International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 767
expected credit losses, paras. A45-A55,
Measurement of the loss allowance for credit-
December 2015.
impaired financial assets, 11 December 2015.
34 Transition Resource Group for Impairment of
Financial Instruments, Agenda ref 8,
Measurement of expected credit losses in
respect of a modified financial asset,
22 April 2015.
3874 Chapter 47
3875
Chapter 48
Financial instruments:
Derecognition
1 INTRODUCTION .......................................................................................... 3881
1.1
Off-balance sheet finance ................................................................................. 3881
2 DEVELOPMENT OF IFRS ........................................................................... 3882
2.1
Definitions ........................................................................................................... 3883
3 DERECOGNITION – FINANCIAL ASSETS ................................................... 3885
3.1
Background ......................................................................................................... 3885
3.2 Decision
tree ....................................................................................................... 3886
3.2.1
Importance of applying tests in sequence .................................... 3888
3.3
Derecognition principles, parts of assets and groups of assets ................. 3888
3.3.1
Credit enhancement through transferor’s waiver of right
to future cash flows ........................................................................... 3890
3.3.2
Derecognition of groups of financial assets ................................. 3890
3.3.2.A
The IASB’s view and the Interpretations
Committee’s tentative conclusions ........................... 3892
3.3.2.B
What are ‘similar assets’? ............................................. 3893
3.3.3
Transfer of asset (or part of asset) for only part of its life ......... 3894
3.3.4
‘Financial asset’ includes whole or part of a financial asset ...... 3894
3.4
Have the contractual rights to cash flows from the asset expired? ......... 3894
3.4.1
Renegotiation of the terms of an asset .......................................... 3895
3.4.2 Interpretations
Committee discussions on asset
restructuring in the context of Greek government debt ........... 3896
3.4.3
Novation of contracts to intermediary counterparties .............. 3897
3.4.4 Write-offs
............................................................................................
3897
3.5
Has the entity ‘transferred’ the asset? ............................................................ 3898
3.5.1
Transfers of contractual rights to receive cash flows ................ 3898
3876 Chapter 48
3.5.1.A
Meaning of ‘transfers the contractual rights to
receive the cash flows’ ................................................. 3899
3.5.1.B Transfers
subject
to conditions .................................. 3900
3.5.2
Retention of rights to receive cash flows subject to
obligation to pay over to others (pass-through
arrangement) ....................................................................................... 3902
3.6
Securitisations .................................................................................................... 3903
3.6.1
Recourse to originator ...................................................................... 3904
3.6.2 Short-term
loan facilities ................................................................. 3904
3.6.3 Insurance
protection
.........................................................................
3904
3.6.4
Treatment of collection proceeds .................................................. 3905
3.6.5 Transfers
of
non-optional derivatives along with a group
of financial assets ............................................................................... 3906
3.6.6 ‘Empty’
subsidiaries or SPEs ........................................................... 3906
3.7
Client money ...................................................................................................... 3907
3.8
Has the entity transferred or retained substantially all the risks and
rewards of ownership? ...................................................................................... 3908
3.8.1
Transfers resulting in transfer of substantially all risks and
rewards ................................................................................................ 3908
3.8.2
Transfers resulting in retention of substantially all risks
and rewards ........................................................................................ 3909
3.8.3
Transfers resulting in neither transfer nor retention of
substantially all risks and rewards ................................................... 3910
3.8.4
Evaluating the extent to which risks and rewards are
transferred – practical example ...................................................... 3910
3.9
Has the entity retained control of the asset? ................................................. 3913
3.9.1
Transferee’s ‘practical ability’ to sell the asset ............................. 3913
4 PRACTICAL APPLICATION OF THE DERECOGNITION CRITERIA ............. 3914
4.1
Repurchase agreements (‘repos’) and securities lending ............................ 3914
4.1.1
Agreements to return the same asset .............................................. 3914
4.1.1.A
Transferee’s right to pledge ......................................... 3914
4.1.2
Agreements with right to return the same or substantially
the same asset ...................................................................................... 3915
4.1.3 Agreements
with
right of substitution ............................................ 3915
4.1.4
Net cash-settled forward repurchase ............................................. 3915
4.1.5
Agreement to repurchase at fair value ........................................... 3915
4.1.6
Right of first refusal to repurchase at fair value ........................... 3916
4.1.7 Wash
sale .............................................................................................. 3916
4.2
Transfers subject to put and call options ....................................................... 3916
4.2.1
Deeply in the money put and call options ..................................... 3917
4.2.2
Deeply out of the money put and call options ........................
..... 3917
Financial
instruments:
Derecognition
3877
4.2.3
Options that are neither deeply out of the money nor
deeply in the money .......................................................................... 3917
4.2.3.A
Assets readily obtainable in the market .................... 3917
4.2.3.B
Assets not readily obtainable in the market ............. 3918
4.2.4
Option to put or call at fair value .................................................... 3918
4.2.5 Net
cash-settled options ................................................................... 3918
4.2.6
Removal of accounts provision ....................................................... 3919
4.2.7 Clean-up
call options ......................................................................... 3919
4.2.8
Same (or nearly the same) price put and call options ................. 3919
4.2.9
Changes in probability of exercise of options after initial
transfer of asset ..................................................................................... 3919
4.3
Subordinated retained interests and credit guarantees .............................. 3921
4.4 Transfers
by
way of swaps ................................................................................ 3921
4.4.1
Total return swaps .............................................................................. 3921
4.4.2 Interest
rate
swaps
............................................................................. 3922
4.5
Factoring of trade receivables ......................................................................... 3922
5 ACCOUNTING TREATMENT ....................................................................... 3923
5.1
Transfers that qualify for derecognition ....................................................... 3923
5.1.1
Transferred asset part of larger asset............................................. 3924
5.1.2 Servicing
assets
and liabilities ......................................................... 3926
5.2
Transfers that do not qualify for derecognition through retention
of risks and rewards .......................................................................................... 3928
5.3
Transfers with continuing involvement – summary ................................... 3931
5.3.1
Guarantees .......................................................................................... 3932
5.3.2 Options
................................................................................................
3932
5.3.3 Associated
liability
............................................................................. 3933
5.3.4 Subsequent
measurement
of assets and liabilities ...................... 3933
5.3.5
Continuing involvement in part only of a larger asset ............... 3933
5.4
Transfers with continuing involvement – accounting examples ............. 3934
5.4.1
Transfers with guarantees ................................................................ 3934
5.4.2
Transfers of assets measured at amortised cost .......................... 3935
5.4.3
Transfers of assets measured at fair value ..................................... 3937
5.4.3.A
Transferor’s call option................................................. 3937
5.4.3.B Transferee’s
put
option
...............................................
3939
5.4.3.C
‘Collar’ put and call options ........................................ 3940
5.4.4
Continuing involvement in part only of a financial asset .......... 3942
5.5
Miscellaneous provisions ................................................................................. 3945
5.5.1
Offset .................................................................................................... 3945
5.5.2 Collateral ............................................................................................. 3945
3878 Chapter 48
5.5.3
Rights or obligations over transferred assets that continue
to be recognised ................................................................................. 3946
5.6
Reassessing derecognition ............................................................................... 3946
5.6.1
Reassessment of consolidation of subsidiaries and SPEs .......... 3946
6 DERECOGNITION – FINANCIAL LIABILITIES ............................................ 3947
6.1
Extinguishment of debt .....................................................................................3947
6.1.1
What constitutes ‘part’ of a liability? ...............................................3947
6.1.2 Legal
release
by creditor .................................................................. 3948
6.1.3 ‘In-substance
defeasance’ arrangements ...................................... 3949
6.1.4
Extinguishment in exchange for transfer of assets not
meeting the derecognition criteria ................................................. 3949
6.2
Exchange or modification of debt by original lender ................................. 3950
6.2.1
Costs and fees ...................................................................................... 3951
6.2.2 Modification
gains and losses.......................................................... 3952
6.2.3 Illustrative examples ......................................................................... 3954
6.2.4
Settlement of financial liability with issue of new equity
instrument ........................................................................................... 3956
6.3
Gains and losses on extinguishment of debt ................................................ 3956
6.4
Derivatives that can be financial assets or financial liabilities ................... 3957
6.5 Supply-chain
finance
.........................................................................................
3957
7 FUTURE DEVELOPMENTS .......................................................................... 3960
List of examples
Example 48.1:
Risks and rewards analysis – variability in the amounts
and timing of net cash flows ............................................................. 3910
Example 48.2:
Financial asset transferred subject only to deeply out of
the money call option ........................................................................ 3919
Example 48.3:
Financial asset transferred subject only to deeply in the
money call option .............................................................................. 3920
&nb
sp; Example 48.4:
Financial asset transferred subject to call option neither
deeply in the money nor deeply out of the money .................... 3920
Example 48.5:
Derecognition of whole of financial asset in its entirety ........... 3923
Example 48.6:
Derecognition of part of financial asset in its entirety ............... 3925
Example 48.7:
Servicing assets and liabilities ......................................................... 3926
Example 48.8:
Asset not qualifying for derecognition (risks and rewards
retained) ............................................................................................... 3928
Example 48.9:
Asset not qualifying for derecognition (‘repo’ transaction) ....... 3929
Example 48.10:
Continuing involvement through guarantee ................................ 3934
Example 48.11:
Asset measured at amortised cost .................................................. 3936
Financial
instruments:
Derecognition
3879
Example 48.12:
Asset measured at fair value subject to transferor’s call
option .................................................................................................... 3937
Example 48.13:
Asset measured at fair value subject to transferee’s put
option ................................................................................................... 3939
Example 48.14:
Asset measured at fair value subject to collar put and call
options .................................................................................................. 3941
Example 48.15:
Continuing involvement in part only of a financial asset .......... 3942
Example 48.16:
Transfer of debt obligations with and without legal release ..... 3948
Example 48.17:
Extinguishment of debt in exchange for transfer of assets
not meeting derecognition criteria ................................................ 3949
Example 48.18:
Fees and costs incurred on modification of debt not
treated as extinguishment ................................................................. 3951
Example 48.19:
Modification of debt not treated as extinguishment .................. 3954
Example 48.20:
Modification of debt treated as extinguishment ......................... 3955
Example 48.21:
Partial derecognition of debt ............................................................ 3957