Page 211 - Bank-Muamalat_Annual-Report-2023

ANNUAL REPORT 2023
OUR NUMBERS

2. MATERIAL ACCOUNTING POLICIES (CONT’D.)
2.2 Material accounting policy information (cont’d.)

(b) Financial assets (cont’d.)
(i) Initial recognition and subsequent measurement (cont’d.)

(1) Financial assets at amortised cost (cont’d.)
The details of these conditions are outlined below:
(i) The SPPP test

As a first step of its classification process, the Group and the Bank assess the contractual terms of
financial assets to identify whether they meet the SPPP 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 were
payments of principal or amortisation of the premium/discount).

The most significant elements of profit within a financing arrangement are typically
the consideration for the time value of money and credit risk. To make the SPPP assessment,
the Group and the Bank apply judgement and consider relevant factors such as the currency
in which the financial asset is denominated, and the period for which the profit rate is set.
In contrast, contractual terms that introduce a more than de minimis exposure to risks or
volatility in the contractual cash flows that are unrelated to a basic financing arrangement
do not give rise to contractual cash flows that are solely payments of principal and profit
on the amount outstanding. In such cases, the financial asset is required to be measured
at FVTPL.
(ii) Business model assessment

The Group and the Bank determine its business model at the level that best reflects how
groups of financial assets are managed to achieve its business objective.

The Group’s and the Bank’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:

• The way the performance of the business model and the financial assets held within that
business model are evaluated and reported to the 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 way the managers of the business are compensated (for example, whether the compensation
is based on the fair value of the assets managed or on the contractual cash flows collected).
• The expected frequency, value and timing of sales which are also important aspects of
the Group’s and the Bank’s assessment.

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