Trade date or settlement date accounting

[From Guidance on implementing IFRS 9 Financial Instruments]

Recognition and derecognition of financial liabilities using trade date or settlement date accounting

IFRS 9 has special rules about recognition and derecognition of financial assets using trade date or settlement date accounting. Do these rules apply to transactions in financial instruments that are classified as financial liabilities, such as transactions in deposit liabilities and trading liabilities?

No. IFRS 9 does not contain any specific requirements about trade date accounting and settlement date accounting in the case of transactions in financial instruments that are classified as financial liabilities. Therefore, the general recognition and derecognition requirements in paragraphs 3.1.1 and 3.3.1 of IFRS 9 apply. Paragraph 3.1.1 of IFRS 9 states that financial liabilities are recognised on the date the entity ‘becomes a party to the contractual provisions of the instrument’. Such contracts generally are not recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of IFRS 9. Paragraph 3.3.1 of IFRS 9 specifies that financial liabilities are derecognised only when they are extinguished, ie when the obligation specified in the contract is discharged or cancelled or expires.

Trade date accounting is an accounting method company accountants and bookkeepers use to record transactions. Trade date accounting records the transaction as of the date at which an agreement has been entered (the trade date), instead of on the date the transaction has been finalized (the settlement date).Trade date or settlement date accounting

The distinction between trade date and settlement date accounting is an important one, as it can impact the company’s financial statements. For example, assume ZXC Corporation, which has a fiscal year end-date of December 31, purchases a new factory with debt on December 26 and takes possession of this factor on January 31 of the next year. This transaction spans its fiscal year end-date. The accounting method used by ZXC Corporation will affect the year for which this transaction is recorded.

If ZXC Corporation uses trade date accounting, the asset and loan amount will be recorded in the company’s books — without any interest accruing for the five days — on December 26. If they use settlement data accounting the asset and liability will be recorded in the company’s books on January 31 of the following year. Regardless of the accounting method used, interest associated with the transaction will not be recorded until settlement.