IASB February 2009
Derecognition
The Board continued its discussion of two approaches to derecognition of financial assets and made the following tentative decisions:
Approach 1
- Scope. The Board tentatively decided to define ‘transfers’ broadly so that the decision to assess an item for derecognition would not be based on the form of the transaction. A transfer occurs ‘when one party passes to or undertakes to pass to another party some or all of the cash flows or other economic benefits underlying its financial assets’. The term ‘transfer’ is used broadly to include all forms of sale, assignment, and provision of collateral, sacrifice, distribution and other exchange.
Approach 2
- Scope. The definition of a transfer is the same as in Approach 1.
- Determination of the transferor entity. The determination of the asset being assessed for derecognition and the assessment of continuing involvement should be made at the level of the reporting entity.
- Definition of the asset to be assessed for derecognition:
(a) The determination of the asset to be assessed for derecognition should be on the basis of the remaining interest in the financial asset that was the subject of the transfer.
(b) A proportionate part of an equity instrument qualifies as an asset to be assessed for derecognition (this is a change from the decision the Board made at the January 2009 meeting).
- The ‘practical ability to transfer’ test. The ‘practical ability to transfer’ test should be applied to the entity with which the transferor has agreements that result in the transferor’s continuing involvement with the transferred asset.
- Retained interests and beneficial interests. The Board reaffirmed that a transferor should treat any remaining proportionate interest in the financial asset recognised before the transfer as part of that asset (ie not as a new asset). The Board tentatively decided that a transferor should treat an investment in a transferee vehicle (ie a proportionate beneficial interest) acquired in connection with a transfer as part of the asset previously recognised. If the vehicle contains assets or liabilities in addition to the assets transferred by the transferor, the transferor’s investment should be split between (a) a proportionate interest in the previously recognised assets (ie part of the ‘old’ assets) and (b) a proportionate interest in new assets or liabilities. (This decision is a change from the tentative decision the Board made at its meeting in January 2009).
The Board tentatively decided to propose Approach 2 in the exposure draft, but to include a detailed description of Approach 1 as an alternative view.
The Board tentatively decided that the disclosure objectives for Approach 2 should be to provide information about the:
- nature of, and risks associated with, an entity’s continuing involvement with derecognised assets (disclosure objective 1)
- relationship between assets and associated liabilities when an asset is not derecognised following a transaction (disclosure objective 2).
The Board tentatively decided on the following transitional requirements:
- The standard would be applied prospectively to new transactions occurring after its effective date. An entity should not restate information for comparative periods. Earlier application would be permitted.
- For financial assets that were already derecognised but would not have been derecognised under the proposed requirements: an entity would apply disclosure objective (1).
- For financial assets that are still recognised but would have been derecognised under the proposed requirements: an entity would apply disclosure objective (2).
The Board intends to publish the exposure draft in March or April 2009, with a comment period of 120 days.
Location: London UK
Date: 20/02/2009
Observer Notes