Financial Assets Classification for Mutual Fund

All topics related to IFRS Standards.
Post Reply
Saugat
Posts: 3
Joined: 20 Jul 2021, 16:21

Financial Assets Classification for Mutual Fund

Post by Saugat »

A close-ended mutual fund with a maturity of 7 years has made an investment in a debenture of maturity of 10 years. Can this be a SPPI and classified as Amortized cost? The principal realization portion here depends on the fair value at the date of liquidation of the mutual fund. The mutual fund is sure that it may not be able to realize the principal portion so does this need to be classified as FVOCi considering its business model to collect contractual cash flows and sell asset or is it okay to classify under Amortized cost considering its intention to hold till maturity?
User avatar
Marek Muc
Site Admin
Posts: 1627
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Financial Assets Classification for Mutual Fund

Post by Marek Muc »

SPPI test and business model considerations are completely different things, have a look at this page, give it some more thought and post back your reflections:

https://ifrscommunity.com/knowledge-bas ... abilities/
Saugat
Posts: 3
Joined: 20 Jul 2021, 16:21

Re: Financial Assets Classification for Mutual Fund

Post by Saugat »

Thank you @Marek Muc for sharing this insight. I have been through this reference but could not get a conclusive answer regarding my query. I agree with your point that the business model test and SPPI test are not the same. My concern is whether the business model assumption is valid for the fund to assume investment in debenture with a maturity higher than the fund itself for obtaining contractual cash flow and collection on principal as the life of the fund is shorter than the maturity of debenture which makes it impossible to realize the principal on maturity. As IFRS suggests that, "An entity's business model for managing financial assets is a matter of fact and not merely as assertion (IFRS 9 para B4.1.2B)."
User avatar
Marek Muc
Site Admin
Posts: 1627
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Financial Assets Classification for Mutual Fund

Post by Marek Muc »

The only reasonable intention is to sell this bond before its maturity, so FVOCI in my opinion. This is also consistent with common sense, because you do need to sell this bond before maturity
DJP
Trusted Expert
Posts: 80
Joined: 26 Jun 2020, 15:57

Re: Financial Assets Classification for Mutual Fund

Post by DJP »

Are you talking about the accounting for the bond in the fund, or the accounting for the unit of participation in the fund?
Saugat
Posts: 3
Joined: 20 Jul 2021, 16:21

Re: Financial Assets Classification for Mutual Fund

Post by Saugat »

@DJP it I am talking about the accounting for the bond in the fund.
Post Reply