For a bank reporting under IFRS, you may see it classify some of these financial assets under the amortized cost category. So, we need to understand what process the bank goes through in order to apply this categorization. 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, i.e. is the bank going to trade the asset? No, that's not relevant here. What we're talking about is financial assets, where the asset is managed on a hold and collect basis, and yes, that literally means they hold the asset to maturity and collect a principal repayment. This is determined at a high level for a portfolio of financial assets. As long as the general intention is to hold the asset rather than sell it, then the circumstantial treatment of an individual asset is irrelevant, i.e. if it's sold unexpectedly to free up some cash, then it doesn't impact the classification. So, it's not necessary for the entity to always hold the financial assets to maturity. Secondly, we look at the cashflow characteristics. What does this mean? Well, it means if I'm holding the financial asset, then I'm expecting to receive cash flows. And what are they made up of? Are these cash flows solely, and I'm stressing solely there, made up of interest and principal repayment. What we're, of course, talking about 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 principal and interest, then it meets this test. Clearly, the intention here is to capture financial instruments that are effectively just basic lending arrangements. If the financial asset meets both, and I'm stressing both tests, i.e. it's managed on a hold and collect basis and its cash flows are solely made up of interest in principal repayment, then it will fall within the amortized cost category in financial assets. Some examples include loan receivables, investments in bonds, and investment in term deposits.

Okay, so we know why the entity is classifying the financial asset under the amortized cost category, but what impact does that have Let's say we're a lender. We have a portfolio of financial assets totalling $100,000. These financial assets represent an investment in bonds, each paying a coupon of 10%. Initially, they're recognized at $100,000 and held at amortized cost. Why are they gonna be recognized as such? Well, because we're expecting to hold them to maturity and because the cash flows are solely made up of interest and principal. And then, in the first period, we received interest of 10,000, i.e. cash up and retained earnings up due to the gross interest income. What is the carrying value? Well, it's still $100,000. So, we can see here they're being held at amortized cost. There's no attempt here to do any sort of fair value revaluation in any way. So, as we said, this financial asset represents a portfolio of bonds. Now, within that portfolio, you might expect some credit losses, so how do we recognize those? Well, IFRS 9 tells us to apply the expected loss impairment model. What does that mean? If credit losses are expected within the portfolio when it is originated or acquired of, say, 2%, then the financial asset would be immediately written down to $98,000, with the expense taken to interest expense for that period. We don't need evidence of a past event. No losses need to have been incurred. This is called the expected loss model, and that is how to treat financial assets held at amortized cost, which, as we said, will include items such as loan receivables, investments in bonds, and investments in term deposits.