Accounting Alerts

PIC Q&A No. 2022-04 PFRS 9 Business Model Assessment Practical Issues

This Accounting Alert is issued to circulate Philippine Interpretations Committee (PIC) Questions and Answers (Q&A) No. 2022-04 PFRS 9 Business Model Assessment Practical Issues dated January 12, 2023.

Overview

On January 12, 2023, the Financial Reporting and Sustainability Reporting Council approved the Philippine Interpretations Committee (PIC) Questions and Answers (Q&A) No. 2022-04, PFRS 9 Business Model Assessment Practical Issues.

The business model assessment is one of the two steps to classify debt financial assets under PFRS 9, Financial Instruments. An entity’s business model reflects how it manages its financial assets in order to generate cash flows; its business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets or both.

Ever since the implementation of PFRS 9 on January 1, 2018, several practical issues on business model assessment have arisen particularly from the banking industry. As such, PIC Q&A No. 2022-04 is intended to provide guidance in applying the business model assessment in practice.

Issues Discussed

The following are practical issues discussed in the PIC Q&A:

  • Determining if there is a change in business model or change in intention in managing financial assets
  • Reestablishment of an amortized cost [i.e., hold to collect (HTC)] business model
  • Change in management of financial assets due to black swan events
  • Assessing whether sales are integral or incidental to the business model
  • Determining the significant and frequency of sales out of the HTC portfolio
  • Assessing past sales information and expectation of future sales out of a portfolio of financial assets

Please refer to the attached PIC Q&A for the detailed discussion, guidance and conclusion on each of the practical issues.  The accounting references to PFRS 9 are also included in the PIC Q&A.  Be it noted that the guidance and illustrations provided in the PIC Q&A are by no means exhaustive and their applicability depends on the specific facts and circumstances of each entity.

Transition and Effective Date

The effective date of this PIC Q&A is upon the approval of the FRSRC.  The consensus in this PIC Q&A is to be applied retrospectively.

 

See the attached Q&A for further details.