2. SUMMARY OF MATERIAL ACCOUNTING POLICIES (CONTINUED) 2.5 Financial instruments (continued) Financial assets – Business model assessment The Group and the Bank make an assessment of the objective of the business model in which a financial asset is held at the portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: • the stated policies and objectives for the portfolio and the operation of those policies in practice. These include whether management’s strategy focuses on earning contractual profit income, maintaining a particular profit rate profile, matching the duration of the financial assets to the duration of any related liabilities or expected cash outflows or realising cash flows through the sale of the assets; • how the performance of the portfolio is evaluated and reported to the management; • the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and • how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected. Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Group’s and the Bank’s continuing recognition of the assets. Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL. Financial assets – Assessment whether contractual cash flows are solely payments of principal and profit (“SPPI”) For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Profit’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and profit, the Group and the Bank consider the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Group and the Bank consider: • contingent events that would change the amount or timing of cash flows; • terms that may adjust the contractual coupon rate, including variable-rate features; • prepayment and extension features; and • terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse features). 283 1 2 3 4 5 6 7 8 9 www.bankislam.com FINANCIAL STATEMENTS
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