SPPI test & business model objective test

SPPI test & business model objective test

Which criteria should be applied first – SPPI test or business model test?

SPPI test refers to the evaluation of contractual cash flows that analyses if such cash flows represent solely payments of principal and interest on the principal amount outstanding.

Business model is in fact not a test. An entity should examine its business model to arrive at whether the financial assets are held with the sole purpose of generating contractual cash flows or buying and selling of such financial assets or both.

There is no specific order in which the two above-mentioned criteria are to be examined. An entity should classify a financial asset on the basis of its contractual cash flow characteristics if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. To do so, an entity should determine whether the asset’s contractual cash flows are solely payments of principal and interest on the principal amount outstanding.

Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement. In a basic lending arrangement, consideration for the time value of money and credit risk are typically the most significant elements of interest. However, in such an arrangement, interest can also include consideration for other basic lending risks (for example, liquidity risk) and costs (for example, administrative costs) associated with holding the financial asset for a particular period of time. In addition, interest can include a profit margin that is consistent with a basic lending arrangement. In extreme economic circumstances, interest can be negative if, for example, the holder of a financial asset either explicitly or implicitly pays for the deposit of its money for a particular period of time (and that fee includes the consideration that the holder receives for the time value of money, credit risk and other basic lending risks and costs). However, contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. An originated or a purchased financial asset can be a basic lending arrangement irrespective of whether it is a loan in its legal form.

Ind AS Accounting Standards

Effective Rate of Interest – EIR

What is SPPI test?

Are RBI circulars relevant for ECL computation as per Ind AS 109?

What is a Financial instrument?

Is there a choice to designate as FVTPL?

What are treasury shares and how are these presented

Contract to deal in non-financial item

Can a corporate entity still follow settlement date accounting?

What does Interest represent?

Gains and losses on assets measured at FVOCI

Separately accounting for an embedded derivative

Derecognition of a financial asset

Foreign currency risk in a firm commitment as a fair value hedge

Treatment of transaction costs

Derecognise financial assets/financial liabilities retrospectively

Modification of contractual cash flows

Own use exemption as per the Accounting Standard

Difference between amortised cost & held-to-maturity

Accounting treatment for FVOCI Instruments

What is the concept of effective interest method?

What is a hybrid contract?

First-time adoption while classifying a financial instrument

Current standards for financial instruments as per AS?

Effective interest Rate

Contract is settled through the entity’s own equity instrument

Financial asset categorised as FVOCI

What is an embedded derivative?

Impairment model for different categories of financial assets

Ind ASs relating to financial instruments

FVOCI (equity instruments) and FVOCI (debt instruments)

Classification of derivative instruments

Contract meant for own use

Reclassification of a financial asset

Debt instrument measured at FVOCI

Change in contractual cash flows

Loss allowance as per Ind AS 109

Ind AS for financial instruments replica of IFRS?

Contractual cash flows & effective interest rate

Long-term financial liability classified as FVTPL

Credit adjusted effective interest rate

Effective rate of interest during the first-time adoption

Consequence of not de-recognising an asset after the sale

Designation of contracts deal a non-financial item on first time adoption

Recognition of financial instruments on first-time adoption

Gains and losses on a financial instrument

Gains and losses from liabilities designated as FVTPL

Measurement categories for financial assets

Difference between time value of money and modified time value of money