[IFRS 9.B3.2.16(n)]. Such techniques are commonly used in securitisation transactions
(see 3.6 above).
IFRS 9 notes that, if the entity retains substantially all the risks and rewards of
ownership of the transferred asset, the asset continues to be recognised in its entirety.
If the entity retains some, but not substantially all, of the risks and rewards of ownership
and has retained control, derecognition is precluded to the extent of the amount of cash
or other assets that the entity could be required to pay. [IFRS 9.B3.2.16(n)]. This ‘guidance’
is really no more than a repetition of the basic principles of the standard, adding no real
clarification specific to this type of transaction.
4.4
Transfers by way of swaps
4.4.1
Total return swaps
An entity may sell a financial asset to a transferee and enter into a total return swap
with the transferee, whereby the transferor pays an amount equivalent to fixed or
floating rate interest on the consideration for the transfer and receives an amount
equivalent to the cash flows from, together with any increases or decreases in the fair
value of, the underlying asset. In such a case, derecognition of all of the asset is
prohibited, [IFRS 9.B3.2.16(o)], since the transaction has the effect that substantially all
the risks and rewards associated with the asset are retained by the transferor
(Figure 48.1, Box 7, Yes).
3922 Chapter 48
4.4.2
Interest rate swaps
An entity may transfer a fixed rate financial asset and enter into an interest rate swap
with the transferee to receive a fixed interest rate and pay a variable interest rate based
on a notional amount equal to the principal amount of the transferred financial asset.
IFRS 9 states that the interest rate swap does not preclude derecognition of the
transferred asset, provided that the payments on the swap are not conditional on
payments being made on the transferred asset. [IFRS 9.B3.2.16(p)]. It is interesting that this
is included as guidance as it does not follow from the principles. There are situations in
which the entity retains substantially all of the risks by retaining interest rate risk.
If, however, the transferor were to transfer an asset subject to prepayment risk (e.g. a
domestic mortgage), and the transferor and transferee were to enter into an amortising
interest rate swap (i.e. one whose notional amount amortises so that it equals the
principal amount of the transferred financial asset outstanding at any point in time), the
transferor would generally retain substantial prepayment risk through the swap. In this
case, the transferor would (depending on the other facts of the transaction, such as the
transfer or retention of credit risk) continue to recognise the transferred asset either in
its entirety (Figure 48.1, Box 7, Yes) or to the extent of the transferor’s continuing
involvement (Figure 48.1, Box 9). [IFRS 9.B3.2.16(q)].
Conversely, if the transferor and the transferee were to enter into an amortising interest
rate swap, the amortisation of the notional amount of which is not linked to the principal
amount outstanding on the transferred asset, the transferor would no longer retain
prepayment risk. Therefore such a swap would not preclude derecognition of the
transferred asset, provided the payments on the swap were not conditional on interest
payments being made on the transferred asset and the swap did not result in the entity
retaining any other significant risks and rewards of ownership on the transferred asset.
[IFRS 9.B3.2.16(q)].
4.5
Factoring of trade receivables
IFRS 9 does not specifically address one of the more common forms of ‘off-balance
sheet finance’ – the factoring of trade receivables. The common aim of all factoring
structures is to provide cash flow from trade receivables quicker than would arise from
normal cash collections, which is generally achieved by a ‘sale’ of all, or certain selected,
receivables to a financial institution. However, the conditions of such ‘sales’ are
extremely varied (which may well explain the lack of any generic guidance in the
standard), ranging from true outright sales and pass-through arrangements (resulting in
full derecognition), to transactions with continuing involvement through guarantee or
subordination arrangements. It will therefore be necessary for an entity to consider the
terms of its particular debt-factoring arrangement(s) carefully in order to determine the
appropriate application of the derecognition provisions of IFRS 9. Operational matters,
for example how cash receipts from a debtor are allocated to particular invoices
outstanding, could also be relevant to the analysis.
Depending on circumstances, Examples 48.5 (see 5.1 below), 48.6 (see 5.1.1 below), 48.10
(see 5.4.1 below) and 48.15 (see 5.4.4 below) may also be of particular relevance.
Financial
instruments:
Derecognition
3923
5 ACCOUNTING
TREATMENT
This part of the chapter deals with the accounting consequences of the derecognition
criteria for financial assets – in other words how the principles discussed above
translate into accounting entries.
In order to provide a link with Figure 48.1 at 3.2 above we have used the following
convention:
‘Box 6, Yes’
The transaction would result in the answer ‘Yes’ at Box 6 in the
flowchart.
‘Box 7, No’
The transaction would result in the answer ‘No’ at Box 7 in the
flowchart.
5.1
Transfers that qualify for derecognition
It is important to remember throughout this section that references to an asset
being derecognised in its entirety include situations where a part of an asset to
which the derecognition criteria are applied separately is derecognised in its
entirety (see 3.3 above). In this context, IFRS 9 uses the phrase ‘in its entirety’ in
contrast to the accounting treatment applied to assets where there is continuing
involvement (see 5.3 below) where some, but not all, of a financial asset, or part of
an asset, is derecognised.
If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer
results in the transferor obtaining a new financial asset or servicing asset or assuming a
new financial liability, or a servicing liability (see 5.1.2 below), IFRS 9 requires the entity
to recognise the new financial asset, servicing asset, financial liability or servicing
liability at fair value. [IFRS 9.3.2.10-11].
On derecognition of a financial asset in its entirety, IFRS 9 requires the difference between:
(a) the carrying amount of the asset; and
(b) the consideration received (including any new asset obtained less any new
liability assumed),
to be recognised in profit or loss. [IFRS 9.3.2.12]. In addition, any cumulative gain or loss in
respect of that asset which was previously recognised in other comprehensive income
should be reclassified from equity to profit or loss if the asset is a debt instrument
accounted for at fair value through other comprehensive income under IFRS 9.
[IFRS 9.3.2.10].
Example 48.5 illustrates these requirements.
Example 48.5: Derecognition of whole of financial asset in its entirety
At 1 October 2019 an entity has a debt instrument carried at €1,400 in respect of which a cumulative gain of
€200 has been recognised in equity. At that date, the asset is unconditionally sold to a third party in exchange
for cash of €2,500 and a loan note issued to the third party. The loan note bears a fixed rate interest below
current market rates and is repayable at €1,150 but is considered to have a fair value of €1,100. The following
accounting entries are made by the entity to record the disposal:
3924 Chapter 48
€
€
Cash 2,500
Equity (‘recycling’ of cumulative gain on asset)
200
Gain on disposal
200
Asset 1,400
Loan note
1,100
Thereafter the loan note will be accreted up to its repayable amount of €1,150 over its expected life using the
effective interest method (see Chapter 46 at 3).
If the asset had been accounted for using the amortised cost method and had a carrying amount of (say) €1,300
at the date of the transfer, the accounting entry would have been:
€
€
Cash 2,500
Profit on disposal
100
Asset 1,300
Loan note
1,100
5.1.1
Transferred asset part of larger asset
If the transferred asset is part of a larger financial asset, for example when an entity
transfers interest cash flows that are part of a debt instrument (see 3.3 above), and the part
transferred qualifies for derecognition in its entirety, IFRS 9 requires the previous carrying
amount of the larger financial asset to be allocated between the part that continues to be
recognised and the part that is derecognised. The allocation is based on the relative fair
values of those parts on the date of the transfer. For this purpose, a retained servicing asset
(see 5.1.2 below) is to be treated as a part that continues to be recognised.
IFRS 9 requires the difference between:
(a) the carrying amount allocated to the part derecognised; and
(b) the
sum
of:
(i)
the consideration received for the part derecognised (including any new asset
obtained less any new liability assumed); and
(ii) any cumulative gain or loss allocated to it previously recognised directly in equity
to be recognised in profit or loss. Any cumulative gain or loss that had been recognised
in equity is allocated between the part that continues to be recognised and the part that
is derecognised, based on the relative fair values of those parts. [IFRS 9.3.2.13].
The requirement in (b)(ii) above for ‘recycling’ of any cumulative gain or loss previously
recognised directly in equity applies to debt instruments accounted for at fair value
through other comprehensive income under IFRS 9.
IFRS 9 notes that the accounting treatment prescribed for the derecognition of a part
(or parts) of a financial asset requires an entity to determine the fair value of the part(s)
that continue to be recognised. Where the entity has a history of selling parts similar to
the part that continues to be recognised, or other market transactions exist for such
parts, IFRS 9 requires recent prices of actual transactions to be used to provide the best
estimate of its fair value. When there are no price quotations or recent market
transactions to support the fair value of the part that continues to be recognised, the
best estimate of the fair value is the difference between:
Financial
instruments:
Derecognition
3925
• the fair value of the larger financial asset as a whole; and
• the consideration received from the transferee for the part that is derecognised.
[IFRS 9.3.2.14].
The requirements of IFRS 13 that deal with the determination of fair value should also
be used [IFRS 9.B3.2.11] – see Chapter 14.
Example 48.6 illustrates the requirements for full derecognition of a part of an asset.
Example 48.6: Derecognition of part of financial asset in its entirety
On 1 January 2014 an entity invested €1 million in a loan with a par value of €1 million. The loan pays interest
of €75,000 on 31 December annually in arrears and is to be redeemed at par on 31 December 2022. The entity
accounts for the loan at amortised cost.
On 1 January 2019 it unconditionally sells the right to receive the remaining five interest payments to a bank.
The derecognition provisions of IFRS 9 are applied to the interest payments as an identifiable part of the
asset, leading to the conclusion that they are required to be derecognised.
The consideration received for, and the fair value of, the future interest payments (based on the net present value, as
at 1 January 2019, of the payments at the current market interest rate that would be available to the borrower of 5%)16
is €324,711 (€75,000 × [1/1.05 + 1/1.052 ... + 1/1.055]). By the same methodology the fair value of the principal
repayment can be calculated as €783,526 (€1,000,000 × 1/1.055), giving a total fair value for the loan of €1,108,237.
In order to calculate the gain or loss on disposal, the total carrying value of the loan of €1,000,000 is allocated
between the part disposed of and the part retained, based on the fair values of those parts. This allocates €292,998
(€1,000,000 × 324,711 ÷ 1,108,237) to the interest payments disposed of and €707,002 (€1,000,000 × 783,526
÷ 1,108,237) to the retained right to the repayment of principal. This generates the accounting entry:
€
€
Cash 324,711
Loan (portion of carrying amount allocated to interest
payments) 292,998
Gain on disposal
31,713
If the loan had instead been a quoted bond accounted for as available-for-sale, it would have already have
been carried at €1,108,237, so that the basic disposal journal would simply be:
€
€
Cash 324,711
Bond (portion of carrying amount allocated to interest
payments) 324,711
However, as the bond was accounted for as available-for-sale, it would also be necessary to recycle that
portion of the cumulative revaluation gain of €108,237 that relates to the interest ‘component’ of the total
carrying value from equity to the income statement. IFRS 9 requires a pro-rata allocation of the cumulative
gain or loss in equity based on the total fair value of the interest and principal – this would deem €31,713
(€108,237 × €324,711 ÷ 1,108,237) of the cumulative revaluation gain to relate to interest. This would give
rise to the further journal, resulting in the same gain on disposal as above:
€
€
Equity 31,713
Gain on disposal (income statement)
31,713
3926 Chapter 48
5.1.2
Servicing assets and liabilities
It is common for an entity to transfer a financial asset (or part of a financial asset) in its
entirety, but to retain the right or obligation to service the asset, i.e. to collect payments
as they fall due and undertake other administr
ative tasks, in return for a fee.
When an entity transfers a financial asset in a transfer that qualifies for derecognition in
its entirety and retains the right to service the financial asset for a fee, IFRS 9 requires
the entity to recognise either a servicing asset or a servicing liability for that servicing
contract, as follows:
• If the fee to be received is not expected to compensate the entity adequately for
performing the servicing, the entity should recognise a servicing liability for the
servicing obligation at its fair value.
• If the fee to be received is expected to be more than adequate compensation for the
servicing, the entity should recognise a servicing asset for the servicing right. This
should be recognised at an amount determined on the basis of an allocation of the
carrying amount of the larger financial asset (as described in 5.1.1 above). [IFRS 9.3.2.10].
It is not immediately clear what is meant by this requirement. The application guidance
expands on the point, as follows.
An entity may retain the right to a part of the interest payments on transferred assets as
compensation for servicing those assets. The part of the interest payments that the
entity would give up upon termination or transfer of the servicing contract is allocated
to the servicing asset or servicing liability. The part of the interest payments that the
entity would not give up is an interest-only strip receivable.
For example, if the entity would not give up any interest upon termination or transfer of the
servicing contract, the entire interest spread is an interest-only strip receivable. Presumably,
as the entity will still have a liability to service the portfolio, it will have to account for this if
it allocates none of the interest spread to a servicing asset. For the purposes of applying the
requirements for disposals of part of an asset discussed in 5.1.1 above, the fair values of the
servicing asset and interest-only strip receivable are used to allocate the carrying amount of
the receivable between the part of the asset that is derecognised and the part that continues
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 776