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Classification in IFRS 9 considers the business model and cash f= low characteristics of a financial instrument.
The classification process is to be executed at initial recognition.
A "relassicification check" needs to be applied in addition at any = subsequent posting date till the maturity date of the asset is reached.
The solution provides different types of accounting category assignment = processes, each taylor-made to individual needs depending on the business o= f the entity in question.
In general, the user can choose between fully automated processes and a = semi-automated process. These processes mainly differ with regard to how th= e business model is identified or assigned and how the SPPI test will = be executed.
The selection of the appropriate taylor-made classification process is&n= bsp;driven by the complexity of the portfolio and business of the entity.= p>
FlexFinance provides various ways of assigning the accounting category t= o financial assets and financial liabilities:
For the consideration of the cash flow characteristics, it is assumed th= at, based on the =E2=80=9CDeal Type Overview=E2=80=9D, which is part of a b= ank=C2=B4s portfolio analysis during the project, deal information such as = floating interest agreements, embedded caps/floors, early repayment rights = can be identified to check the SPPI criteria. Of course such an analysis de= pends on the availability of comprehensive deal information. For this purpo= se, the contractual deal information needs to include supplementary agreeme= nts such as options and specific rights (e.g. caps, floors, cancellation ri= ghts, early repayment rights) as these might have an impact on the accounti= ng category assignment.
The most pragmatic way is to perform classification on the basis of boar= d portfolios. For this purpose, financial instruments can be grouped i= n portfolios in FlexFinance. The applicable IFRS 9 accounting category= will be assigned for these portfolios.
Depending on an entity's individual portfolio and the approval process o= f product designs in the bank, there are several options for building portf= olios. Usually a board-approved product design involves existing valuation = approaches and impacts on profit and loss. Therefore, a board-approved prod= uct design usually provides a strong parameter for deciding on the app= ropriate IFRS 9 accounting category. In addition, the following parameters = are usually used to assign an asset or liability to an IFRS 9 accounting ca= tegory:
It should be possible to assign the appropriate IFRS 9 category for= attribute combinations of these criteria. In this case, a separate decisio= n for every individual deal is not required. Individual deals are assi= gned to a portfolio during the import into the IFRS solution. Then the IFRS= 9 category that has been configured for the portfolio will be assigned to = an individual deal.
Beside the pragmatic approach, the blueprint also covers a sophisticated= approach. For this purpose, specific components are provided to derive the= business model or SPPI criteria.
In general, there are two ways to assign the accounting category to fina= ncial assets and financial liabilities:
a) Import of the accounting category= . The accounting category is delivered from an external sourc= e (e.g. front office) and imported as contractual information into the solu= tion.
b) Automatic assignment of t= he accounting category within the solution, taking specific parameters for = assets and liabilities into account.
Targets of classification in FlexFinance are