IFRS 9 Full derecognition of financial assets

IFRS 9 Full derecognition of financial assets

IFRS 9 Full derecognition of financial assets is the ending point after having decided in Step 5 of the below decision tree, that the entity has transferred substantially all risks and rewards for the asset.

The action to be accounted for is:

Full derecognition of a financial asset

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 through other comprehensive income i.e. recycling) in the income statement (profit or loss).

This page 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 summaryFlash light focus
  • 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)

Derecognition step by step of financial assets

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 Full derecognition of financial assets

Partly derecognition of a financial 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. IFRS 9 Full derecognition of financial assets

Examples

Some other examples of a full derecognition of a financial asset are as follows: IFRS 9 Full derecognition of financial assets

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IFRS 9 Full derecognition of financial assets

Repurchase right

Repurchase right of first refusal at fair value If an undertaking sells a financial asset and retains only a right of first refusal to repurchase the transferred asset at fair value if the transferee subsequently sells it, the undertaking derecognises the asset as it has transferred substantially all the risks and rewards of ownership.

Put options and call options 

Put options and call options that are deeply out of the money (most unlikely to be exercised). A financial asset that is transferred subject only to a deep out-of-the-money put (sell) option held by the transferee or a deep out-of-the-money call (buy) option held by the transferor is derecognised. This is because the transferor has transferred substantially all the risks and rewards of ownership.

Readily obtainable assets

Readily obtainable assets subject to a call (buy) option that is neither deeply in the money nor deeply out of the money. If an undertaking holds a call option on an asset that is readily obtainable in the market and the option is neither deeply in the money nor deeply out of the money, the asset is derecognised. IFRS 9 Full derecognition of financial assets

This is because the undertaking IFRS 9 Full derecognition of financial assets

  1. has neither retained nor transferred substantially all the risks and rewards of ownership, and Full derecognition of financial assets
  2. has not retained control. IFRS 9 Full derecognition of financial assets

However, if the asset is not readily obtainable in the market, derecognition is precluded to the extent of the amount of the asset that is subject to the call option because the undertaking has retained control of the asset.

The practical ability to sell the asset

Paragraphs IFRS 9.B3.2.7-9 elaborate 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’.

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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.

Transferee repurchase

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 paragraph IFRS 9.3.2.6(c).

Also read: IFRS Community – Derecognition

IFRS 9 Full derecognition of financial assets

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