Derecognition of Financial Assets as per IFRS 9 STATES that a ‘trade receivable should be de-recognized when an entity collects payment‘. The collection of payment signifies the end of any exposure to risks or any continuing involvement.
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Derecognition of Financial Assets – Introduction
An entity shall DERECOGNIZE a Financial Asset when:
- The contractual rights to the cash flows from the financial asset expire; OR
- The financial asset is transferred and substantially all of the risks and rewards of ownership pass to the transferee; OR
- The financial asset is transferred and substantially all of the risks and rewards of ownership are neither transferred nor retained but control of the asset has been lost.
However, ‘Financial Assets’ May-be subject to COMPLICATED transactions where some of the risks and rewards that attach to an asset are retained but some are passed on.
Derecognition of Financial Assets – Accounting as Per IFRS 9
| On de-recognition of a financial asset, the difference between: |
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| (a) The ‘Carrying Amount‘ (Measured at the date of de-recognition); AND |
| (b) The ‘Consideration Received‘ (including any new asset obtained less any new liability assumed) |
| shall be RECOGNIZED in Profit or Loss – P&L. |
The following points ILLUSTRATE the evaluation of whether and to what extent a ‘Financial Asset’ is de-recognized:
| (a) If the contractual rights to receive the cash flows from the asset have expired or have been wholly transferred, the whole of the asset should be de-recognized. [If the ‘contractual rights‘ have been retained by the entity but it has assumed a ‘contractual obligation‘ to pay the cash flows.] Such an obligation is only ASSUMED if: – The entity has no obligation to pay unless amounts are actually collected; – The entity is forbidden to sell or pledge the original asset other than to the recipient of the cash flows; AND – The entity must remit the cash flows collected without material delay. |
| (b) If an entity has sold just a portion of the cash flows arising from an asset, only part of the asset should be de-recognized. |
| (c) If substantially all the risks and rewards of ownership have been transferred, the financial asset should be de-recognized; if they have not, it should not. |
| (d) If the entity has neither retained nor transferred all the risks and rewards of ownership, it should determine whether it has retained control of the financial asset. If it has, it continues to RECOGNIZE the asset to the extent of its continuing involvement. |
[Remember always to apply the principle of ‘substance over form‘.]
Repurchase Agreement
In the ‘Repurchase Agreement‘, a financial asset is sold with a simultaneous agreement to buy it back at some future date at an agreed price.
1. If Repurchase is at Specified Price
Continue to RECOGNIZE the ‘financial asset‘ and recognize the Financial Liability for cash received.
2. If Repurchase at Fair Market Price
Derecognize the financial asset and debit the consideration received with any gain/loss recognized in P&L.
Factoring
In a ‘Factoring Transaction‘, one party transfers the right to some receivables to another party for an immediate cash payment.
1. Non-Recourse Factoring
The transferor does NOT provide any guarantee about the performance of the receivables.
In such a case, the entity has transferred the risks and rewards of ownership of the asset and therefore the entity shall derecognize the receivables against the consideration received with any gain/loss recognized in P&L.
2. Recourse Factoring
The transferor sells its invoices to a factor with the promise to buy back any uncollected invoices. The factor does NOT take the risk of any ‘uncollected invoices’.
The transferor has not therefore transferred fully the risks to another party. In such a case, the entity shall NOT derecognize the receivable and recognize a financial liability for consideration received.
| Where the entity provides a guarantee to pay for default losses on transferred assets, the entity shall record: |
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| [Transferred Asset] Transferred asset is measured at LOWER of: – Carrying amount of asset; OR – Maximum amount of the consideration in the transfer that the entity could be required to repay. Subsequently, the carrying amount of the asset is reduced by impairment losses. |
| [Associated Liability] Associated liability is initially measured at the: – Guarantee amount; AND – Fair value (FV) of the guarantee. Subsequently, the FV of the guarantee is recognized in P&L on a time proportionate basis. |
Sale of Financial Asset (At FV) with Purchased Call Option
Where a ‘Financial Asset‘ is sold along with a Call Option that provides the transferor a right (not obligation) to repurchase the asset from the transferee at a specified price, the entity shall RECORD:
| [Transferred Asset] Transferred asset shall be Measured at fair value. |
| [Associated Liability] Associated liability shall be Measured at: – If option is in or at the money <Option exercise price less time value of option> – If option is out of the money <Fair value less time value of option> |
Sale of Financial Asset (At FV) with Written Put Option
Where a ‘Financial Asset‘ is sold along with a Put option that provides the transferee a right (not obligation) to sell the asset to the transferor at a specified price, the entity shall RECORD:
| [Transferred Asset] Transferred asset shall be Measured at LOWER of: – Fair value; OR – Option exercise price. |
| [Associated Liability] Associated liability shall be Measured at option exercise price. |
Synopsis
Derecognition of Financial Assets under IFRS 9 involves the removal of a previously recognized financial asset from an entity’s balance sheet when certain criteria are fulfilled. To derecognize a ‘Financial Asset‘, the entity should transfer the contractual rights to receive cash flows and substantially transfer the risks and rewards associated with ownership.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia