The below is a direct extract from the 2009 IFRS 9 basis of...

The below is a direct extract from the 2009 IFRS 9 basis of conclusions. As I mentioned above, the original exposure draft suggested those debts acquired at deep discount couldn't be held for collection of SPPI - i.e the price paid reflected something other than SPPI. That was later removed and amortised cost allowed if the requirements were met. In other words, FV was preferred but amortised cost allowed if the criteria met. As mentioned before amortised cost requires cash flow estimation in the same way as a dcf for FV when no observable price. What I have outlined prior in relation to this is reflected in PNCs statement to the market..

Financial assets acquired at a discount thatreflects incurred credit losses

BC44  The exposure draftproposed that if a financial asset is acquired at a discount that reflectsincurred credit losses, it cannot be measured at amortised cost because:

(a)the entity does not hold suchfinancial assets to collect the cash flows arising from those assets'contractual terms; and

(b)an investor acquiring afinancial asset at such a discount believes that the actual losses will be lessthan the losses that are reflected in the purchase price. Thus, that assetcreates exposure to significant variability in actual cash flows and suchvariability is not interest.

BC45  Almost all respondentsdisagreed with the Board's conclusion that these assets cannot be held tocollect the contractual cash flows. They regarded that conclusion as anexception to a classification approach based on the entity's business model formanaging the financial assets. In particular, they noted that entities couldacquire and subsequently manage such assets as part of an otherwise performingasset portfolio for which the objective of the entity's business model is tohold the assets to collect contractual cash flows.

BC46  Respondents also notedthat an entity's expectations about actual future cash flows are not the sameas the contractual cash flows of the financial asset. Those expectations areirrelevant to an assessment of the financial asset's contractual cash flowcharacteristics.

BC47  The Board agreed thatthe general classification approach in IFRS 9 should apply to financial assets acquired at adiscount that reflects incurred credit losses. Thus, when such assets meet theconditions in paragraph 4.2, they are measured atamortised cost.

DYOR