the asset and the fair value of the put option less the time value of the call option, i.e. (€100+€1) – €5 = €96.
The net of this and the fair value of the asset (€100) is €4 which is the net fair value of the two options (call
€5 less put €1). Assuming that the transaction is undertaken at arm’s length, the transferee would pay €96 for
the asset and the entity would record the accounting entry:
€
€
Cash 96
Liability
96
A
Transferred asset increases in value
Suppose that, at 31 December 2019, the fair value of the asset is €140, and the time value of the put and call
are €0.5 and €2 respectively. The call option is now in the money, so that IFRS 9 requires the entity to
recognise a liability equal to the sum of the call exercise price and fair value of the put option less the time
value of the call option, i.e. (€120 + €0.5) – €2 = €118.5. The net of this and the carrying value of the asset
(€140) is €21.5 which is the net fair value of the two options (call €22 [time value €2 plus intrinsic value €20]
less put €0.5 = €21.5). This gives the accounting entry:
€
€
31 December 2019
Asset (€140 – €100)
40.0
Gain (profit or loss)
17.5
Liability (€118.5 – €96)
22.5
The gain represents the increase in fair value of the call option of €17 (€5 at outset and €22 at 31 December
2019) plus the €0.5 decrease (a gain from the transferor’s perspective) in the fair value of the put option (€1
at outset and €0.5 at 31 December 2019).
3942 Chapter 48
If the entity were able to, and did, exercise its call option, it would record the entry:
€
€
Exercise of call option
Liability
118.5
Loss (profit or loss)
1.5
Cash 120.0
The overall gain of €16 on the transaction (€1.5 loss above and €17.5 profit recorded in 2019) represents the
increase in fair value of the asset of €40 (€100 at outset, €140 at 31 December 2019) less the net €24 paid to
the transferee (€120 paid on exercise of call less €96 received on initial transfer).
B
Transferred asset decreases in value
Suppose instead that, at 31 December 2019, the fair value of the asset is €78, and the time value of the put
and call are €0.5 and €2 respectively. The call option is now out of the money, so that IFRS 9 requires the
entity to recognise a liability equal to the sum of the fair value of the asset and the fair value of the put option
(i.e. €2.5 – time value €0.5 plus intrinsic value €2 [€80 exercise price versus €78 fair value of asset]) less the
time value of the call option, i.e. (€78 + €2.5) – €2 = €78.5.
The net of this and the carrying value of the asset (€78) is €(–0.5) which is the net fair value of the two options
(call €2 less put €2.5 = €(–0.5)). This gives the accounting entry:
€
€
31 December 2019
Liability (€78.5 – €96)
17.5
Loss (profit or loss)
4.5
Asset (€78 – €100)
22.0
The loss represents the decrease in the fair value of the call option of €3 (€5 at outset and €2 at 31 December
2019) plus the €1.5 increase (a decrease from the transferor’s perspective) in the fair value of the put option
(€1 at outset and €2.5 at 31 December 2019).
If the transferee were able to, and did, exercise its put option, the entity would record the entry:
€
€
Exercise of put option
Liability
78.5
Loss (profit or loss)
1.5
Cash 80.0
The overall loss of €6 on the transaction (€1.5 loss above and €4.5 loss recorded in 2019) represents the
decrease in fair value of the asset of €22 (€100 at outset, €78 at 31 December 2019) offset by the net €16
received from the transferee (€96 received on initial transfer less €80 paid on exercise of put).
5.4.4
Continuing involvement in part only of a financial asset
IFRS 9 gives the following example of the application of the continuing involvement
approach to continuing involvement in part only of a financial asset. [IFRS 9.B3.2.17].
Example 48.15: Continuing involvement in part only of a financial asset
An entity has a portfolio of prepayable loans whose coupon and effective interest rate is 10% and whose
principal amount and amortised cost is €10 million. It enters into a transaction in which, in return for a
payment of €9.115 million, the transferee obtains the right to €9 million of any collections of principal plus
9.5% interest.
The entity retains rights to €1 million of any collections of principal plus interest at 10%, plus the remaining
0.5% (‘excess spread’) on the remaining €9 million of principal. Collections from prepayments are allocated
Financial
instruments:
Derecognition
3943
between the entity and the transferee proportionately in the ratio of 1:9, but any defaults are deducted from
the entity’s interest of €1 million until that interest is exhausted.
The fair value of the loans at the date of the transaction is €10.1 million and the estimated fair value of the
excess spread of 0.5 per cent is €40,000.
The entity determines that it has transferred some significant risks and rewards of ownership (for example,
significant prepayment risk) but has also retained some significant risks and rewards of ownership because
of its subordinated retained interest (Figure 48.1, Box 7, No) and has retained control (Figure 48.1, Box 8,
Yes). It therefore applies the continuing involvement approach (Figure 48.1, Box 9).
The entity analyses the transaction as:
• a retention of a fully proportionate retained interest of €1 million, plus
• the subordination of that retained interest to provide credit enhancement to the transferee for credit losses.
The entity calculates that €9.09 million (90% of €10.1 million) of the consideration received of €9.115 million
represents the consideration for a fully proportionate 90% share. The remainder of the consideration (€25,000)
received represents consideration received by the entity for subordinating its retained interest to provide credit
enhancement to the transferee for credit losses. In addition, the excess spread of 0.5% represents consideration
received for the credit enhancement. Accordingly, the total consideration received for the credit enhancement is
€65,000 (€25,000 received from transferee plus €40,000 fair value of excess spread).
The entity first calculates the gain or loss on the sale of the 90% share of cash flows. Assuming that separate fair
values of the 10% part transferred and the 90% part retained are not available at the date of the transfer, the entity
allocates the carrying amount of the asset pro-rata to the fair values of those parts (see 5.1.1, 5.1.2 and 5.3.5
above). The total fair value of the portfolio is considered to be €10.1 million (see above), and the fair value of
the consideration for the part disposed of €9.09 million. The carrying amount of the whole portfolio
is
€10 million. This implies a carrying amount for the part disposed of €10m × 9.09/10.1 = €9 million, and for the
part retained €1 million. The gain on the sale of the 90% is therefore €90,000 (€9.09 million – €9 million).
In addition, IFRS 9 requires the entity to recognise the continuing involvement that results from the
subordination of its retained interest for credit losses. Accordingly, it recognises an asset of €1 million (the
maximum amount of the cash flows it would forfeit under the subordination), and an associated liability of
€1.065 million (the maximum amount of the cash flows it would forfeit under the subordination, i.e.
€1 million, plus the consideration for the subordination of €65,000). It also recognises an asset for the fair
value of the excess spread which forms part of the consideration for the subordination.
This gives rise to the accounting entry:
€000
€000
Cash 9,115
Asset for the subordination of the residual interest
1,000
Excess spread received for subordination
40
Loan portfolio
9,000
Liability for subordination
1,065
Gain on disposal
90
It is crucial to an understanding of this example that, as a result of the transaction, the
original asset (the portfolio of prepayable loans) is being accounted for as two separate
assets. Because the cash flows from the portfolio are split in fully proportionate (pro-
rata) shares (see 3.3 above), each of these assets must be considered separately.
The first of these assets, the right to cash flows of €9 million, continues to be recognised
only to the extent of the entity’s continuing involvement, which in this case is via the
credit enhancement. The approach is very similar to continuing involvement through
guarantee (see Example 48.10 at 5.4.1 above), except that the liability for subordination
includes the maximum cash flow that the entity might not receive from its retained share
(i.e. €1 million) rather than, as in Example 48.10, a potential cash outflow (the guarantee
3944 Chapter 48
amount, which is the maximum amount that the entity could be required to repay). This
is aggregated with the fair value of the amount received in respect of the credit
enhancement, in order to calculate the full liability for subordination. This is similar to
the way in which the fair value of the guarantee is added to the guarantee amount in
order to calculate the associated liability. [IFRS 9.B3.2.13(a)].
The second asset is the entity’s proportionate retained share of €1 million. It is,
seemingly, irrelevant to the accounting analysis in IFRS 9 that this has already been
taken into account in calculating the entity’s continuing involvement in the remaining
€9 million of the portfolio.
The effect is to gross up the statement of financial position with a subordination asset
and liability. As IFRS 9 notes, immediately following the transaction, the carrying
amount of the asset is €2.04 million (i.e. €1 million part retained plus €1 million
subordination asset plus €40,000 excess spread) – in respect of an asset whose fair value
is only €1.01 million!
We have some reservations concerning the example above. First, we challenge whether,
as a point of principle, it is appropriate to apply the derecognition criteria to part of an
asset where the part that is retained provides credit enhancement for the transferee. As
discussed more fully at 3.3.1 above, it is possible that IFRS 9 is implicitly drawing a
distinction between:
• a guarantee that could result in an outflow of the total resources of the transferor,
or a return of consideration for the transfer already received (which would not
allow partial derecognition); and
• a guarantee that could result in the transferor losing the right to receive a specific
future cash inflow, but not being obliged to make any other payment should that
specific future cash inflow not materialise.
Moreover, even in the context of the analysis presented by IFRS 9, we do not
understand the basis of the treatment of the excess spread. The example simply asserts
that this forms part of the consideration for providing the subordination, although it is
not clear that it forms any more or any less of the consideration for the subordination
than the interest and principal on the 10% of the portfolio retained.
In our view, a more logical analysis would have been that:
• the entity has disposed of not 90% of the whole portfolio, but 90% of the principal
balances and 9.5% interest on that 90%; and
• the consideration for the subordination is still €65,000, on the basis that if:
• the fair value of the consideration for a fully proportionate share of 90% (i.e.
including 10% interest) is €9,090,000; and
• the fair value of the excess spread of 0.5% interest is €40,000, then
the fair value of consideration for a fully proportionate share less the excess spread
is €9,050,000 (i.e. €9,090,000 less €40,000). This in turn means that the balance
of the total consideration of €9,115,000 (i.e. €65,000) relates to the subordination.
In addition, of course, Example 48.15 ignores the possibility that the excess spread is
retained by the transferor because it continues to service the portfolio, although this
may be an attempt to avoid overcomplicating matters even further.
Financial
instruments:
Derecognition
3945
A further issue is that, if the excess spread is regarded as part of the asset retained, rather
than the consideration received, it would seem more appropriate to recognise it on a
basis consistent with the accounting treatment of the original transferred asset (typically,
amortised cost) rather than at fair value.
5.5 Miscellaneous
provisions
IFRS 9 contains a number of accounting provisions generally applicable to transfers of
assets, as discussed below.
5.5.1 Offset
IFRS 9 provides that, if a transferred asset continues to be recognised, the entity must
not offset:
• the asset with the associated liability; or
• any income arising from the transferred asset with any expense incurred on the
associated liability. [IFRS 9.3.2.22].
Whilst IFRS 9 does not say so specifically, this is clearly intended to apply both to assets
that continue to be recognised in full and to those that continue to be recognised to the
extent of their continuing involvement.
This requirement apparently overrides the offset criteria in IAS 32, [IAS 32.42], as
illustrated, for example, by the various situations highlighted in the discussion at 4 and
5.1 to 5.4 above where a transaction required to be net-settled (which would normally
be required to be accounted for as such under IAS 32) is accounted for as if it were to
be gross-settled.
5.5.2 Collateral
If a transferor provides non-cash collateral (such as debt or equity instruments) to the
transferee, the accounting treatment for the collateral by both the transferor and the
transferee depends on:
• whether the transferee has the right to sell or repledge t
he collateral; and
• whether the transferor has defaulted.
If the transferee has the right by contract or custom to sell or repledge a collateral asset,
the transferor should reclassify that asset in its statement of financial position (e.g. as a
loaned asset, pledged equity instruments or repurchase receivable) separately from
other assets.
If the transferee sells collateral pledged to it, it recognises the proceeds from the sale
and a liability measured at fair value for its obligation to return the collateral.
If the transferor defaults under the terms of the contract and is no longer entitled to
redeem the collateral, it derecognises the collateral, and the transferee either:
• recognises the collateral as its asset initially measured at fair value; or
• if it has already sold the collateral, derecognises its obligation to return
the collateral.
In no other circumstances should the transferor derecognise, or the transferee
recognise, the collateral as an asset. [IFRS 9.3.2.23].
3946 Chapter 48
5.5.3
Rights or obligations over transferred assets that continue to be
recognised
Where a transfer of a financial asset does not qualify for derecognition, the transferor
may well have contractual rights or obligations related to the transfer, such as options
or forward repurchase contracts that are derivatives of a type that would normally be
required to be recognised under IFRS 9.
IFRS 9 prohibits separate recognition of such derivatives, if recognition of the derivative
together with either the transferred asset or the liability arising from the transfer would
result in recognising the same rights or obligations twice.
For example, IFRS 9 notes that a call option retained by the transferor may prevent a
transfer of financial assets from being accounted for as a sale (see 4 above). In that case,
the call option must not be separately recognised as a derivative asset. [IFRS 9.B3.2.14].
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 780