Reclassifying financial assets

Learning objectives

• Determine whether a change in business model justifies the reclassification of financial assets and apply the reclassification prospectively from the reclassification date.L2, L3
• Calculate, from the data of a case, the amounts relating to the reclassification of financial assets.L2, L3
• Record the journal entries for the reclassification of financial assets and measure their effect on the financial position, profit or loss and other comprehensive income.L2, L3
• Support in writing, from the facts of the case, the judgement made on the reclassification of financial assets.L2, L3

Normative references

• IFRS 9 §4.4.1The entity reclassifies financial assets when, and only when, it changes its business model for managing those financial assets.
• IFRS 9 §B4.4.1Changes in business model are expected to be very infrequent; they are determined by senior management as a result of external or internal changes, must be significant to the entity's operations and demonstrable to external parties, and occur only when the entity begins or ceases to perform an activity that is significant to its operations (for example, acquisition, disposal or termination of a business line); the paragraph gives two examples. Situations that are not changes are listed in para. B4.4.3.
• IFRS 9 §B4.4.3The following are not changes in business model: a change in intention related to particular financial assets (even in circumstances of significant changes in market conditions), the temporary disappearance of a particular market for financial assets, and a transfer of financial assets between parts of the entity with different business models.
• IFRS 9 §5.6.1The reclassification is applied prospectively from the reclassification date (the first day of the first reporting period following the change in business model); previously recognised gains, losses (including impairment gains or losses) and interest are not restated.
• IFRS 9Appendix A (amortised cost terms): the gross carrying amount is the amortised cost of a financial asset before adjusting for any loss allowance; the effective interest rate exactly discounts estimated future cash flows through the expected life of the instrument, considering all its contractual terms (prepayment, options); the credit-adjusted effective interest rate of purchased or originated credit-impaired (POCI) assets also takes expected credit losses into account; the modification gain or loss is the amount arising from adjusting the gross carrying amount to reflect the renegotiated or modified cash flows; the reclassification date is the first day of the first reporting period following the change in business model.

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

3 questions

• Banque Est manages a portfolio of bonds under a collection model. The market for some of these securities temporarily disappears, and management considers selling a few of them soon, without changing the portfolio's strategy. Should the portfolio be reclassified?L2
• Following a change in business model, a portfolio of bonds of Fort SA, carried at amortised cost for {carrying_amount}, is reclassified. At the reclassification date, the fair value of the portfolio is {fair_value_at_reclass_date}. Calculate the difference between fair value and carrying amount. The accounting treatment of that difference is not asked.L2
• Gamma Assurance kept bonds within a collection model. Facts of the case: after a reorganisation decided by senior management following a significant external change, demonstrable to third parties, the management of the portfolio is entrusted to a trading team whose objective is to benefit from fair value movements; a manager also wishes to sell two particular securities. Write a short note that concludes on reclassification, distinguishing the facts of the case, the rule and professional judgement.L3