In March 2009 the Board published the exposure draft (ED) Derecognition to replace the derecognition requirements in IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) and to improve the disclosure requirements in IFRS 7 Financial Instruments: Disclosures relating to the transfer of financial assets and liabilities. At the IASB meeting in September 2009, the Board discussed the feedback received from respondents to the ED and also from the extensive outreach programme undertaken by the staff.
At this meeting the Board discussed comments received from respondents on the derecognition requirements in IAS 39 for financial liabilities, and the changes to those requirements proposed in the ED. The Board made the following tentative decisions:
A financial liability is extinguished and hence should be derecognised when the contract giving rise to that liability is substantially modified. The contract is substantially modified if the contract is altered in such a manner that
1. the timing, amounts or uncertainty of the cash flows under the new or modified contract are substantially different from those under the original contract, or
2. it changes the nature of the debtor's obligation or the nature of the investment that the contract represents - for example:
(a) A change in the currency in which the principal or interest is denominated
(b) Addition or removal of contingent interest rate or shared appreciation features
(c) A change in liquidation preference or ranking of the instrument
(d) A change from variable interest rate to fixed rate or vice versa
(e) A change that requires the consent of other class of creditors of the entity
(f) Addition or deletion of cross collateralization provisions
(g) Addition of repayment provisions or prepayment premium clauses
An entity should account for an extinguishment of a financial liability in accordance with the current guidance in IAS 39. Any transaction costs or fees incurred related to the extinguishment of the original liability should be included in the gain or loss recognised on extinguishment, unless any part of that cost can be directly attributed to the new liability. The accounting for any transaction costs or fees directly attributable to the new financial liability should follow the current guidance under IAS 39 for initial measurement of financial liabilities.
When there is a modification to a financial liability that does not qualify as an extinguishment, the entity should account for the modification in accordance with the guidance under IAS 39.
When an entity partially extinguishes a financial liability by repurchasing a part of that financial liability, it must follow the partial extinguishment guidance in IAS 39. However, the assessment as to whether a contract has been substantially modified should be on contract by contract basis. Hence, an entity shall not apply the substantial modification guidance to a part of a financial liability.
Debt for equity swaps
The Board agreed to incorporate the decisions reached in IFRIC Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments into the derecognition ED for the extinguishment of an entire financial liability, with one clarification. If there is a difference between the fair value of the liability that has been extinguished and the fair value of the equity instruments issued as consideration, the difference should adjust the gain or loss to be recognised to the extent that the difference qualifies as an asset or liability.
Symmetry in liability derecognition requirements between debtor and creditor
The Board agreed that derecognition accounting by the borrower and lender, if an amendment to a contract meets the substantial modification criteria, should be symmetrical.