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CA Final · Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Narmada Securities Ltd first applies Ind AS 109 on 1 April 2025. It holds a debt portfolio that, in earlier years, it managed to collect contractual cash flows. On 1 April 2025 its facts and circumstances show a business model of selling assets for trading. Which statement on classification at the date of initial application is correct?

The business model is assessed on the facts and circumstances existing at the date of initial application, and the resulting classification is applied retrospectively, irrespective of the entity's business model in prior reporting periods. The earlier collect-cash-flows model therefore does not decide the classification on transition.

  1. AThe business model assessment must follow the model used in prior reporting periods
  2. BThe assessment uses facts and circumstances at the date of initial application, and the resulting classification is applied retrospectively irrespective of the prior-period business modelCorrect
  3. CThe assessment uses facts at the end of the first reporting year, applied prospectively only
  4. DClassification is chosen freely, ignoring business model and cash flow characteristics

Explanation

Paragraph 7.2.3 says the entity assesses the business model condition on facts and circumstances existing at the date of initial application, and applies the resulting classification retrospectively irrespective of the business model in prior periods. The first option contradicts this. Classification still depends on both business model and cash flow characteristics under paragraph 4.1.1.

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