1. The IFRS 9 Two-Step Classification Test
IFRS 9 uses a strict, structured approach to classify debt instruments (such as corporate bonds, commercial paper, and loans receivable). Classification depends on two simultaneous tests: 
  • The Business Model Test: Evaluates how an entity manages its financial assets to generate cash flows—whether by collecting contractual cash flows, selling the assets, or both.
  • The SPPI Test (Solely Payments of Principal and Interest): Evaluates whether the contractual cash flows consist solely of payments of principal and interest on the principal amount outstanding on specified dates.

                  ┌────────────────────────────────────────┐
                  │        IFRS 9 Debt Classification      │
                  ├─────────────────┬──────────────────────┤
                  │ Business Model  │ SPPI Test Result     │ --> Classification
                  ├─────────────────┼──────────────────────┤
                  │ Hold to Collect │ Passes SPPI          │ --> Amortized Cost
                  │ Hold & Sell     │ Passes SPPI          │ --> FVOCI (with recycling)
                  │ Other / Trading │ Fails either test    │ --> FVTPL
                  └─────────────────┴──────────────────────┘

2. The US GAAP Framework (ASC 320)
US GAAP classifies debt securities based on management’s intent at the acquisition date, without using a formal contractual cash flow test:
  • Held-to-Maturity (HTM): Debt securities that the entity has the positive intent and ability to hold to maturity. They are measured at amortized cost.
  • Trading Securities: Debt securities bought and held principally for the purpose of selling them in the near term. They are measured at fair value through net income.
  • Available-for-Sale (AFS): Debt securities not classified as HTM or trading. They are measured at fair value, with unrealized gains and losses recorded in Other Comprehensive Income (OCI). [1, 2]

 
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