The loss on derecognition at 1 January 2020 of £140 arises because the net-settled contract is equivalent to
the entity disposing of the bond for its then fair value of £1,860, which is £140 lower than its amortised cost
of £2,000.
This illustrates the point that, where the terms of net-settled forward contract over a
transferred asset are such that the original asset cannot be derecognised, the result will
be that the entity’s statement of financial position shows a gross position – i.e. the
original asset and a liability for the consideration for the transfer. This may seem a
strange accounting reflection of a contract that is required to be settled net. However,
the IASB was to some extent forced into this approach as an anti-avoidance measure. It
is clear from the analysis in 4.1.1 to 4.1.4 above that an asset sold subject to the obligation
to repurchase the same or similar asset at a fixed price should not be derecognised. If
the accounting treatment were to vary merely because the contract was net-settled, it
would be possible to avoid the requirements of IFRS 9 for continued recognition of
assets subject to certain forward repurchase agreements simply by altering the terms of
the agreement to allow net settlement.
5.3
Transfers with continuing involvement – summary
If an entity neither transfers nor retains substantially all the risks and rewards of
ownership of a transferred asset, but retains control of the transferred asset (see 3.9
above), IFRS 9 requires the entity to continue to recognise the transferred asset to the
extent of its ‘continuing involvement’ – i.e. the extent to which it is exposed to changes
3932 Chapter 48
in the value of the transferred asset. [IFRS 9.3.2.16]. Such transactions fall within Box 9 of
the flowchart at 3.2 above.
The concept of ‘continuing involvement’ was first introduced in the exposure draft of
proposed amendments to IAS 32 and IAS 39 published in June 2002. The IASB’s
intention at that time was to move towards an accounting model for derecognition based
entirely on continuing involvement. However, this approach (or at least the
methodology for implementing it proposed in the exposure draft) received little support
in the exposure period and the IASB decided to abandon it and revert largely to an
accounting model for derecognition based on the transfer of risks and rewards.
[IFRS 9.BCZ3.4-BCZ3.12]. However, the continuing involvement approach remains relevant
for certain transactions – mainly transfers of assets which result in the sharing, rather
than the substantial transfer, of the risks and rewards.
The accounting requirements in respect of assets in which the entity has continuing
involvement are particularly complex, and are summarised at 5.3.1 to 5.3.5 below, with
worked examples at 5.4 below. In particular, and in contrast to the treatment for
transactions that do not qualify for derecognition through retention of risks and rewards
(see 5.2 above), the associated liability is often calculated as a balancing figure that will not
necessarily represent the proceeds received as the result of the transfer (see 5.3.3 below).
We have a general concern regarding the required accounting treatment for a
continuing involvement, namely that IFRS 9 provides examples of how to deal with
certain specific transactions rather than clear underlying principles. It can be difficult to
determine the appropriate treatment for a continuing involvement that does not
correspond fairly exactly to one of the examples in IFRS 9.
5.3.1 Guarantees
When the entity’s continuing involvement takes the form of guaranteeing the
transferred asset, the extent of the entity’s continuing involvement is the lower of:
• the carrying amount of the asset; and
• the maximum amount of the consideration received that the entity could be
required to repay (‘the guarantee amount’). [IFRS 9.3.2.16(a)].
An example of this treatment is given at 5.4.1 below.
It follows that if the transferor guarantees the entire amount of the transferred asset, no
derecognition would be achieved, even though it may have passed other significant risks
to the transferee.
5.3.2 Options
When the entity’s continuing involvement takes the form of a written and/or purchased
option (including a cash-settled option or similar provision) on the transferred asset, the
extent of the entity’s continuing involvement is the amount of the transferred asset that
the entity may repurchase. However, in case of a written put option (including a cash-
settled option or similar provision) on an asset measured at fair value, the extent of the
entity’s continuing involvement is limited to the lower of the fair value of the transferred
asset and the option exercise price. [IFRS 9.3.2.16(b)-(c)].
Examples of this treatment are given at 5.4.2 and 5.4.3 below.
Financial
instruments:
Derecognition
3933
5.3.3 Associated
liability
When an entity continues to recognise an asset to the extent of its continuing
involvement, IFRS 9 requires the entity to recognise an associated liability. [IFRS 9.3.2.17].
IFRS 9 provides that ‘despite the other measurement requirements in this Standard’, the
transferred asset and the associated liability are to be measured on a basis that reflects
the rights and obligations that the entity has retained. The associated liability is
measured in such a way that the net carrying amount of the transferred asset and the
associated liability is equal to:
• if the transferred asset is measured at amortised cost, the amortised cost of the
rights and obligations retained by the entity; or
• if the transferred asset is measured at fair value, the fair value of the rights and
obligations retained by the entity when measured on a stand-alone basis.
[IFRS 9.3.2.17].
This has the effect that the ‘liability’ is often calculated as a balancing figure that will not
necessarily represent the proceeds received as the result of the transfer (see
Examples 48.10 to 48.13 at 5.4 below). This does not fit very comfortably with the
normal rules in IFRS 9 for the initial measurement of financial liabilities (see Chapter 45
at 3) – hence the comment that this treatment applies ‘despite the other measurement
requirements in this Standard’.
5.3.4
Subsequent measurement of assets and liabilities
IFRS 9 requires an entity to continue to recognise any income arising on the transferred asset
to the extent of its continuing involvement and to recognise any expense incurred on the
associated liability. [IFRS 9.3.2.18]. This is comparable to the requirements in respect of assets
not derecognised through retention of substantially all risks and rewards (see 5.2 above).
When the transferred asset and associated liability are subsequently measured, IFRS 9
requires recognised changes in the fair value of the transferred asset and the associated
liability to be accounted for consistently with each other in accordance with the general
provisions of IFRS 9 for measuring gains and losses (see Chapter 46 at 2) and not offset.
[IFRS 9.3.2.19]. Moreover, if the transferred asset is measu
red at amortised cost, the option
in IFRS 9 to designate a financial liability as at fair value through profit or loss (see
Chapter 44 at 7) is not applicable to the associated liability. [IFRS 9.3.2.21].
5.3.5
Continuing involvement in part only of a larger asset
An entity may have continuing involvement in a part only of a financial asset, for
example where the entity retains an option to repurchase part of a transferred asset, or
retains a residual interest in part of an asset, such that the entity does not retain
substantially all the risks and rewards of ownership, but does retain control.
In such a case, IFRS 9 requires the entity to allocate the previous carrying amount of
the financial asset between the part that it continues to recognise under continuing
involvement, and the part that it no longer recognises on the basis of the relative fair
values of those parts on the date of the transfer. The allocation is to be made on the
same basis as applies on derecognition of part only of a larger financial asset – see 5.1.1
and 5.1.2 above.
3934 Chapter 48
The difference between:
(a) the carrying amount allocated to the part that is no longer recognised; and
(b) the
sum
of:
(i) the consideration received for the part no longer recognised; and
(ii) any cumulative gain or loss allocated to it that had been recognised directly
in equity,
is recognised in profit or loss. A 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
no longer recognised on the basis of the relative fair values of those parts. [IFRS 9.3.2.13].
The ‘recycling’ of any cumulative gain or loss previously recognised directly in equity in (b)(ii)
above would apply to debt instruments accounted for at fair value through other
comprehensive income under IFRS 9. This was previously an explicit requirement of IAS 39,
but has not been carried over to IFRS 9, something we suspect is nothing but an oversight.
This topic is discussed further at 5.4.4 below.
5.4
Transfers with continuing involvement – accounting examples
The provisions summarised at 5.3 above, even judged by the standards of IFRS 9, are
unusually impenetrable. However, the application guidance provides a number of
clarifications and examples, the substance of which is reproduced below.
5.4.1
Transfers with guarantees
If a guarantee provided by an entity to pay for default losses on a transferred asset
prevents the transferred asset from being derecognised to the extent of the continuing
involvement, IFRS 9 requires:
(a) the transferred asset at the date of the transfer to be measured at the lower of:
(i) the carrying amount of the asset; and
(ii) the maximum amount of the consideration received in the transfer that the
entity could be required to repay (‘the guarantee amount’); and
(b) the associated liability to be initially measured at the guarantee amount plus the fair
value of the guarantee (which is normally the consideration received for the guarantee).
Subsequently, the initial fair value of the guarantee is recognised in profit or loss on a
time proportion basis in accordance with IFRS 15 and the carrying value of the asset is
reduced by any impairment losses. [IFRS 9.B3.2.13(a)].
This is illustrated in Example 48.10 below (which is based on the circumstances in
Example 48.15 below).
Example 48.10: Continuing involvement through guarantee
An entity has a loan portfolio carried at €10 million with a fair value of €10.5 million. It sells the rights to
100% of the cash flows to a third party for a payment of €10.55 million, which includes a payment of €50,000
in return for the entity agreeing to absorb the first €1 million of default losses on the portfolio. The loans are
fixed rate loans with significant prepayment risk.
Financial
instruments:
Derecognition
3935
The guarantee has the effect that the entity has transferred substantially all the rewards, but not substantially
all the risks, of the portfolio (Figure 48.1, Box 6, No). The prepayment risk and interest rate risk have been
transferred to the transferee, so that the entity does not retain all significant risks of the loans (Figure 48.1,
Box 7, No). The portfolio is not a readily marketable asset, so that the entity retains control of the asset
(Figure 48.1, Box 8, Yes – see also 3.9 above), and the continuing involvement provisions of IFRS 9 apply
(Figure 48.1, Box 9).
The entity turns to the requirements above. The continuing involvement in the transferred asset must be
measured at the lower of:
(i) the amount of the asset transferred – i.e. €10 million; and
(ii) the maximum amount of the consideration received in the transfer that the entity could be required to
repay – i.e. €1 million (the amount guaranteed).
Therefore, the entity will set up an asset that represents its continuing involvement in the transferred asset of
€1 million.
The entity then considers the carrying amount of the liability. This is required to be measured at the guarantee
amount (i.e. €1 million) plus the fair value of the guarantee (i.e. the €50,000 guarantee payment), a total of
€1.05 million. Therefore, the entity’s continuing involvement in the transaction will be reflected as follows:
€m
€m
Cash 10.55
Loan portfolio transferred
10.00
Continuing involvement in the transferred asset
1.00
Liability
1.05
Profit on disposal*
0.50
* Cash received (€10.55m) less guarantee payment (€50,000) = consideration for
portfolio (€10.5m) less carrying amount of portfolio (€10m).
Over the remaining life of the transaction, the €50,000 of the liability that represents
the consideration received for the guarantee is amortised to the income statement on a
time proportion basis. This has the effect that the income earned by the entity for
entering into the guarantee arrangement is reported as revenue on a time proportion
basis. This is exactly the same result as would have been obtained by simply recognising
the €50,000 as a liability and amortising it (as would be required by IFRS 15).
If in a subsequent period credit losses of €0.2 million are suffered, requiring a payment
under the guarantee, IFRS 9 requires the following accounting entries to be made:
[IFRS 9.B3.2.17]
€m
€m
Profit or loss (loss under guarantee)
0.20
Cash (paid to transferee)
0.20
Liability
0.20
Continuing involvement in the transferred asset
0.20
5.4.2
Transfers of assets measured at amortised cost
If a put or call option prevents derecognition (see 3.8.3 and 4 above) of a transferred
asset measured at amortised cost, IFRS 9 requires the associated liability to be measured
at cost (i.e. the consideration received) and subsequently adjusted for the amortisation
of any difference between that cost and the amortised cost
of the transferred asset at
the expiration date of the option, as illustrated by Example 48.11 below. [IFRS 9.B3.2.13(b)].
3936 Chapter 48
Example 48.11: Asset measured at amortised cost
An entity has a financial asset, accounted for at amortised cost, carried at £98. It transfers the asset to a third
party in return for consideration of £95. The asset is subject to a call option whereby the entity can compel
the transferee to sell the asset back to the entity for £102. The amortised cost of the asset on the option exercise
date will be £100. The option is considered to be neither deeply in the money nor deeply out of the money.
IFRS 9 therefore requires the entity to continue to recognise the asset to the extent of its continuing
involvement (Figure 48.1, Box 9 – see also 4.2.3 above).
The initial carrying amount of the associated liability is £95. This is then accreted to £100 (i.e. the amortised
cost of the asset on exercise date – not the £102 exercise price) through profit or loss using the effective
interest method. Because the transferred asset is measured at amortised cost, the associated liability must also
be accounted for at amortised cost, and not at fair value through profit or loss (see 5.3.4 above). This will
give rise to the accounting entries:
£
£
Date of transfer
Cash 95
Liability
95
After date of transfer
Interest on liability
5
Liability (£100 – £95)
5
Asset (£100 – £98)
2
Income on asset 2
If the option is exercised, any difference between the carrying amount of the associated liability and the
exercise price is recognised in profit or loss. This last requirement has the possibly counter-intuitive effect
that the question of whether the entity records a profit or loss on exercise of the option is essentially a function
of the difference between the liability (representing the amortised cost of the transferred asset) and the cash
paid, not of whether it has in fact (i.e. in economic terms) made a gain or loss.
Thus, if the entity were to exercise its option at £102 it would apparently record the accounting entry:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 778