Full derecognition with new assets liabilities best of 1

Full derecognition with new assets liabilities

Full derecognition with new assets liabilities is the ending of the derecognition decision tree in IFRS 9. It was decided in step 6 that the entity has NOT retained control of the asset.

The action to be accounted for is:

Full derecognition of a financial asset and continued recognition of liabilities retained (plus some new assets as consideration received)

An entity that derecognises a financial asset in its entirety includes the difference between the carrying amount of the asset less carrying amount of liabilities retained and the consideration received (including any cumulative gain or loss that had been recognised directly in equity through other comprehensive income i.e. recycling) in the income statement (profit or loss).

Full derecognition with new assets liabilities retained is part of a decision model for the derecognition of financial assets. The derecognition can be a full derecognition, a full continued recognition, a full derecognition with recognition of new assets or liabilities retained or a continued involvement. The model is starting here Derecognition of financial assets.

The principles from IAS 39 for recognition and derecognition of financial assets/liabilities were carried forward to IFRS 9. However, IFRS 9 explicitly states that write-offs constitute a derecognition event (IFS 9.5.4.4).

In summaryFull derecognition with new assets liabilities
  • A financial asset (or part of a financial asset) is derecognised when:
    • The rights to the cash flows from the asset expire.
    • The rights to the cash flows from the asset and substantially all risks and rewards of ownership of the asset are transferred.
    • An obligation to transfer the cash flows from the asset is assumed and substantially all risks and rewards are transferred.
    • Substantially all the risks and rewards are neither transferred nor retained but control of the asset is transferred.
  • If the entity retains control of the asset but does not retain or transfer substantially all the risks and rewards, the asset is recognised to the extent of the entity’s continuing involvement.
  • A financial liability is removed from the balance sheet only when it is extinguished – that is, when the obligation specified in the contract is discharged or cancelled – or expires.
  • A transaction is accounted for as a collateralised borrowing if the transfer does not satisfy the conditions for derecognition.

Derecognition is the term used for the removal of an asset or liability from the balance sheet. IFRS 9 sets out the criteria for derecognition of financial assets and liabilities and the consequential accounting treatment.

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Derecognition of financial assets

In many cases it is not difficult to assess whether or not a financial asset is derecognised. For example, when a manufacturer receives a payment from a customer for the delivery of spare parts, the manufacturer no longer has any rights to further cash flows from the receivable and should remove it from the balance sheet.

Where a company sells a portfolio of trade receivables or mortgages in order to receive finance, it is less obvious whether those financial assets should be derecognised. Examples of such arrangements are debt factoring and securitisation schemes.

The following flow chart summarises the criteria for derecognition in IFRS 9 (IFRS 9B.3.2.1)

Full derecognition with new assets liabilities


Derecognition

Derecognition is the removal of a previously recognised financial asset (or financial liability) from an entity’s statement of financial position. In general, IFRS 9 criteria for derecognition of a financial asset aim to answer the question whether an asset has been sold and should be derecognised or whether an entity obtained a kind of financing against this asset and simply a financial liability should be recognised.

No transfer or retainment of risks and rewards but transfer of control

When an entity has neither transferred nor retained substantially all the risks and rewards but has transferred control, it derecognises the financial asset and recognises separately as assets or liabilities any rights and Full derecognition with new assets liabilitiesobligations created or retained in the transfer. For example, if an entity sells an asset that is traded in an active market but retains a call option to buy back that asset at a fixed price, the transferor derecognises the asset and recognises the call option.

Derecognition?

An entity that derecognises a financial asset in its entirety includes the difference between the carrying amount of the asset and the consideration received (including any cumulative gain or loss that had been recognised directly in equity) in the income statement.

Part derecognition of a larger asset

An entity that derecognises only a part of a larger financial asset allocates the previous carrying amount of the financial asset between the part that continues to be recognised and the part that is derecognised based on relative fair values at the date of transfer. The difference between the carrying amount allocated to the part derecognised (including any cumulative gain or loss relating to the part derecognised that had previously been recognised in equity) and the consideration received is included in the gain or loss on derecognition.

The contract (or agreement or habit) on which the derecognition is based may also result in new assets acquired and/or new liabilities assumed. Read the contract!

Full derecognition with recognition of new assets or liabilities retained – Example Securitisation

Source: Annual report 2018 Deutsche Bank (page 242)

Securitisation

The Group securitizes various consumer and commercial financial assets, which is achieved via the transfer of these assets to a structured entity, which issues securities to investors to finance the acquisition of the assets. Financial assets awaiting securitisation are classified and measured as appropriate under the policies in the “Financial Assets and Liabilities” section.

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Unconsolidated structured entity

If the structured entity is not consolidated then the transferred assets may qualify for derecognition in full or in part, under the policy on derecognition of financial assets. Synthetic securitisation structures typically involve derivative financial instruments for which the policies in the “Derivatives and Hedge Accounting” section would apply. Those transfers that do not qualify for derecognition may be reported as secured financing or result in the recognition of continuing involvement liabilities. The investors and the securitisation vehicles generally have no recourse to the Group’s other assets in cases where the issuers of the financial assets fail to perform under the original terms of those assets.

Retained interests

Interests in the securitized financial assets may be retained in the form of senior or subordinated tranches, interest only strips or other residual interests (collectively referred to as “retained interests”). Provided the Group’s retained interests do not result in consolidation of a structured entity, nor in continued recognition of the transferred assets, these interests are typically recorded in financial assets at fair value through profit or loss and carried at fair value.

Fair value

Consistent with the valuation of similar financial instruments, the fair value of retained tranches or the financial assets is initially and subsequently determined using market price quotations where available or internal pricing models that utilize variables such as yield curves, prepayment speeds, default rates, loss severity, interest rate volatilities and spreads. The assumptions used for pricing are based on observable transactions in similar securities and are verified by external pricing sources, where available. Where observable transactions in similar securities and other external pricing sources are not available, management judgment must be used to determine fair value. The Group may also periodically hold interests in securitized financial assets and record them at amortized cost. Full derecognition with new assets liabilities

Present obligation

In situations where the Group has a present obligation (either legal or constructive) to provide financial support to an unconsolidated securitisation entity (Financial support to SPV) a provision will be created if the obligation can be reliably measured and it is probable that there will be an outflow of economic resources required to settle it. Full derecognition with new assets liabilities

Derecognition

When an asset is derecognized a gain or loss equal to the difference between the consideration received and the carrying amount of the transferred asset is recorded. When a part of an asset is derecognized, gains or losses on securitisation depend in part on the carrying amount of the transferred financial assets, allocated between the financial assets derecognized and the retained interests based on their relative fair values at the date of the transfer. Full derecognition with new assets liabilities

Also read: IFRS Community – Derecognition

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Full derecognition with new assets liabilities

Full derecognition with new assets liabilities Full derecognition with new assets liabilities Full derecognition with new assets liabilities Full derecognition with new assets liabilities Full derecognition with new assets liabilities Full derecognition with new assets liabilities

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