IFRS 9-The SPPI test explained by example!!!

The solely payments of principal and interest (SPPI) test requires that the contractual terms of the financial asset (as a whole) give rise to cash flows that are solely payments of principal and interest on the principal amounts outstanding ie cash flows that are consistent with a basic lending arrangement. Here are some examples to obtain an understanding for the IFRS reasoning:

Loan with zero interest and no fixed repayment terms

Relevant IFRS paragraphs [IFRS9.B4.1.7] – [IFRS Continue reading

Cash flows identification- Not-Only Principal and interest

IFRS 10 Consolidated Financial StatementsThe following examples illustrate contractual cash flows that are not solely payments of principal and interest on the principal amount outstanding. For the context within IFRS 9: Financial Instruments, reference is made to IFRS 9 The Solely Payments of Principal and Interest Test .

Cash flows identification- Only Principal and interest

Cash flows solely payments of principal and interest on the principal amount

The following examples illustrate contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. For the context within IFRS 9: Financial Instruments, reference is made to IFRS 9 The Solely Payments of Principal and Interest Test (IFRS 9 The solely payments of principal and interest test).

Classification of financial assets

Whether a financial asset is classified as at amortised cost, at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVPL) is mainly based on the business model assessment and the solely payments of principal and interest (SPPI-) test.

Business model hold to collect

Ok so the financial instrument to classify and measure is a debt instrument.

Based on the overall business, not instrument-by-instrument

Centers on whether financial assets are held to collect contractual cash flows:

The objective of the ‘hold to collect’ business model is to hold financial assets to collect their contractual cash flows, … Continue reading

Business model hold to collect and sell

Ok so the financial instrument to classify and measure is a debt instrument and the business model is not to hold to collect.

Based on the overall business, not instrument-by-instrument

Centers on whether financial assets are held to collect contractual cash flows:

Under the ‘hold to collect and sell’ business model, the … Continue reading

The SPPI test

Ok so the financial instrument to classify and measure is a debt instrument, the business model is to hold to collect.

Based on an instrument-by-instrument basis

Financial assets with cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Interest is consideration for only the time-value of money and credit risk.

A more elaborate explanation and examples of assets likely/not likely to meet the SPPI test.

The question is: Are the payments Continue reading

The SPPI test

Ok so the financial instrument to classify and measure is a debt instrument, the business model is to hold to collect and sell.

Based on an instrument-by-instrument basis

Financial assets with cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Interest is consideration for only the time-value of money and credit risk.

A more elaborate explanation and examples of assets likely/not likely to meet the SPPI test.

The question is: Are Continue reading

Is the fair value option applied?

At initial recognition an entity may irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see Designation eliminates …. an accounting mismatch).

The question is: Do you want to designate a financial asset as measured Continue reading

Is the fair value option applied?

At initial recognition an entity may irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see Designation eliminates …. an accounting mismatch).

The question is: Do you want to designate a financial asset as measured Continue reading