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Hi Mike,
Pardon me for this stupid question: do debt instruments have to meet the business model and cash flow tests? I know debt assets are required to meet them, but I don’t really see any of such requirements written under debt instruments on the BPP study text or the ACCA article.
Also, for a debt asset to be classified as FVTPL, must it be held for trading? Or a reason of “by doing so would reduce an accounting mismatch that would otherwise arise from measuring assets and liabilities….” sufficient enough to classify it as FVTPL?
Hoping you could help me on this, thank you 🙂
“do debt instruments have to meet the business model and cash flow tests?”
You were correct … it was a stupid question!
How can a financial (instrument) liability be held for its investment potential or the flow of funds?
To satisfy the business model test a financial asset must satisfy this requirement:
“Business model test: The objective of the entity’s business model is to hold the financial asset to collect the contractual cash flows (rather than to sell the instrument prior to its contractual maturity to realise its fair value changes)”
An asset held for trading automatically excludes the business model criteria so cannot be held at amortised cost and therefore falls into
“All other debt instruments must be measured at fair value through profit or loss (FVTPL) IFRS 9, paragraph 4.1.4”
In specific answer to your question, if an asset satisfies the two criteria, it must be held at amortised cost unless …
But it doesn’t necessarily have to be held for trading
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