IFRS 9 Financial assets continued involvement at best

IFRS 9 Financial assets continued involvement

IFRS 9 Financial assets continued involvement is the end position after deciding in Step 6 that the entity retained control of the asset in the derecognition decision tree (see below). The accounting is discussed further below.

IFRS 9 Financial assets continued involvement 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 summaryIFRS 9 Financial assets continued involvement
  • 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)

IFRS 9 Financial assets continued involvement

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 Financial assets continued involvement

Overview of the continuing involvement

Under the continuing involvement approach, the entity continues to recognise part of the asset. The amount of the asset that continues to be recognised is the maximum amount of the entity’s exposure to that particular asset or its previous carrying amount, if lower. The presentation of the asset and liability will result in the recognition of the entity’s remaining exposure on the balance sheet on a gross basis (i.e., both an asset and a liability).

Asset measurement

The asset will be measured either at fair value if the asset was previously held at fair value, or at amortised cost if the asset was previously accounted for on that basis. The treatment of the changes in the liability should be consistent with the treatment of changes in the asset. Consequently, when the transferred asset is classified as available for sale, gains and losses on both the asset and the liability are taken to equity. IFRS 9 Financial assets continued involvement

Accounting for continuing involvement

Accounting for continuing involvement in transferred assets is covered in paragraphs IFRS 9 3.2.16-21 and applies when an entity neither transfers nor retains substantially all the risks and rewards of ownership of a transferred asset, and retains control of the transferred asset.

Transfers with guaranteesIFRS 9 Financial assets continued involvement

If a guarantee provided by an entity to pay for default losses on a transferred asset prevents the transferred asset from being derecognised to the extent of the continuing involvement, the transferred asset at the date of the transfer is measured at the lower of (IFRS 9 3.2.16(a); IFRS 9 B3.2.13(a)):

  • the carrying amount of the asset and IFRS 9 Financial assets continued involvement
  • the guarantee amount IFRS 9 Financial assets continued involvement

An example is given in IFRS 9 B3.2.17. IFRS 9 Financial assets continued involvement

Put and call options on assets measured at amortised cost

If a put or call option prevents a transferred asset from being derecognised and the entity measures the transferred asset at amortised cost, the associated liability is measured at the consideration received adjusted for the amortisation of any difference between that cost and the gross carrying amount of the transferred asset at the expiration date of the option (IFRS 9 B3.2.13(b)).

Put and call options on assets measured at fair value

If a put or call option prevents a transferred asset from being derecognised and the entity measures the transferred asset at fair value, the asset continues to be measured at its fair value. The associated liability is measured at IFRS 9 Financial assets continued involvement

  1. the option exercise price less the time value of the option if the option is in or at the money, or
  2. the fair value of the transferred asset less the time value of the option if the option is out of the money (IFRS 9 B3.2.13(c)).

Continuing involvement in a part of a financial asset

Paragraph IFRS 9 B3.2.17 illustrates accounting for continuing involvement in a part of a financial asset.

US GAAP

Unlike IFRS, continuing involvement is not an explicit consideration when testing a transfer for derecognition, but rather derecognition is based on whether legal, actual and effective control have been surrendered. However, after a transfer of financial assets or participating interests, an entity continues to recognise the financial and servicing assets that it controls and derecognises the financial assets or participating interest for which control has been surrendered. [860-20-40-1A – 40-1B] IFRS 9 Financial assets continued involvement

Also read: IFRS Community – Derecognition

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IFRS 9 Financial assets continued involvement

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