Annual Report 2019
Central Bank of the Republic of Armenia
Notes to the 2019 consolidated financial statements
2.
Summary of significant accounting policies (continued)
(j)
Financial instruments - key measurement terms (continued)
Financial assets at fair value through profit or loss
Financial instruments classified as held for trading are included in the category "Financial instruments at fair value through
profit or loss". Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near
term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments.
Gains or losses on financial assets held for trading, including interest income on trading debt securities are recognised
in profit or loss as net gain/(loss) on financial instruments at fair value through profit and loss.
In the normal course of business, the Group enters into various derivative financial instruments including futures, forwards
and swaps in the foreign exchange and capital markets. Such financial instruments are held for trading and are recorded
at fair value.
The fair values are estimated based on quoted market prices or pricing models that take into account the current market
and contractual prices of the underlying instruments and other factors.
Under IAS 39, derivatives embedded in financial assets, liabilities and non-financial host contacts, were treated as
separate derivatives and recorded at fair value if they met the definition of a derivative (as defined above), their economic
characteristics and risks were not closely related to those of the host contract, and the host contract was not itself held
for trading or designated at FVPL. The embedded derivatives separated from the host were carried at fair value in the
trading portfolio with changes in fair value recognised in the consolidated statement of profit or loss.
From 1 January 2018, with the introduction of IFRS 9, the Group accounts in this way for derivatives embedded in
financial liabilities and non-financial host contracts. Financial assets are classified based on the business model and
SPPI assessments.
Amounts due from credit institutions, loans to customers, investments securities at amortised cost
The Group only measures amounts due from credit institutions, loans to customers and other financial investments at
amortised cost if both of the following conditions are met:
The financial asset is held within a business model with the objective to hold financial assets in order to collect
contractual cash flows;
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding (SPPI).
The details of these conditions are outlined below.
Business model assessment
The Group determines its business model at the level that best reflects how it manages groups of financial assets to
achieve its business objective.
The Group's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated
portfolios and is based on observable factors such as:
How the performance of the business model and the financial assets held within that business model are
evaluated and reported to the entity's key management personnel;
The risks that affect the performance of the business model (and the financial assets held within that business
model) and, in particular, the way those risks are managed;
The expected frequency, value and timing of sales are also important aspects of the Group's assessment.
The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case'
scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original
expectations, the Group does not change the classification of the remaining financial assets held in that business model,
but incorporates such information when assessing newly originated or newly purchased financial assets going forward.
The SPPI test
As a second step of its classification process the Group assesses the contractual terms of financial asset to identify
whether they meet the SPPI test.
'Principal' for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change
over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).
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