In banking, HTC generally refers to Held to Collect, an accounting classification for financial assets.
Here's a breakdown of what that means in practice:
- Held to Collect (HTC): This classification applies to debt instruments (like bonds or loans) that a bank intends to hold until maturity to collect the contractual cash flows (principal and interest). These assets are initially measured at fair value but subsequently measured at amortized cost.
Understanding the Terminology
To fully grasp the significance of HTC, it's essential to define the key terms involved:
- Debt Instruments: Financial assets representing a loan made by an investor (the bank) to a borrower. Examples include bonds, loans, and mortgages.
- Contractual Cash Flows: The payments of principal and interest specified in the debt instrument agreement.
- Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Amortized Cost: The initial cost of an asset, reduced by principal repayments, plus or minus the cumulative amortization of any difference between the initial amount and the maturity amount, and less any reduction for impairment.
HTC vs. Other Accounting Classifications
The HTC classification is distinct from other accounting classifications for financial assets, such as:
- Fair Value Through Profit or Loss (FVTPL): Assets are measured at fair value, and changes in fair value are recognized in the profit or loss statement. Typically used for assets held for trading or those not meeting the criteria for HTC or FVTOCI.
- Fair Value Through Other Comprehensive Income (FVTOCI): Assets are measured at fair value, with changes in fair value recognized in other comprehensive income (OCI). Some recycling to profit or loss is permitted in certain circumstances (e.g., upon derecognition).
Implications of HTC
- Stability in Earnings: Because HTC assets are measured at amortized cost, fluctuations in market value don't directly impact the bank's reported earnings (profit and loss statement). This provides more stability to the bank's reported financial performance.
- Focus on Cash Flow: The emphasis is on the contractual cash flows rather than mark-to-market gains or losses.
- Specific Criteria: To classify an asset as HTC, the bank must have both the intention and the ability to hold the asset to maturity.
Example
A bank purchases a bond with the intention of holding it until maturity and collecting the interest and principal payments. The bank has the financial and operational capacity to do so. In this case, the bond would be classified as Held to Collect (HTC). The bond's value on the balance sheet would be based on its amortized cost, providing stability to the bank's earnings.
