30 Account Classification Rules
- Amortized Cost (AMRTCOST)
- Fair Value through Other Comprehensive Income (FVOCI)
- Fair Value through Profit and Loss (FVTPL)
Financial assets must undergo the Business Model test (BM) and Cash Flow Characteristics test (SPPI) and Financial Liabilities must undergo the Business Model Test for classification in the aforementioned categories. While defining the Account classification rules, the user needs to first select the folder and then the modelling set.
Account Classification based on Business Model and SPPI:
Once the Business Model test or Cash Flow Characteristics test is performed, the classification method needs to be assigned, depending on the outcome of the test. As the first step, accounts that have been assigned the classification through staging or based on election, retain that classification.
Table 30-1 Account Classification for Assets
| Business Model | SPPI Test | Classification |
| Held to Collect | Y | AMRTCOST |
| Held to Collect and Sell | Y | FVOCI |
| Held to Sell | Y | FVTPL |
| Held to Collect | N | FVTPL |
| Held to Collect and Sell | N | FVTPL |
| Held to Sell | N | FVTPL |
Account Classification for Liabilities:
| Business Model | Classification |
| Held to Maturity | AMRTCOST |
| Available for Sale | FVTPL |
| Held to Sell | FVTPL |
- Fair Value option: If the fair value flag is Y, then Classification = FVTPL
- Equity Instruments: For Instrument Type = Equities and Business Model = Held to Collect, then Classification = FVOCI.
Business Model Test
The Business Model Test is conducted at an aggregated level. This test allows the banks to classify instruments into any of the subcategories of the business model such as Held to Collect (Assets), Held to Collect and Sell (Assets), Held to Sell (Assets and Liabilities), Held to Maturity (Liabilities), and Available for Sale (Liabilities).
The service is seeded with certain Rules which can be modified.
The Rules around Business Model Test enable banks to design a hierarchy-based Holding Type assessment, that is the Rules help banks to classify their accounts into any one of the holding types, such as Held to Collect, Held to Sell, or Held to Collect and Sell.
Banks can configure Rules based on available Hierarchies. For example, Customer Type, Product.
Table 30-2 The Source Dimension and Target Dimension Rules
| Source Dimensions | Target Dimension |
| Product, Customer Type | Holding Type |
| Product, Capital Exposure Flag | Holding Type |
| Product, Exposure for Sale Indicator | Holding Type |
Cash Flow Characteristics (SPPI) Test
IFRS 9 requires all financial instruments to be tested for their cash flow characteristics before being classified into any of the three accounting classifications. This test is conducted at the instrument level. To pass the cash flow characteristics or the Solely Payments of Principal and Interest (SPPI) test, an entity needs to prove that the contractual cash flows received from an instrument are Solely Payments of Principal and Interest on the principal amount outstanding.
To conduct the Cash Flow Characteristics Test, various dimensions are considered. However, more importantly, the contract level characteristics are taken into consideration with the help of certain flags, parameters, values, and so on. This defines the instrument in detail.
The Service picks the dimension-based Rules to assign the SPPI flag as YES. Primarily, the SPPI flag is assigned based on the broad knowledge of the Portfolio, Product, or Product type. After the SPPI flags are assigned based on a given set of dimensions, further evaluation is conducted for those accounts with the SPPI flag as YES.
The Rules related to the SPPI test enable the bank to evaluate every instrument or account to check if the contractual cash flows received from an instrument are Solely Payments of Principal and Interest on the principal amount outstanding or SPPI. The initial set of Rules allows you or the bank to define if a product or portfolio may potentially pass the SPPI test, at an aggregated level, that is, the hierarchy at which the Rule is defined. All the subsequent Rules verify the characteristics of an instrument to check if it caters to the SPPI requirements.
The standard product consists of the following Rules.
Table 30-3 The Source Dimension and Target Dimension Rules
| Source Dimensions | Target Dimension |
| Behavior Type = 'Development and Recovery' | SPPI = N |
| If SPPI='Y', Fixed, Interest Rate<=0% | SPPI = N |
| If SPPI='Y', Floating Rate, Float Spread<=0% | SPPI = N |
| If SPPI='Y', Embedded Options Flag = 'Y' | SPPI = N |
| If SPPI='Y', Securitized Flag='Y' | SPPI = N |
| If SPPI='Y', Employee Account = 'Y' | SPPI = N |
| If SPPI='Y', Sub Prime Flag='Y' | SPPI = N |
| If SPPI='Y', Payment Pattern <any specific pattern> | SPPI = N |
| If SPPI='Y', Benchmark Currency<>Instrument currency | SPPI = N |
Users can configure the given Rules as per the requirement.