IFRS 9 – Financial Instruments


Entity’s business model

For the purpose of financial assets’ measurement IFRS 9 requires analysis of entity’s business model to determine whether entity’s objective is to hold financial assets to collect contractual cash flows. Every entity needs not to be running business with an objective to receive contractual cash flows.

Business model is not about the intentions of management regarding particular instrument. It is about how entity is being operated i.e. objectives and decisions of key management personnel. In simple words business model is not determined by assessing intentions of management regarding each financial asset rather how they are managed overall.

Entity needs not to have a single business model and for the same reason no single classification entity wide. One entity may have diverse investment portfolio with one portfolio of asset held for collection at maturity and the other for trading.

Similarly if entity’s business model is to hold asset until maturity does not imply that it has to hold all of the asset until they are mature. Entity may sell an asset if:

  1. Financial asset is no longer in accordance with entity’s policies e.g. credit rating of asset fell below entity’s minimum requirement
  2. Entity needs to finance non-current assets

However, if sales prior to maturity rose beyond a frequent number of assets then entity needs to assess if such sales are in line with its objective to hold asset till maturity.

Cash flow characteristics of asset

Just like in business model, in assessment regarding cash flow characteristics of asset entity is required to determine if cash flows are only for:

  1. The repayments of principal amount
  2. The interest on the principal amount outstanding

For the purpose of assessment, interest is consideration only for:

  1. Time value of money
  2. Risk associated with the principal amount outstanding