What is SPPI Test?
SPPI test means Solely Payment of Principal and Interest.
The SPPI test is performed at the instrument level. So, if the test passes for one, it means the test passes for everyone in respect of that instrument. SPPI test should be passed for an instrument to be eligible to be classified as “Amortised Cost” instrument. If the test fails then no other test is applied on that instrument and the instrument would be classified as FVTPL only.
If the contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amounts outstanding viz., cash flows that are consistent with a basic lending arrangement. As mentioned above this assessment must be carried out on an instrument by instrument basis.
Principal is defined as the fair value of the financial asset at initial recognition. Interest is defined as the compensation for time value of money. It also includes a compensation for credit risk and other lending risks such as liquidity, administrative costs and a profit margin.
