32 • Annual Report 2022 • TF Bank AB (publ)
assessment of both the Bank’s business model for the manage-
ment of financial assets, and whether the instruments’ contractual
cash flows only include payments of principal and interest. As a
general rule, financial liabilities are reported at amortised cost. The
exception is financial liabilities, which must be valued at fair value
through the profit and loss.
Financial assets are classified, in accordance with IFRS 9, into one
of the following categories:
1. amortised cost
2. fair value through other comprehensive income
3. fair value through profit and loss
Financial liabilities are classified, in accordance with IFRS 9, into
one of the following categories:
1. amortised cost
2. fair value through other comprehensive income
3. fair value through profit and loss
At the initial recognition, all financial assets and liabilities are
reported at fair value. For assets and liabilities that are classified at
fair value through profit and loss, transaction costs are recognised
directly through profit and loss at the time of acquisition. For other
financial instruments, transaction costs are included in the acquisi-
tion value. The classification of financial instruments into different
categories forms the basis for how each financial instrument is
subsequently valued in the balance sheet and how changes in
its value are reported. Note 18 “Classification of financial assets
and liabilities” shows how TF Bank has categorised its financial
instruments.
Amortised cost
This category includes financial assets that are valued at amor-
tised cost since the assets are included in a business model with
the purpose to hold the financial assets to collect the contractual
cash flows and that the agreed terms for the assets contributes
to cash flows, that only consist of principal and interest on the
remaining principal at certain times. This category includes the
Bank’s loan receivables and accounts receivable.
Financial assets and liabilities valued at amortised cost are initially
reported in the balance sheet at fair value, including transaction
costs. After the initial recognition, the instrument in this category
is valued at amortised cost using the effective interest method
minus the provisions for financial assets.
Fair value through other comprehensive income
Financial assets classified as fair value through other compre-
hensive income are held according to a business model whose
objectives can be achieved both by collecting contractual cash
flows and selling financial assets, and the terms at certain times
give rise to cash flows consisting only of principal amounts and
interest on the outstanding principal amount. Changes in fair
value, apart from interest rates, are reported in other comprehen-
sive income. Interest is reported in the income statement in either
“Interest income” or “Interest expenses”.
Fair value through profit and loss
Financial assets and liabilities valued at fair value through profit
and loss if they are not to be valued in any of the other catego-
ries. These assets and liabilities are valued at fair value excluding
transaction costs. All changes in value of these items are reported
directly in the income statement in “Net results from financial
transactions”. The financial instruments that are valued at fair value
through TF Bank’s profit and loss comprise derivative instruments
held for trading purposes and shares whose cash flows do not
meet the cash flow criteria.
Recognition and derecognition
Financial assets and financial liabilities are reported in the balance
sheet on the business day, which is the day on which the agree-
ment is entered into, in addition to financial assets classified as
amortised cost which are reported on the settlement date. Finan-
cial assets are removed from the balance sheet when the right to
receive cash flows from the instrument has expired or has been
transferred and the Bank has transferred virtually all risks and
benefits associated with ownership to another party. A financial
asset and a financial liability are netting off and reported at the
netting amount in the balance sheet, only when there is a legal
right to net off the amounts, and the intention is there to settle
the posts with a net amount or to simultaneously realise the asset
and settle the liability. When a loan is modified, the Bank makes
an assessment of whether the modification results in removal
from the balance sheet.
A loan is considered to be modified when the terms and con-
ditions governing cash flows change compared to the original
agreement, for example due to easing of loan terms, changes in
market conditions, measures to retain the customer and other
factors unrelated to a borrower’s deteriorating creditworthiness.
Modified loans are removed from the balance sheet and a new
loan is reported either when the existing loan is terminated and a
new agreement is entered into with significantly different terms
or if the terms of an existing agreement are significantly modified.
Modifications solely due to the borrower’s financial difficulties,
including the provision of relief in loan terms, are not considered
significant on their own. If a loan has been modified and moved
from Stage 1 to either Stage 2 or 3, it will not be moved back dur-
ing the term of the loan. Financial liabilities are removed from the
balance sheet when the debt is extinguished by the agreement
being fulfilled, cancelled or terminated. Loan receivables classi-
fied as impaired are written off from the balance sheet when the
Bank has no reasonable expectation of recovering a claim in its
entirety or in part. The Bank has no reasonable expectation of re-
covering the claim and considers the loss to be determined when
a customer has passed, completed a debt restructuring program,
or when it has been sold to a third party.
After write-off, loan receivables are no longer reported on the
balance sheet. Recovery of previously written-off amounts is
reported as a reduction of loan losses in the net loan losses line
of the income statement.
Impairment of financial assets
TF Bank has a portfolio-based model for calculating loan loss
provisions based on the valuation of expected loan losses.
Expected loan losses are calculated for each individual credit
exposure as the discounted product of the probability of default
(PD), exposure at default (EAD) and loss given default (LGD). The
PD represents the probability that a borrower will default on
its obligation. The EAD is an expected exposure at the time of
default and the LGD represents the expected loss on a default-
ed exposure, taking into account such factors as counterparty
characteristics and product type. Expected loan losses are deter-
mined by calculating PD, LGD and EAD for each future month up
to and including the end of the expected term of a credit expo-
sure. These three parameters are multiplied and in this way the
monthly expected loan losses are calculated, which are then dis-
counted back to the reporting date with the original loan interest
rate and summed up. A summary of the monthly expected loan
losses up to and including the end of the expected term gives the
expected loan losses for the asset’s remaining term and the sum
of the loan losses that are expected to occur within 12 months
gives the expected credit losses for the next 12 months. Further-
more, this is supplemented with risk parameters that are used to
calculate expected loan losses. Risk parameters are updated at
each individual reporting date to take into account forward-look-
ing information. The Bank segments the issued loans each month
to analyse current behaviours relative to historical behaviours
and calibrate models to calculate expected loan losses. In cases
where the effect of relevant factors is not captured by risk mod-
els, the Bank uses expert adjustments. The Bank conducts regu-
lar quantitative analysis of macroeconomic parameters to identify
correlations with the Bank’s loan losses. Currently, no significant
correlations have been identified to incorporate into the loan loss
Note 2 cont.