To categorize a financial asset as held at amortized cost. Under IFRS, there are a number of tests which need to be applied.

Firstly, IFRS requires the bank to look at what is referred to as the business model.

This is all about how the asset is managed by the bank. IE. Is the bank gonna trade the asset for a bond to be recognized at amortized cost? It needs to be managed by the bank on a hold and collect basis.

And yes, this literally means they hold the asset to maturity and collect the principal repayments and interest payments along the way.

This can be determined at a high level for a portfolio of financial assets, as long as the general intention is to hold the assets in the portfolio rather than sell them.

Then the circumstantial treatment of an individual asset is irrelevant, meaning that if it's sold unexpectedly to free up some cash, then this doesn't impact on the overall classification for the portfolio as a whole.

Second, we look at the cash flow characteristics and what does that mean? Well, it means if I'm holding the financial asset, then I'm expecting to receive cash flows.

And what are these made up of? To be classified as amortized cost, the cash flows must solely, exclusively be made up of interest and principle repayments.

What we're of course talking about here is a debt instrument, certainly not equity.

So if we have an instrument, say a bond with a stated maturity date where the cash flows are entirely principle and interest, then this will meet this test.

Clearly. The intention here is to capture financial instruments that are effectively just basic lending arrangements.

If the financial asset meets both tests, it's managed on a hold and collect basis, and its cash flows are solely made up of interest and principal repayments, then it falls within the amortized cost category in financial assets under IFRS.

Some examples include loan receivables, investments in bonds, and investments in term deposits.