At this meeting, the Board continued its discussions of the new derecognition approach for financial assets. The Board also discussed the feedback received on the disclosures proposed in the Derecognition Exposure Draft.
Sale and repurchase agreements and similar transactions
At this meeting, the Board tentatively decided to make an exception to the derecognition approach to require that a sale of a financial asset that is accompanied by an agreement that entitles and obligates the seller to repurchase the same, or substantially the same, asset before maturity of the asset, should be accounted for as a secured borrowing.
The Board tentatively decided that for a financial asset to meet the 'substantially the same asset' requirement, it must have all of the following characteristics:
- the same primary obligor (except for debt guaranteed by a sovereign government, central bank, government-sponsored enterprise or agency thereof, in which case the guarantor and the terms of the guarantee must be the same);
- identical form and type so as to provide the same risks and rights;
- the same maturity (or in the case of mortgage backed pass-through and pay-through securities, similar remaining weighted-average maturities that result in approximately the same market yield);
- identical contractual interest rates;
- similar assets as collateral; and
- the same aggregate unpaid principal amount or principal amounts within accepted 'good delivery' standards for the type of security involved.
The Board also tentatively decided to provide the following application guidance for the 'same primary obligor' and 'similar assets as collateral' conditions:
- The same primary obligor: the exchange of pools of single-family loans would not meet this criterion, because the mortgages comprising the pool do not have the same primary obligor, and would therefore not be considered substantially the same.
- Similar assets as collateral: mortgage-backed pass-through and pay-through securities must be collateralised by a similar pool of mortgages, such as single-family residential mortgages, to meet this characteristic.
Pass-through arrangements, non-recourse loans and accounting for assets and liabilities of SPEs
The Board also discussed how the derecognition approach for financial assets would apply to pass-through arrangements, non-recourse loans and SPEs that issue beneficial interests in the 'assets' of the SPE. The Board tentatively decided the following:
- The derecognition approach will not include the pass-through criteria in IAS 39.19 because the approach addresses the issues that the pass-through criteria are designed to address. However, the next due process document will include application guidance on how the derecognition approach addresses the pass-through requirements.
- The application of the derecognition approach will not necessarily result in special-purpose entities (SPEs) becoming 'empty shells'. The Board concluded that whether an SPE will be empty depends on the nature of the beneficial interests issued (ie whether the beneficial interests entitle the holders of such instruments to the cash flows of an asset or a to portfolio of assets or to an interest in the entity).
- For non-recourse loans that are effectively pass-through arrangements, the debtor should not recognise the securing asset and nor should it recognise a liability. Rather, the parties involved (creditor and debtor) should only recognise their related interests in the underlying asset, or in parts of the underlying asset. Non-recourse loans are in effect pass-through arrangements if the primary source from which the debtor is expected to obtain cash to pay the principal and interest on the loan is the securing asset. In these arrangements, the debtor effectively promises or agrees to pass the cash flows of the asset to the creditor.
The Board tentatively decided that the next due process document would incorporate the derecognition disclosures, and related objectives, proposed in the ED, with the clarification that for assets that are derecognised and in which the entity has more than one type of continuing involvement, the disclosures should be aggregated.