Business model for corporate management of financial assets

Business Models for Businesses Managing Financial Assets:

1. Assessment of Business Models

The business model for a business managing financial assets refers to how the business manages its financial

assets to generate cash flows. The business model determines whether the source of cash flows from financial assets managed by an enterprise is the collection of contractual cash flows, the sale of financial assets, or both.

The business model of an enterprise's management of financial assets shall be determined on the basis of the specific business objectives of the enterprise's management of the financial assets as determined by the key management personnel of the enterprise, and shall be based on objective facts and shall not be determined on the basis of circumstances that are not reasonably expected to occur.

2. Business model with the objective of collecting contractual cash flows

In a business model with the objective of collecting contractual cash flows, the enterprise manages the financial assets with the objective of realizing cash flows through the collection of contractual payments over the life of the financial assets, rather than generating an overall return from the holding and sale of the financial assets.

Even if a firm sells a financial asset to minimize credit losses when the credit risk of the financial asset increases, the business model for the financial asset may still be a business model that aims to collect contractual cash flows.

The frequency of sales or an increase in the value of sales over a period of time is not necessarily inconsistent with a business model aimed at collecting contractual cash flows if the firm can explain the reasons for the sale and demonstrate that the sale does not reflect a change in the business model.

3. A business model that targets collection of contractual cash flows and sale of financial assets

In a business model that targets collection of contractual cash flows and sale of financial assets, key executives of the organization consider that the collection of contractual cash flows and the sale of financial assets are both essential to achieving their management objectives. For example, the firm's objective is to manage day-to-day liquidity needs while maintaining a specific yield, or to match the duration of a financial asset with the duration of the underlying liability.

4. Other business models

If an enterprise's business model for managing a financial asset is not one in which the objective is to collect the contractual cash flows, or one in which the objective is to both collect the contractual cash flows and sell the financial asset, the financial asset should be classified as a financial asset at fair value through profit or loss.

On the contractual cash flow characteristics of financial assets

The contractual cash flow characteristics of financial assets refer to the cash flow attributes agreed in the contract of the financial instrument that reflect the economic characteristics of the relevant financial assets, and the enterprise classifies financial assets measured at amortized cost and financial assets measured at fair value through other comprehensive income. The contractual cash flow characteristics of the financial assets should be consistent with the underlying lending arrangements. That is, the contractual cash flows arising from the underlying financial assets at a given date are solely payments of principal and interest based on the amount of principal outstanding (the characteristics of contractual cash flows of principal plus interest).

The principal amount is the fair value of the financial asset at initial recognition, and the principal amount may change over the life of the financial asset due to, for example, early repayment; interest includes consideration for the time value of money, the credit risk associated with the principal amount outstanding in a given period, and other underlying borrowing risks, costs and profits.

Specific classification of financial assets

1. A financial asset shall be classified as a financial asset measured at amortized cost if the financial asset meets the following conditions at the same time:

(1) The enterprise's business model for managing the financial asset is to collect contractual cash flows.

(2) The contractual terms of the financial asset provide that the cash flows to be generated at a specified date are solely payments of principal and interest based on the amount of principal outstanding.

2. A financial asset shall be classified as a financial asset at fair value through other comprehensive income if the financial asset meets the following conditions at the same time:

(1) The enterprise's business model for managing the financial asset is based on the objective of both collecting the contractual cash flows and selling the financial asset.

(2) The contractual terms of the financial asset provide that the cash flows to be generated at a specified date will be payments only of principal and interest based on the amount of principal outstanding.

3. Financial assets classified in accordance with 1 and 2 above, other than financial assets at amortized cost and financial assets at fair value through other comprehensive income, shall be classified by the enterprise as financial assets at fair value through profit or loss.