Derecognition

Last Updated on 12/02/2020 by 75385885

Derecognition

Derecognition = the removal of all or part of an asset or liability

5.26 Derecognition is the removal of all or part of a recognised asset or liability from an entity’s statement of financial position. Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability:

  1. for an asset, derecognition normally occurs when the entity loses control of all or part of the recognised asset; and
  2. for a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the recognised liability.

Retained assets and liabilities and the derecognition

5.27 Accounting requirements for derecognition aim to faithfully represent both:

  1. any assets and liabilities retained after the transaction or other event that led to the derecognition (including any asset or liability acquired, incurred or created as part of the transaction or other event); and Derecognition of assets and liabilities
  2. the change in the entity’s assets and liabilities as a result of that transaction or other event.

How to achieve the faithful representation of the retained assets and liabilities and the derecognitions

5.28 The aims described in Retained assets and liabilities and the derecognition (see above) are normally achieved by:

  1. derecognising any assets or liabilities that have expired or have been consumed, collected, fulfilled or transferred, and recognising any resulting income and expenses. In the rest of this chapter, the term ‘transferred component’ refers to all those assets and liabilities; Derecognition of assets and liabilities
  2. continuing to recognise the assets or liabilities retained, referred to as the ‘retained component’, if any. That retained component becomes a unit of account separate from the transferred component. Accordingly, no income or expenses are recognised on the retained component as a result of the derecognition of the transferred component, unless the derecognition results in a change in the measurement requirements applicable to the retained component; and
  3. applying one or more of the following procedures, if that is necessary to
    1. presenting any retained component separately in the statement of financial position; achieve one or both of the aims described in Retained assets and liabilities and the derecognition (see above):
    2. presenting separately in the statement(s) of financial performance any income and expenses recognised as a result of the derecognition of the transferred component; or
    3. providing explanatory information.
Something else -   Relevance

Retainment of exposure in a transfer or an agent holds an asset or liability in a (presumed) transfer

5.29 In some cases, an entity might appear to transfer an asset or liability, but that asset or liability might nevertheless remain an asset or liability of the entity. For example:

  1. if an entity has apparently transferred an asset but retains exposure to significant positive or negative variations in the amount of economic benefits that may be produced by the asset, this sometimes indicates that the entity might continue to control that asset (see 6. More factors imply control in Control of an economic resource); or
  2. if an entity has transferred an asset to another party that holds the asset as an agent for the entity, the transferor still controls the asset (see and 7. Agency theory – principal and agent in Control of an economic resource).

Inappropriate derecognitions

5.30 In the cases described in Retainment of exposure in a transfer or an agent holds an asset or liability in a (presumed) transfer, derecognition of that asset or liability is not appropriate because it would not achieve either of the two aims described in Retained assets and liabilities and the derecognition.

Derecognitions faithfully represented

5.31 When an entity no longer has a transferred component, derecognition of the transferred component faithfully represents that fact. However, in some of those cases, derecognition may not faithfully represent how much a transaction or other event changed the entity’s assets or liabilities, even when supported by one or more of the procedures described in How to achieve the faithful representation of the retained assets and liabilities and the derecognition sub (c). In those cases, derecognition of the transferred component might imply that the entity’s financial position has changed more significantly than it has. This might occur, for example:

  1. if an entity has transferred an asset and, at the same time, entered into another transaction that results in a present right or present obligation to reacquire the asset. Such present rights or present obligations may arise from, for example, a forward contract, a written put option, or a purchased call option.
  2. if an entity has retained exposure to significant positive or negative variations in the amount of economic benefits that may be produced by a transferred component that the entity no longer controls.
Something else -   SME Notes to the Financial Statements

Insufficient derecognitions

5.32 If derecognition is not sufficient to achieve both aims described in Retained assets and liabilities and the derecognition (see above), even when supported by one or more of the procedures described in How to achieve the faithful representation of the retained assets and liabilities and the derecognition sub (c), those two aims might sometimes be achieved by continuing to recognise the transferred component. This has the following consequences:

  1. no income or expenses are recognised on either the retained component or the transferred component as a result of the transaction or other event;
  2. the proceeds received (or paid) upon transfer of the asset (or liability) are treated as a loan received (or given); and
  3. separate presentation of the transferred component in the statement of financial position, or provision of explanatory information, is needed to depict the fact that the entity no longer has any rights or obligations arising from the transferred component. Similarly, it may be necessary to provide information about income or expenses arising from the transferred component after the transfer.

Derecognition and modifications to the transfer

5.33 One case in which questions about derecognition arise is when a contract is modified in a way that reduces or eliminates existing rights or obligations. In deciding how to account for contract modifications, it is necessary to consider which unit of account provides users of financial statements with the most useful information about the assets and liabilities retained after the modification, and about how the modification changed the entity’s assets and liabilities:

  1. if a contract modification only eliminates existing rights or obligations, the discussion in paragraphs Derecognition = the removal of all or part of an asset or liability, Retained assets and liabilities and the derecognition, How to achieve the faithful representation of the retained assets and liabilities and the derecognition, Retainment of exposure in a transfer or an agent holds an asset or liability in a (presumed) transfer, Inappropriate derecognition, Derecognition faithfully represented, Insufficient derecognition is considered in deciding whether to derecognise those rights or obligations;
  2. if a contract modification only adds new rights or obligations, it is necessary to decide whether to treat the added rights or obligations as a separate asset or liability, or as part of the same unit of account as the existing rights and obligations (see Unit of Account); and
  3. if a contract modification both eliminates existing rights or obligations and adds new rights or obligations, it is necessary to consider both the separate and the combined effect of those modifications. In some such cases, the contract has been modified to such an extent that, in substance, the modification replaces the old asset or liability with a new asset or liability. In cases of such extensive modification, the entity may need to derecognise the original asset or liability, and recognise the new asset or liability.
Something else -   The recognition process

 

Last Updated on 12/02/2020 by 75385885

Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). Individual jurisdictions around the world may require or permit the use of (locally authorised and/or amended) IFRS Standards for all or some publicly listed companies.  The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. The specific status of IFRS Standards should be checked in each individual jurisdiction. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   SME Statement of Comprehensive Income and Income Statement

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