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IFRS 9 Best long-read SPPI Test

10/05/202201/04/2021 by 75385885

The SPPI Test

If an asset is in a hold-to-collect or hold-to-collect or sell business model, an entity assesses whether the cash flows from the financial asset meet the ‘solely payments of principal and interest’ (SPPI Test) benchmark – i.e. whether the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest.

‘Principal’ is the fair value of the financial asset on initial recognition. The principal may change over time – e.g. if there are repayments of principal.
‘Interest’ is consideration for the time value of money and credit risk. Interest can also include consideration for other basic lending risks and costs, and a profit margin.

A financial asset that does not meet the SPPI Test is always measured at FVPL, unless it is a non-trading equity instrument and the entity makes an irrevocable election to measure it at FVOCI. Here is the decision tree to put the narrative in context:

SPPI Test

Contractual cash flows that meet the SPPI Test are consistent with a basic lending arrangement in the banking industry.

Purchased and originated credit-impaired financial assets – IFRS 9 Best Read

04/09/202126/02/2019 by 75385885

Purchased and originated credit-impaired financial assets

Purchased and originated credit-impaired financial assets are those for which one or more events that have a detrimental impact on the estimated future cash flows have already occurred. If these financial assets had been originated or purchased before becoming credit impaired, they would be in Stage 3 and lifetime expected losses would be recognised.

Purchased and originated credit-impaired financial assets Indicators that an asset is credit-impaired would include observable data about the following events:

Significant financial difficulty of the issuer or the borrower
Breach of contract,
The lender has granted concessions as a result of the borrower’s financial difficulty which the lender would not otherwise consider,
It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation,
The disappearance of an active market for that financial asset because of financial difficulties,
The financial asset is purchased or originated at a deep discount that reflects the incurred credit losses.

It may not be possible to identify a single discrete event. It could be the combined effect of several events may have caused financial assets to become credit-impaired.

Food for thought – Interaction between definitions of ‘credit-impaired’ and ‘default’

The definition of ‘credit-impaired’ under IFRS 9 may differ from the entity’s definition of ‘default’ (see explanation here). However, an entity’s definition of default should be consistent with its credit risk management, and should consider qualitative factors. For example, many financial institutions apply regulatory definitions of default for accounting and regulatory purposes – e.g. those issued by the Basel Committee on Banking Supervision under which a default is considered to have occurred when it is unlikely that the obligor will be able to repay its obligation. The assessment of whether such a definition is met may be based on similar criteria to those used for assessing whether an asset is credit-impaired. In these cases, the asset would be considered to be in default when it is credit-impaired. (IFRS 9.5.5.37)

IFRS 9 Proper accounting for Related Company Loans

05/12/202016/03/2020 by 75385885

IFRS 9 Proper accounting for Related Company Loans – IFRS 9 Financial Instruments makes no distinction between unrelated third party and related party transactions. Entities that prepare stand-alone financial statements are required to apply the full provisions of the standard to all transactions within its scope.

This means related company loan receivables must be classified and measured in accordance with the requirements of IFRS 9, including where relevant, applying the Expected Credit Loss (ECL) model for impairment. IFRS 9 Proper accounting for Related Company Loans

Applying IFRS 9 to related company loans can present a number of application challenges as they are often advanced on terms that are not arms-length or sometimes advanced on an informal basis without any terms … Read more

9 Best practical Impairment related company loans

05/12/202017/03/2020 by 75385885

9 Best practical Impairment related company loans – What are related company loans?

Technically not the most difficult question one would think, BUT………

Entities must first consider whether the loan is within the scope of IFRS 9 or another standard. This is because IFRS 9: 2.1(a) scopes out ‘interests in subsidiaries, associates and joint ventures’ that are accounted for in accordance with IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures i.e. at cost less impairment or using the equity method.

In many cases, it will be clear that the loan is a debt instrument that falls within the scope of IFRS 9 but some scenarios may require a more detailed analysis.

IFRS 9 replaced … Read more

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

25/02/202016/05/2019 by 75385885

The objective of the ‘hold to collect’ business model is to hold financial assets to collect their contractual cash flows, rather than to selling the assets

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

25/02/202016/05/2019 by 75385885

Under the 'hold to collect and sell’ business model, the objective is to both collect the contractual cash flows and sell the financial asset for cash

IFRS 9 The Business Model Test

25/02/202014/08/2019 by 75385885

IFRS 9 The Business Model Test is a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable at Amortized Cost or FVOCI. The test is about whether the asset is part of a group or portfolio that is being managed within a business model whose objective is to collect contractual cash flows from the non-equity financial asset (Amortized Cost), or to both collect contractual cash flows from the non-equity financial asset and sell the non-equity financial asset (FVOCI). Otherwise, the asset is measured at FVPL. The key elements of this test are listed below.

Observe: IFRS 9 recommends applying the Business Model test before applying the SPPI test because

The important Solely Payments of Principal and Interest Test

IFRS 9 The Solely Payments of Principal and Interest Test is the second necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying loans and receivables at Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI), or the Fair value through Profit or Loss (FVPL) as the residual class. This means that the contractual payments give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.

The classification and measurement of non-equity instruments (financial assets) under IFRS 9 is dependent on two key criteria:

The business model within which the asset is held (the