Business model: collect, collect and sell, other

Learning objectives

• Determine the business model for a portfolio (hold to collect, hold to collect and sell, other) from the evidence in the case (reporting, risk management, compensation, past and expected sales).L1, L2, L3, L4
• Prepare a workpaper documenting the business model: hold to collect, hold to collect and sell, other.L1, L2, L3, L4
• Support in writing, from the facts of the case, the judgement made on the business model: hold to collect, hold to collect and sell, other.L1, L2, L3, L4

Normative references

• IFRS 9 §4.1.2A financial asset is measured at amortised cost if both conditions are met: it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). Paras. B4.1.1 to B4.1.26 provide application guidance; para. B4.1.3 clarifies that there is no requirement to hold the assets until maturity.
• IFRS 9 §4.1.2AA financial asset is measured at FVOCI if it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and its contractual cash flows are solely payments of principal and interest on the principal amount outstanding. The treatment of gains and losses in this category (interest, impairment and foreign exchange in profit or loss, recycling on derecognition) is set out in para. 5.7.10.
• IFRS 9 §B4.1.1Classification on the basis of the business model (para. 4.1.1(a), unless para. 4.1.5 applies) is assessed by reference to the business model as determined by the entity's key management personnel as defined in IAS 24. The relevant evidence (reporting of performance to key management personnel, risks and how they are managed, compensation of managers) is listed in para. B4.1.2B.
• IFRS 9 §B4.1.2BThe business model is a matter of fact, observable through the activities the entity undertakes, and not merely an assertion; assessing it requires judgement and is based on all relevant evidence available, including how performance is evaluated and reported to key management personnel, the risks that affect performance and how they are managed, and how managers are compensated.
• IFRS 9 §B4.1.2CA hold-to-collect business model aims to realise cash flows by collecting contractual payments over the life of the instrument; in assessing it, the entity considers the frequency, value and timing of sales in prior periods, the reasons for those sales and expectations about future sales, sales not being determinative in isolation but assessed in context. Guidance on consistent sales (credit deterioration, infrequent or insignificant sales) and on the absence of any requirement to hold until maturity is in paras. B4.1.3 to B4.1.3B; the Standard sets no numerical threshold.
• IFRS 9 §B4.1.6A portfolio of financial assets that is managed and whose performance is evaluated on a fair value basis (as described in para. 4.2.2(b)), or that meets the definition of held for trading, is held neither to collect contractual cash flows nor both to collect contractual cash flows and to sell: collecting contractual cash flows is only incidental and the portfolio is measured at FVTPL.
• IFRS 9 §B4.1.3A hold-to-collect business model does not require all instruments to be held until maturity: past or expected sales are consistent with this business model.
• IFRS 9 §B4.1.3ASales due to an increase in the credit risk of the assets, regardless of their frequency and value, are consistent with a hold-to-collect business model, because credit quality affects the entity's ability to collect; the sale of an asset that no longer meets the credit criteria specified in a documented investment policy is an example, the entity otherwise being able to demonstrate the reason for the sale in another way.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• A business model of collecting contractual cash flows requires the entity to hold each asset in the portfolio until maturity.L1
• Banque Sud holds a loan portfolio within a collection business model. During the year it sold a few loans whose credit risk had deteriorated. Do these sales call the collection model into question?L2
• Which elements inform the assessment of the business model of a portfolio of financial assets? Several answers are possible.L3