Continuing involvement

The continuing involvement approach applies if the entity has neither transferred nor retained substantially all the risks and rewards of ownership and control has not passed to the transferee. Under the continuing involvement approach, the entity continues to recognise part of the asset. That part represents the extent of its continuing exposure to the risks and rewards of the transferred asset. That is, the continuing involvement asset will include both obligations to support the risks arising from the asset’s cash flows (for example, if a guarantee has been provided) and the right to receive benefits from these cash flows. A liability is also recognised in these circumstances. IFRS 9 contains some guidance on how to account for certain scenarios.

The principle underlying continuing involvement is to reflect on the balance sheet the maximum amount of the entity’s exposure to the particular asset being transferred. For example, in the case where a guarantee is the cause of the continuing involvement, the continuing involvement asset is measured at the lower of the carrying amount of the asset and the maximum amount the entity could be required to pay under the guarantee (for example, the guaranteed amount).

For example, an entity sells a CU 10,000,000 portfolio of receivables to a factor where the average expected losses are 5% and the seller guarantees the first 4% of losses. If the analysis shows that the transaction falls into the continuing involvement box in the flowchart, the continuing involvement asset is CU 400,000, as that is the maximum amount the entity could be required to repay. The associated liability is measured at that maximum amount plus the fair value of the guarantee (for example, if the fair value of guarantee is CU 50,000, the liability is CU 450,000). Therefore the net result of the asset and liability recognised in the balance sheet is the fair value of the guarantee (ie, CU 50,000). If the transaction results in control being transferred, the entity derecognises the asset and recognises only the fair value of the guarantee as a liability.

Another example of continuing involvement is presented in IFRS 9 B3.2.17. Consider a securitisation transaction in which CU 1,000 of assets are transferred and the seller retains a subordinated interest of CU 100 in that pool. If the analysis shows that the transaction is to be accounted for using the continuing involvement approach (which, inter alia, requires that the buyer assumes some risks and rewards), the continuing involvement approach typically results in the seller showing an asset of CU 200 and a liability of CU 100. This gives a net asset of CU 100, which might be expected as it represents the retained subordinated interest of CU 100. However, the gross numbers can be confusing. However, the transaction is comprising (a) a retention of a non-subordinated 10% interest in the assets, plus (b) the subordination of that interest, that is equivalent to the seller providing a credit guarantee. Both these elements result in continuing involvement and both are accounted for. The first element (the retention of a non-subordinated 10% interest) results in a continuing involvement asset of CU 100. In addition, the second element (the subordination of that interest, which is equivalent to the seller providing a guarantee of the first CU 100 of losses) also results in a continuing involvement asset of CU 100, and a liability of CU 100 (being the maximum amount the entity may have to pay by losing the CU 100 asset recognised for the first element). Therefore the seller will recognise a total continuing involvement asset of CU 200 and a liability of CU 100.

There are challenges in interpreting this model, and it is not always easy to rationalise what it means. In ‘Factoring of receivables with late-payment risk retained‘, ‘Sale of loans: guarantee retained‘, and ‘Securitisation: all-in interest rate swap retained‘ examples are provided of how it might be interpreted.

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 (ie, both an asset and a liability). 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 at amortised cost gains and losses on both the asset and the liability are taken to profit or loss.

Where a guarantee causes the continuing involvement, the asset recognised at the date of transfer is measured at the lower of the carrying amount of the asset and the maximum amount of the consideration received in the transfer that the entity could be required to repay (the guaranteed amount). As the net amount of the asset and associated liability represents the fair value of the guarantee, the associated liability is the balancing number. The liability is initially measured at the guarantee amount plus the fair value of the guarantee (which is normally the consideration received for the guarantee). The diagram below explains this visually.

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The component of the liability attributable to the guarantee is subsequently recognised in profit or loss on a systematic basis in the same way as any other guarantee fee is amortised under IAS 18, to the extent that the asset was previously measured at amortised cost, or remeasured to fair value if the asset was previously at fair value. Repayments on the underlying assets are reflected by a reduction in the carrying amount of both the asset and the liability. For assets previously measured at amortised cost, any impairment in the recoverability of the asset is accounted for as normal under IFRS 9, with no adjustment to the carrying amount of the liability.

Where a written put option is the cause of the continuing involvement, and the asset was previously measured at fair value, the transferred asset is measured at the lower of fair value and the option’s strike price, as the entity has no exposure to increases in fair value above the strike price (ie, the maximum amount it continues to be exposed to is the lower of the strike price or fair value). As the net amount of the asset and associated liability has to be the fair value of the option, the associated liability is the balancing number. It is initially measured at the option strike price plus the time value of the option.

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Subsequently, any changes in the fair value of the transferred asset and associated liability are accounted for consistently such that at all times the net amount is the fair value of the option. For example, if the asset was previously classified as an available-for-sale equity investment, any changes in the fair value of the transferred asset and associated liability (other than impairments) are recognised in a separate component of equity.

Where a purchased call option is the cause of the continuing involvement and the asset was previously measured at fair value, the transferred asset continues to be measured at fair value. The net amount of the asset and associated liability is always the fair value of the option. The associated liability is the balancing number and is measured initially at (a) the lower of the fair value of the transferred asset or the strike price less (b) the time value of the option. Where the asset was previously measured at amortised cost, the asset continues to be measured at amortised cost, and the liability is measured at the consideration received (cost). The liability is subsequently adjusted for the amortisation of any difference between its initial cost and the carrying value of the transferred asset at the expiration date of the option. If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognised in profit or loss.

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Subsequently, any changes in the fair value of the transferred asset and associated liability are accounted for consistently with each other.

Helpful hint

If a written put option or a purchased call option prevents a transferred asset from being derecognised and the transferred asset was previously measured at amortised cost, the associated liability is measured at its cost (ie, the consideration received) adjusted for the amortisation of any difference between that cost and the amortised cost of the transferred asset at the date of expiry of the option.

For example:

  • the transferor sells an amortised cost asset and writes a put to the transferee for CU 95.
  • The amortised cost of the asset on the date of transfer is CU 98.
  • The amortised cost of the asset on the expiration of the option will be CU 100.
  • The fair value of the asset on the date of the transfer is CU 92.
  • The exercise price of the written put is CU 90 and therefore the premium received for writing the option consists entirely of time value, being CU3.

In this case, the accounting is as follows:

  • The asset will continue to be recognised at CU 98.
  • The associated liability will be recognised at the consideration received, CU 92.
  • The difference between the CU 95 and CU 100 is recognised in profit or loss using the effective interest method.
  • If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognised in profit or loss.

Accounting treatment

If there is a transfer, the possible accounting results are as follows:

* With recognition of any new assets or liabilities

Other accounting results links:


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