It stands for business model; the way whereby an entity manages a group of assets for the purpose of collecting cash flows. A set of financial assets are aggregated in a portfolio that is managed as a whole for an overarching economic objective. Broadly speaking, this involves the way in which economic benefits are drawn from such a portfolio, typically in the form of cash flows. An entity needs to assess its business model (s) by using a set of tools including judgement, historical data (about how cash flows have been generated, evaluation of financial performance of the assets involved and the risks associated with the business model (s) and how these risks are usually managed, among other factors).
In accounting, a business model may come in many types, including:
- “hold to collect” model: the model is designed to hold the assets until maturity in order to collect the contractual cash flows.
- “hold to collect and sell” model: a mixed model that involves both assets held until maturity (hold to collect) and assets available for sale.
- other models such as trading activities (that give rise to cash flows through sales).
