IFRS 9 Continue to recognise the financial asset at best

IFRS 9 Continue to recognise the financial asset

IFRS 9 Continue to recognise the financial asset is the ending point after having gone through Step 4 part 1 and part 2 of the below decision tree. After deciding the entity has NOT transferred its rights to receive the cash flows from the assets and also deciding the entity has NOT assumed an obligation to pay the cash flows from the asset, the entity cintinues to recognise the asset.

IFRS 9 Continue to recognise the financial asset 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. IFRS 9 Continue to recognise the financial asset

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 summary
  • 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.
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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.

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)

IFRS 9 Continue to recognise the financial asset

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. IFRS 9 Continue to recognise the financial asset

No derecognition (on balance sheet)

If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. If the entity does not control the asset IFRS 9 Continue to recognise the financial assetthen derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. [IFRS 9 3.2.16]

Collateralised borrowing

A transaction is accounted for as a collateralised borrowing if the transfer does not satisfy the conditions for derecognition. The entity recognises a financial liability for the consideration received for the transferred asset.

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If the transferee has the right to sell or repledge the asset, it is presented separately in the balance sheet (for example, as a loaned asset, pledged security or repurchased receivable).

In subsequent periods, the entity recognises income relating to the transferred assets and any expense incurred on the financial liability. Where a derivative forms part of the transaction and precludes the asset from being derecognised, the derivative is not accounted for separately, as this would result in the derivative being accounted for twice. IFRS 9 Continue to recognise the financial asset

Retained control

Whether the entity has retained control of the transferred asset depends on the transferee’s (i.e. a party to whom the asset was transferred) ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control (IFRS 9 3.2.9). IFRS 9 Continue to recognise the financial asset

The practical ability to sell an asset

IFRS 9 B3.2.7-9 elaborates on what is meant by practical ability to sell the asset. It starts with a sentence saying that ‘transferee has the practical ability to sell the transferred asset if it is traded in an active market because the transferee could repurchase the transferred asset in the market if it needs to return the asset to the entity’.

Some tend to interpret this as a condition that an asset must be traded in an active market irrespective of the circumstances. In my opinion this is not the case, as the explanation goes on to say that an active market is needed when the transferee would need to repurchase the transferred asset in the market if it needs to return the asset to the entity.

IFRS 9 Continue to recognise the financial asset

If the transferee would not be obliged to repurchase a transferred asset under no circumstances, there need not be an active market in order to conclude that the control has been transferred. In any case, accounting consequence will often be essentially the same, as retaining control means accounting for continuing involvement in the asset, which will often be similar to recognition of any assets or liabilities resulting from rights and obligations created or retained in the transfer under IFRS 9 3.2.6(c). IFRS 9 Continue to recognise the financial asset

Determination of Fair value

It may be difficult to determine the fair values of the parts of a larger asset that are derecognised and continue to be recognised. Where there are no available market prices, the best estimate of the fair value of the part that continues to be recognised is the difference between the fair value of the larger financial asset as a whole and the consideration received from the transferee for the part of the asset that is derecognised.

Also read: IFRS Community – Derecognition

IFRS 9 Continue to recognise the financial asset

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