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 IASB November 2013


 

The IASB and the FASB discussed clarifications to the business model assessment in the boards’ recent Exposure Drafts.


Agenda Paper 6A: Overall Business Model Assessment


The boards discussed the meaning of the term business model, including the role of cash flow realisation, and the level on which the business model is assessed and tentatively decided to clarify that the business model assessment should:

    a.     refer to the actual management of financial assets in order to generate cash flows and create value for the entity—ie whether the likely actual cash flows will result primarily from the collection of contractual cash flows, sales proceeds or both;
    b.     allocate financial assets to the measurement attribute that will provide the most relevant and useful information about how activities and risks are managed to generate cash flows and create value; and
    c.     be assessed at a level that reflects (groups of) financial assets managed together to achieve a particular (common) objective.

Fifteen IASB members agreed. Seven FASB members agreed.


The boards discussed clarifications of how the business model—and a change in the business model—should be assessed and tentatively decided to clarify that:

    a.     the entity’s business model for managing financial assets is often observable through particular activities that are undertaken to achieve the objectives of that business model;
    b.     sales do not drive the business model assessment and information about sales activity should not be considered in isolation (as further described in paragraph 76 (a)–(b) of the observer notes for Agenda Paper 6A); and
    c.     a change in the business model will occur only when an entity has either stopped or started doing something on a level that is significant to its operations—and that would generally be the case only when the entity has acquired or disposed of a business line.

Fifteen IASB members agreed. Four FASB members agreed.


The IASB also tentatively decided to clarify that:

    a.     business activities usually reflect the way in which the performance of the business model and underlying financial assets in that business model are evaluated and reported (ie key performance indicators) as well as the risks that typically affect the performance of the business model and how those risks are managed;
    b.     an entity should consider all relevant and objective information that is available at the date of the assessment but should not consider every ‘what if’ or worse-case scenario if the entity does not reasonably expect those scenarios to occur; and
    c.     if cash flows are realised in a way that is different from the entity’s expectations at the date that the business model assessment was made, it will neither: 
                        i. result in the restatement of prior period financial statements; nor
                        ii. change the classification of the remaining financial assets in the business model
as long as the entity considered all relevant and objective information that was available at the time that it made the assessment.

Fifteen IASB members agreed.

In addition, the FASB tentatively decided to converge the guidance in its tentative classification and measurement model with IFRS 9 Financial Instruments regarding the date on which reclassification is reflected in the financial statements. Specifically, the FASB tentatively decided that the reclassification date would be the first day of the first reporting period following the change in the business model. The FASB had earlier proposed that the reclassification date should be the last day of the reporting period in which the change in the business model occurs.


Four FASB members agreed.


Agenda Paper 6B: Hold to Collect Business Model


The boards discussed clarifications to the hold to collect business model and tentatively decided to clarify the application guidance for the hold to collect business model as set out in paragraph 62 (a)-(d) of the observer notes for Agenda Paper 6B, specifically:

    a.     to reinforce the current hold to collect ‘cash flows (value) realisation’ concept;
    b.     to emphasise that insignificant and/or infrequent sales may not be inconsistent with the hold to collect business model;
    c.     to clarify that sales information should not be considered in isolation and is not determinative; and
    d.     to clarify that credit risk management activities aimed at minimising potential credit losses due to credit deterioration are integral to the hold to collect objective.

Sixteen IASB members agreed. Seven FASB members agreed.


In addition, as part of the clarifications under point (a), the FASB tentatively decided that the guidance on the hold to collect business model should emphasise activities aimed at achieving the business model’s objective.


Seven FASB members agreed.


The boards tentatively decided that sales made in managing concentration of credit risk should be assessed in the same way as any other sales made in the business model.


Twelve IASB members and four FASB members agreed.


Agenda Paper 6C: Fair Value Categories


The boards discussed the fair value measurement categories.

The boards tentatively decided to retain two fair value measurement categories, that is fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVPL), and to define the business model that results in measurement at FVOCI and to retain FVPL as the residual measurement category.


Twelve IASB and seven FASB members agreed.


The boards tentatively decided to clarify the application guidance for the FVPL measurement category, specifically that:

    a.     financial instruments managed and evaluated on a fair value basis or held for trading purposes must be measured at FVPL; and
    b.     for financial assets that are measured at FVPL, the entity makes decisions based on changes in—and with the objective of realising—the assets’ fair value.

Twelve IASB members agreed. Seven FASB members agreed.

In addition, the IASB tentatively decided to clarify that the activities that the entity undertakes in the FVPL measurement category are primarily focused on fair value information, and key management personnel uses that fair value information to assess the assets’ performance and to make decisions accordingly. In addition, another indicator is that the users of the financial statements are primarily interested in fair value information of these assets in order to assess the entity’s performance.


Twelve IASB members agreed.


The boards also tentatively decided to clarify the application guidance for the FVOCI measurement category, as set out in paragraph 76(a)–(c), (d)(ii)–(d)(iv) and (e) of the observer notes for Agenda Paper 6C, specifically that:

    a.     in the FVOCI business model, managing financial assets both to collect contractual cash flows and for sale is the outcome of the way in which financial assets are managed to achieve a particular objective rather than the objective itself; that is, the assets classified in FVOCI are managed to achieve the business model objectives (such as liquidity management, interest rate risk management, yield management and duration mismatch management) by both collecting contractual cash flows and selling;
    b.     both collection of contractual cash flows and realisation of cash flows through selling are integral to the performance of the FVOCI business model and there is no threshold for the frequency or amount of sales in the FVOCI business model; and
    c.     particular activities are typically aimed at achieving the FVOCI business model objectives.

Twelve IASB members agreed. Seven FASB members agreed.


The IASB also tentatively decided to clarify that for financial assets in the hold to collect and sell business model, the key performance indicators include the contractual interest yield, impairment charges and fair value changes.


Twelve IASB members agreed.


In addition, the FASB tentatively decided to remove the guidance in the FASB’s Exposure Draft requiring an individual asset for which an entity has, at initial recognition, not yet determined whether it will hold the financial asset to collect contractual cash flows or sell to be measured at FVOCI.


Seven FASB members agreed.


Next steps


The boards will consider the other aspects of their respective proposals at future meetings.


 

 

Date: 11/20/2013