4.1] Reclassification of financial assets
Such changes are expected to be very infrequent, and are determined by the entity’s senior management as a result of external or internal changes. These changes have to be significant to the entity’s operations and demonstrable to external parties. Accordingly, a change in the objective of an entity’s business model will occur only when an entity either begins or ceases to carry out an activity that is significant to its operations – e.g. when the entity has acquired, disposed of or terminated a business line. [IFRS 9 B4.4.1] Reclassification of financial assets
Example – Changes in business model
IFRS 9 provides the following examples of circumstances that are or are not changes in the business model. Reclassification of financial assets
Change in business model
Reclassification of financial assets
An entity has a portfolio of commercial loans that it holds to sell in the short term. The entity acquires a company that manages commercial loans and has a business model that holds the loans in order to collect the contractual cash flows.
The original portfolio of commercial loans is no longer for sale, and this portfolio is now managed together with the acquired commercial loans. All of the loans are held to collect the contractual cash flows. [IFRS 9 B4.4.1 (a)]
A financial services firm decides to shut down its retail mortgage business. That business no longer accepts new business and the financial services firm is actively marketing its mortgage loan portfolio for sale. [IFRS 9 B4.4.1 (b)]
No change in business model
An entity changes its intention for particular financial assets (even in circumstances of significant changes in market conditions).
A particular market for financial assets temporarily disappears.
Financial assets are transferred between parts of an entity with different business models.
Notice: Changes in the way in which assets are managed
As explained in the business model test, the classification of financial assets depends on the way in which they are managed within a business model, and not solely on the objective of the business model itself. Changes in the way that assets are managed within the business model – e.g. an increased frequency of sales – will not result in the reclassification of existing assets, but may result in newly acquired assets being classified differently. Such changes may occur more frequently than changes in the objective of the business model itself. [IFRS 9 B4.1.4.A – C, IFRS 9 B4.4.1, IFRS 9 BC114 – 116, IFRS 9 BCE70]
IFRS 9 does not contain any guidance requiring or allowing an entity to reclassify assets based on a reassessment of the SPPI criterion after initial recognition.
Example – Lapse of a contractual term
IFRS 9 does not provide guidance for circumstances in which:
- a feature that is significant in arriving at the conclusion that an asset does not meet the SPPI criterion expires before the maturity of the asset; and
- after the expiry of the feature the asset meets the SPPI criterion.
It appears that the entity should not reclassify the financial asset on expiration of the feature.
For example, assume that a bond is convertible into equity of the issuer and has a 10-year maturity, but the conversion feature is exercisable only for the first five years. If, at the end of five years, the conversion feature has not been exercised, then the bond should remain classified as at FVTPL until its maturity.
Timing of reclassification of financial assets
If an entity determines that its business model has changed in a way that is significant to its operations, then it reclassifies all affected assets prospectively from the first day of the next reporting period (the reclassification date). Prior periods are not restated. [IFRS 9 5.6.1]
The change in business model has to be effected before the reclassification date. For reclassification to be appropriate, the entity cannot engage in activities that are consistent with its former business model after the date of change in business model. [IFRS 9 B4.4.2]
Notice: No definition of ‘reporting period’
IFRS 9 does not define the term ‘reporting period’. It appears that the reclassification date depends on the frequency of the entity’s reporting – i.e. quarterly, semi-annually etc. For example, an entity with an annual reporting period ending 31 December that reports quarterly and determines that its business model has changed on 15 March would have a reclassification date of 1 April.
Notice: Long time period between business model change and reclassification
In some cases, there may be a long time period between the change in an entity’s business model and the reclassification date. During this time period, the financial assets existing at the date of change in business model continue to be accounted for as if the business model has not changed – even though this no longer reflects the actual business model in operation. However, it appears that an entity should classify any new assets that were initially recognised after the date of change in business model based on the new business model in effect at the date of their initial recognition. [IFRS 9 BC4.119]
Measurement on reclassification of financial assets
The measurement requirements on the reclassification of financial assets are as follows:
- reclassification of financial assets is done into the future (i.e. prospectively). No restatement of any previously recognised results (gains, losses and impairments).
- reclassification from amortised costs into FVPL – the fair value is measured at the reclassification date.
- reclassification from FVPL into amortised costs – fair value at reclassification date becomes the new gross carrying amount (see paragraph B5.6.2 for effective interest rate and loss allowance accounting at the reclassification date).
- reclassification from amortised costs into FVOCI – the fair value is measured at the reclassification date. A difference between the carrying value before reclassification (at amortised costs) and the carrying value after reclassification (fair value) is recognised in Other comprehensive income. Effective interest rate and expected credit losses are not adjusted (See paragraph B5.6.1.).
- reclassification from FVOCI into amortised costs – the fair value is measured at the reclassification date and recorded as amortised costs (see revaluation reserve netting next sentence). The cumulative gains/losses in the revaluation reserve in equity is excluded from equity (through Other comprehensive income) and recorded into the fair value carrying amount at the reclassification date. This results in the financial asset being measured at its original amortised costs. Effective interest rate and expected credit losses are not adjusted (see paragraph B5.6.2).
- reclassification from FVOCI into FVPL – the fair value continues as the measurement base. The cumulative gain or loss recorded in the revaluation reserve (through other comprehensive income) is excluded from equity to profit or loss as a reclassification adjustment (see IAS 1)
Reclassification of financial assets
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