Identifying the appropriate components of an entity to which to apply the business model test
A global banking group operates two business lines, retail banking and investment banking. These businesses both operate in the same five locations by means of separate subsidiaries. Each subsidiary has its own board of directors that is responsible for carrying out the strategic objectives set by the group”s board of directors.
The financial assets held by the investment banking business are classified as at fair value through profit or loss as the group”s strategy is to actively trade these financial assets. Financial assets held by four of the five retail banking subsidiaries are considered to be held to collect their contractual cash flows. However, the fifth retail banking subsidiary, comprising approximately 10% of the group”s retail banking business, has a large portion of assets that are expected to be sold before maturity in order to maximise their yield.
For the purpose of applying IFRS 9, how many business models does this group have? In particular, could or should the fifth subsidiary”s retail banking assets be evaluated separately from (a) that subsidiary”s investment banking assets and (b) the group”s other retail banking assets?
In practice, the directors will need to exercise judgement to determine the appropriate level at which to assess its business model(s). Hence, different conclusions are possible depending on the facts and circumstances. This does not mean that the bank has an accounting policy choice but it is, rather, a matter of fact that can be observed by the way the organisation is structured and managed.
In many organisations, key management personnel determine the group”s overall strategy and then delegate authority for executing that strategy to others. The combination of the overall strategy and the effect of the delegated authority are among the factors that can be considered in determining business models.
As a result, the number of business models in this case could potentially vary from two (i.e. retail banking and investment banking) to three (i.e. investment banking, one retail banking business for the first four subsidiaries and a second retail banking business for the fifth subsidiary) or even more.