Derecognise a transfer of a financial instrument or not?

Derecognise a transfer of a financial instrument or not – to quickly grow comfortable and get a gut feeling for derecognising a financial instrument read this page. Small cases with different inputs with a analysing comment on the case provide a fruitful learning ground. Here are some examples regarding transfers of financial instruments and the question of whether or not these should be derecognised (and why)? Derecognise a transfer of a financial instrument or not

Transfer versus agency relationship Derecognise a transfer of a financial instrument or not

Question Derecognise a transfer of a financial instrument or not

Is the transfer of securities to a custodian a transfer of the contractual rights under IFRS 9 3.2.4(a)?

Background Derecognise a transfer of a financial instrument or not

Entity K enters into an arrangement with bank L whereby L will manage K’s securities. K transfers the securities to a safe custody account of L. L will receive a management fee for its service. K can decide when and which assets should be sold and can require a surrender of the securities at any time.

Solution Derecognise a transfer of a financial instrument or not

No. The transfer of securities to a custodian is not a transfer under IFRS 9 3.2.4(a). The contractual rights to the cash flows from the financial asset have to be transferred to satisfy the conditions in IFRS 9 3.2.4(a). L does not have rights to the cash flows of the transferred securities. L acts as an agent of K.


Servicing

Question Derecognise a transfer of a financial instrument or not

Does the retention of servicing prevent a transfer from being a transfer of contractual rights under IFRS 9 3.2.4(a)?

Background Derecognise a transfer of a financial instrument or not

Entity R has transferred the contractual rights to the cash flows of a financial asset to Entity S but continues to service the transferred asset.

Solution Derecognise a transfer of a financial instrument or not

No. The determination of whether the contractual rights to cash flows have been transferred is not affected by the transferor retaining the role of an agent to administer collection and distribution of cash flows. Therefore, retention of servicing rights by the entity transferring the financial asset does not in itself cause the transfer to fail the requirements in IFRS 9 3.2.4(a).


Servicing and co-mingling of cash flows

Question Derecognise a transfer of a financial instrument or not

If a servicer co-mingles cash collections from transferred assets with its own assets, does that prevent a transfer from being a transfer of contractual rights under IFRS 9 3.2.4(a)?

Background Derecognise a transfer of a financial instrument or not

Entity T has transferred the contractual rights to the cash flows of a financial asset to Entity U but continues to provide servicing on the transferred asset. T may co-mingle the cash flows it collects on the transferred assets with T’s other own cash balances not subject to the transfer. 

Solution Derecognise a transfer of a financial instrument or not

No. As the retention of servicing rights by the entity transferring the financial asset does not in itself cause the transfer to fail the requirements in IFRS 9 3.2.4(a), neither does the ability for the servicer to co-mingle cash collections from the transferred assets with its own assets. 

Contractual credit notes Derecognise a transfer of a financial instrument or not

Question Derecognise a transfer of a financial instrument o

Do contractual credit notes associated with trade receivables prevent a transfer from being a transfer of contractual rights under IFRS 9 3.2.4(a)?

Background Derecognise a transfer of a financial instrument or not

Entity P issues a credit note when its customers qualify for a volume discount. The volume discount is included in the general sales conditions between Entity P and its customers, rather than in a particular invoice. Entity P sells its receivables to a factor and agrees to compensate the factor when a credit note is issued on a transferred receivable.

Solution Derecognise a transfer of a financial instrument or not

No. Such contractual credit notes do not prevent a transfer of receivables from being in IFRS 9 3.2.4(a), as they are related to the overall contractual relationship between the seller and its customer and not to the contract that is the receivable.

Derecognise a transfer of a financial instrument or not

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