12,250
175
– 61.25
5.0% 35,000 11.5%
4,025
175
– 20.13
100.0%
34,825
(168.88)
168.88
M
L
L
Percentage of variability retained by Entity X
L÷K
(7.75)%
7.75%
To avoid a mechanical determination and to leave room for judgement, IFRS 9 does not establish any bright-
lines on what constitutes ‘substantially all’ risks and rewards of ownership. Therefore, judgement is needed
to assess what is ‘substantially all’ in each particular situation considering, for example, the sensitivity of the
calculation to certain changes in assumptions.
Assuming that Entity X determined that ‘substantially all’ represents 90% of total expected variability in the
amounts and timing of net cash flows, it will conclude that it has transferred substantially all risks and rewards
of ownership.
This conclusion may seem counterintuitive given that Entity X has retained 83.81% of the total expected
losses (M÷I=34,825÷41,550). However, IFRS 9 is clear that the transfer of risks and rewards should be
evaluated by comparing the transferor’s exposure, before and after the transfer, to the variability in the
3912 Chapter 48
amounts and timing of net cash flows of the transferred asset. In practice, even when factoring with limited
recourse, the transferor very often retains exposure to losses in excess of those reasonably expected to arise
such that substantially all the variability is retained by the transferor.
Fact pattern 2: Entity X guarantees first losses on the portfolio up to 4% of the total face value.
Face value = £1,000,000 = A
Before Transfer
Probability
Probability
Probability
Possible
Discounted
weighted
weighted
weighted
credit
expected cash
discounted
negative
positive
loss
flows
Probability
cash flows
Variability
variability
variability
B C= D
E=C×D
F=C–Σ(E)
G= F×D
H=F×D
A – [A×B]
if F<0
if F>0
£
£
£
£
£
3.0% 970,000 3.5%
33,950
11,550
– 404.25
3.5% 965,000 20.0%
193,000
6,550
– 1,310.00
4.0% 960,000 30.0%
288,000
1,550
– 465.00
4.5% 955,000 35.0%
334,250
(3,450)
(1,207.50)
–
5.0% 950,000 11.5%
109,250
(8,450)
(971.75)
–
100.0%
958,450
(2,179.25)
2,179.25
K K
I
£41,550
A – Σ(E)
After Transfer
Probability
Probability
Probability
Possible
Discounted
weighted
weighted
weighted
credit
expected cash
discounted
negative
positive
loss
flows
Probability
cash flows
Variability
variability
variability
B C=[A×(B),
D
E=C×D
F=C–Σ(E)
G=F×D
H=F×D
max 40,000]
if F<0
if F>0
£
£
£
£
£
3.0% 30,000 3.5%
1,050
(8,650)
(302.75) –
3.5% 35,000 20.0%
7,000
(3,650)
(730.00) –
4.0% 40,000 30.0%
12,000
1,350
– 405.00
4.5% 40,000 35.0%
14,000
1,350
– 472.50
5.0% 40,000 11.5%
4,600
1,350
– 155.25
100.0%
38,650
(1,032.75)
1,032.75
M
L
L
Percentage of variability retained by Entity X
L÷K
(47.39)%
47.39%
Now that Entity X stands ready to cover first losses up to 4% which is in the middle of the range of expected
losses (3% to 5%), it is not a surprise that its exposure to variability has increased to 47.39%. This means that
Entity X has neither transferred nor retained substantially all risks and rewards of ownership in this case.
Again, the fact that the seller now covers, after the sale, 93.02% (M÷I=38,650÷41,550) of the total expected
losses is not relevant to the analysis.
In this case, derecognition will depend on whether the transferee (Entity Y) has the practical ability to sell the
trade receivables unilaterally and without imposing additional restrictions on the transfer. The conclusion
needs to take into account many factors. For example: (i) whether the transferee has legal title to the
transferred receivables (ii) whether there is a market for the transferred receivables or not; (iii) whether or not
the seller has a call option or has written a put option over the transferred receivables; (iv) whether or not the
guarantee of Entity X is transferable with the receivables; (v) whether the receivables are ‘ring-fenced’ in a
SPE as a pledge for securities collateralised by the transferred assets, etc. This aspect of the analysis is covered
in 3.9 below.
Financial
instruments:
Derecognition
3913
3.9
Has the entity retained control of the asset?
The discussion in this section relates to Boxes 8 and 9 of the flowchart at 3.2 above.
If the transferring entity has neither transferred nor retained substantially all the risks
and rewards of a transferred financial asset, IFRS 9 requires the entity to determine
whether or not it has retained control of the financial asset. If the entity has not retained
control, it must derecognise the financial asset and recognise separately as assets or
liabilities any rights and obligations created or retained in the transfer. If the entity has
retained control, it must continue to recognise the financial asset to the extent of its
continuing involvement in the financial asset (see 5.3 below). [IFRS 9.3.2.6(c)].
IFRS 9 requires the question of whether the entity has retained control of the
transferred asset to be determined by the transferee’s ability to sell the asset. If
the transferee:
• has the practical ability to sell the asset in its entirety to an unrelated third party;
and
• is able to exercise that ability unilaterally and without needing to impose additional
res
trictions on the transfer,
the entity has not retained control (see below).
In all other cases, the entity has retained control. [IFRS 9.3.2.9].
3.9.1
Transferee’s ‘practical ability’ to sell the asset
IFRS 9 provides further guidance in two scenarios. Firstly, when a transferred asset is
subject to a repurchase option, second, when a transfer imposes additional restrictions
on selling the transferred assets. If a transferred asset is sold subject to an option that
allows the entity to repurchase it, the transferee may (subject to the further
considerations discussed below) have the practical ability to sell the asset if it can readily
obtain the transferred asset in the market if the option is exercised. [IFRS 9.B3.2.7]. For this
purpose there has to be an active market for the asset.
The transferee has the practical ability to sell the transferred asset only if the transferee
can sell the transferred asset in its entirety to an unrelated third party and is able to
exercise that ability unilaterally and without imposing additional restrictions on the
transfer. IFRS 9 requires that practical ability to sell the transferred asset be determined
by considering what the transferee is able to do in practice, rather than solely by
reference to any contractual rights or prohibitions. The standard notes that a contractual
right to dispose of the transferred asset has little practical effect if there is no market for
the transferred asset. [IFRS 9.B3.2.8].
An ability to dispose of the transferred asset also has little practical effect if it cannot be
exercised freely. Accordingly, the transferee’s ability to dispose of the transferred asset
must be a unilateral ability independent of the actions of others. In other words, the
transferee must be able to dispose of the transferred asset without needing to attach
conditions to the transfer (e.g. conditions about how a loan asset is serviced, or an option
giving the transferee the right to repurchase the asset). [IFRS 9.B3.2.8].
For example, the entity might sell a financial asset to a transferee but the transferee has an
option to put the asset back to the entity or has a performance guarantee from the entity.
3914 Chapter 48
IFRS 9 argues that such an option or guarantee might be so valuable to the transferee that
it would not, in practice, sell the transferred asset to a third party without attaching a similar
option or other restrictive conditions. Instead, the transferee would hold the transferred
asset so as to obtain payments under the guarantee or put option. Under these
circumstances IFRS 9 regards the transferor as having retained control of the transferred
asset. [IFRS 9.B3.2.9].
However, the fact that the transferee is simply unlikely to sell the transferred asset does
not, of itself, mean that the transferor has retained control of the transferred asset.
[IFRS 9.B3.2.9].
4
PRACTICAL APPLICATION OF THE DERECOGNITION
CRITERIA
IFRS 9 gives a number of practical examples of the application of the derecognition
criteria, which are discussed below.
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.
4.1
Repurchase agreements (‘repos’) and securities lending
4.1.1
Agreements to return the same asset
If a financial asset is:
• sold under an agreement to repurchase it at a fixed price or at the sale price plus a
lender’s return; or
• loaned under an agreement to return it to the transferor,
the asset is not derecognised, because the transferor retains substantially all the risks
and rewards of ownership, [IFRS 9.B3.2.16(a)], (Figure 48.1, Box 7, Yes). The accounting
treatment of such transactions is discussed at 5.2 below.
4.1.1.A
Transferee’s right to pledge
If the transferee obtains the right to sell or pledge an asset that is the subject of such a
transaction, the transferor reclassifies the asset on its statement of financial position as,
for example, a loaned asset or repurchase receivable. [IFRS 9.B3.2.16(a)].
It appears that this accounting treatment is required merely where the transferee has
the ‘right’ to sell or pledge the asset. This contrasts with the requirements for
determining whether an asset subject to a transaction in which the entity neither
transfers nor retains substantially all the risks and rewards associated with the asset
(Figure 48.1, Box 7, No) nevertheless qualifies for derecognition because the transferee
has control (Figure 48.1, Box 8). In order for the transferee to be regarded as having
Financial
instruments:
Derecognition
3915
control for the purposes of Box 8, any rights of the transferee to sell an asset must have
economic substance – see 3.9 above.
The accounting treatment of such transactions is discussed at 5.2 below.
4.1.2
Agreements with right to return the same or substantially the same
asset
If a financial asset is:
• sold under an agreement to repurchase the same or substantially the same asset at
a fixed price or at the sale price plus a lender’s return; or
• loaned under an agreement to return the same or substantially the same asset to
the transferor,
the asset is not derecognised because the transferor retains substantially all the risks and
rewards of ownership, [IFRS 9.B3.2.16(b)], (Figure 48.1, Box 7, Yes). The accounting
treatment of such transactions is discussed at 5.2 below.
4.1.3
Agreements with right of substitution
If a financial asset is the subject of:
• a repurchase agreement at a fixed repurchase price or a price equal to the sale
price plus a lender’s return; or
• a similar securities lending transaction,
that provides the transferee with a right to substitute assets that are similar and of equal
fair value to the transferred asset at the repurchase date, the asset sold or lent is not
derecognised because the transferor retains substantially all the risks and rewards of
ownership, [IFRS 9.B3.2.16(c)], (Figure 48.1, Box 7, Yes). The accounting treatment of such
transactions is discussed at 5.2 below.
4.1.4
Net cash-settled forward repurchase
IFRS 9 gives some guidance on the treatment of net cash-settled options over
transferred assets (see 4.2.5 below), which in passing refers to net cash-settled forward
contracts. This guidance indicates that the key factor for determining whether
derecognition is appropriate remains whether or not the entity has transferred
substantially all the risks and rewards of the transferred asset. [IFRS 9.B3.2.16(k)]. This
suggests that an asset sold subject to a fixed price net-settled forward contract to
reacquire it should not be derecognised (see 4.1.1 to 4.1.3 above) until the forward
contract is settled (Figure 48.1, Box 7, Yes).
The acc
ounting treatment of such transactions is discussed at 5.2 below.
4.1.5
Agreement to repurchase at fair value
A transfer of a financial asset subject only to a forward repurchase agreement with a
repurchase price equal to the fair value of the financial asset at the time of repurchase
results in derecognition because of the transfer of substantially all the risks and rewards
of ownership, [IFRS 9.B3.2.16(j)], (Figure 48.1, Box 6, Yes). The accounting treatment of
such transactions is discussed at 5.1 below.
3916 Chapter 48
4.1.6
Right of first refusal to repurchase at fair value
If an entity sells a financial asset and retains only a right of first refusal to repurchase the
transferred asset at fair value if the transferee subsequently sells it, the entity
derecognises the asset because it has transferred substantially all the risks and rewards
of ownership, [IFRS 9.B3.2.16(d)], (Figure 48.1, Box 6, Yes).
IFRS 9 does not address the treatment of a financial asset sold with a right of first refusal
to repurchase the transferred asset at a predetermined value that might well be lower
or higher than fair value (e.g. an amount estimated, at the time at which the original
transaction was entered into, as the future market value of the asset). One analysis might
be that, since the transferee is under no obligation to put the asset up for sale,
derecognition is still appropriate. Another analysis might be that, if the asset can
ultimately only be realised by onward sale, the arrangement is nearer in substance to a
transferor’s call option (see 4.2 below).
4.1.7 Wash
sale
A ‘wash sale’ is the repurchase of a financial asset shortly after it has been sold. Such a
repurchase does not preclude derecognition provided that the original transaction met
the derecognition requirements. However, if an agreement to sell a financial asset is
entered into concurrently with an agreement to repurchase the same asset at a fixed
price or the sale price plus a lender’s return, then the asset is not derecognised.
[IFRS 9.B3.2.16(e)]. Such a transaction would be equivalent to those in 4.1.1 to 4.1.4 above.
4.2
Transfers subject to put and call options
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 774
