- Contractual characteristics (“Solely Payments of Principal & Interests” or SPPI test): SPPI testing combines a set of criteria, examined cumulatively, to establish whether contractual cash flows match the characteristics of simple financing (principal repayments and interest payments on the remaining amount of principal due). The test is met when the financing gives entitlement only to repayment of the principal and when the payment of interest received reflects the time value of money, the credit risk associated with the instrument, the other costs and risks of a conventional loan contract and a reasonable margin, regardless of whether the interest rate is fixed or variable. In a simple loan agreement, interest is the consideration for the cost of time, the price of credit and liquidity risk over the period, and other components related to the cost of carrying the asset (e.g. administrative costs). In some cases, when this form of qualitative analysis does not allow a conclusion to be drawn, quantitative analysis (or Benchmark testing) is carried out. This additional analysis consists of comparing the contractual cash flows of the asset under review with the cash flows of a benchmark asset. If the difference between the cash flows of the financial asset and the benchmark asset is considered immaterial, the asset is deemed to be simple financing. Moreover, a specific analysis is conducted when the financial asset is issued by special purpose entities establishing a differentiated order of payment among the holders of the financial assets by contractually linking multiple instruments and creating concentrations of credit risk (“tranches”). Each tranche is assigned a rank of subordination that specifies the order of distribution of the cash flows generated by the structured entity. In this case, the SPPI test requires an analysis of the characteristics of contractual cash flows of the asset concerned and underlying assets according to the “look-through” approach and the credit risk borne by the tranches subscribed, compared to the credit risk of the underlying assets. The method of accounting for debt instruments resulting from determining the business model and performing the SPPI test can be presented in the form of the diagram below: Business model Debt instruments Collection Collect & Sell Other / Sell SPPI TEST Met Amortised cost Fair value through other comprehensive income (items that may be reclassified) Fair value through profit or loss (SPPI Test N/A) Not met Fair value through profit or loss Fair value through profit or loss Debt instruments at amortised cost Initially measured at fair value, debt instruments are subsequently measured at amortised cost if they are eligible for the Hold to Collect model and pass the “SPPI” test. They are recorded on the settlement date and their initial valuation also includes accrued coupons and transaction costs. Amortisation of any premiums/discounts and transaction costs on loans and receivables and fixed income securities is recognised in the income statement using the effective interest rate method. This category of financial instruments is subject to Expected Credit Loss (ECL) adjustments under the conditions described in the specific paragraph "Impairment and provisioning for credit risk". Debt instruments at fair value through other comprehensive income recyclable to income Initially measured at fair value, debt instruments are valued at fair value through other comprehensive income on items that may be reclassified if they are eligible for the Collect and Sell model and if they meet the SPPI test. They are recorded on the trade date and their initial valuation also includes accrued coupons and transaction costs. Amortisation of any premiums or discounts and transaction costs on fixed-income securities is recognised in the income statement using the effective interest rate method. These financial assets are subsequently measured at fair value, with changes in fair value recorded in other comprehensive income on items that may be reclassified and offset in Outstandings (excluding accrued interest recognised in profit or loss according to the EIR method). Annual Report 2024 69
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