to be recognised. If there is no servicing fee specified, or the fee to be received is not
expected to compensate the entity adequately for performing the servicing, a liability for
the servicing obligation is recognised at fair value. [IFRS 9.B3.2.10].
Unfortunately, IFRS 9 does not provide examples of what exactly is meant here, but we
believe that something along the lines of Example 48.7 below was intended.
Example 48.7: Servicing assets and liabilities
An entity has a portfolio of originated domestic mortgages which are accounted for at amortised cost and have a
carrying amount of £10 million. The mortgages bear interest at a fixed rate of 7.5%. The average life of the mortgages
in the portfolio (taking account of prepayment risk) is 12 years and the fair value of the portfolio is £11 million,
representing £4.5 million in respect of future interest payments and £6.5 million in respect of the principal amounts.
The entity assesses the amount that would compensate it for servicing the assets to be £0.5 million.
The entity sells the entire portfolio to a bank (on terms such that it qualifies for derecognition under IFRS 9)
but continues to service the portfolio. If the entity does not retain any part of the interest payments, the selling
price would be the fair value of the assets of £11 million (or very close to it). It would then assume a servicing
liability of £0.5 million, giving rise to the accounting entry:
Financial
instruments:
Derecognition
3927
£m
£m
Cash 11.0
Mortgage portfolio
10.0
Servicing liability
0.5
Profit on disposal
0.5
Alternatively, it retains interest payments of 1% and the right to service the portfolio. The entity estimates
that the fair value of the right to receive interest payments of 1% is £0.6 million. In this case, the bank would
be expected to pay fair value of £10.4 million (or very close to it).
The standard states – see above – that, if (as is the case here) the entity would not give up any interest on
termination or transfer of the contract, then the whole of the interest spread is an interest-only strip receivable.
In order to calculate the amount of the portfolio to be derecognised, the carrying value of £10 million is pro-
rated (as in Example 48.6 above) as to £9.45 million disposed of (£10m × 10.4/11) and the part retained of
£0.55 million (£10m × 0.6/11). However, as it has allocated the full amount of the interest spread to an
interest-only strip receivable, it would need to recognise a servicing liability of £0.5 million in respect of its
obligations under the contract. This gives rise to the following accounting entry:
£m
£m
Cash 10.40
Interest-only strip receivable
0.55
Mortgage portfolio (£9.45m disposed of plus £0.55m
reclassified as interest-only strip receivable)
10.00
Servicing liability
0.50
Profit on disposal
0.45
If the entity were to retain only £0.1 million of the interest spread on termination or transfer of the servicing
contract, then IFRS 9 requires – see above:
• the part of the interest payments that the entity would not give up, i.e. the part which is not contingent on
fulfilment of the servicing obligation (£0.1 million) to be treated as an interest-only strip receivable; and
• the part of the interest payments that the entity would give up (i.e. £0.45 million – £0.55 million as above
less £0.1 million in previous bullet) upon termination or transfer of the servicing contract to be allocated
to the servicing asset or servicing liability.
This suggests that the following accounting entry would be made:
£m
£m
Cash 10.40
Interest-only strip receivable
0.10
Mortgage portfolio (£9.45m disposed of plus £0.1m
reclassified as interest-only strip receivable and
£0.45m allocated to servicing liability)
10.00
Servicing liability (£0.5m gross cost less interest payments
that would be lost on termination or transfer – £0.45m)
0.05
Profit on disposal
0.45
A servicing asset is a non-financial asset representing a right to receive a higher than
normal amount for performing future services. Accordingly it would normally be
accounted for in accordance with IAS 38 – Intangible Assets. Similarly, a servicing
liability represents consideration received in advance for services to be performed in
the future and would normally be accounted for as deferred revenue in accordance with
IFRS 15 – Revenue from Contracts with Customers.
3928 Chapter 48
5.2
Transfers that do not qualify for derecognition through
retention of risks and rewards
If a transfer does not result in derecognition because the entity has retained substantially all
the risks and rewards of ownership of the transferred asset (see 3.8 above), IFRS 9 requires
the entity to continue to recognise the transferred asset in its entirety and recognise a
financial liability for any consideration received. In subsequent periods, the entity
recognises any income on the transferred asset and any expense incurred on the financial
liability. [IFRS 9.3.2.15]. This treatment is illustrated by Examples 48.8 and 48.9 below.
It should be noted that these provisions apply only where derecognition does not occur as a
result of retention by the transferor of substantially all the risks and rewards of ownership of
the transferred asset (Figure 48.1, Box 7, Yes). They do not apply where derecognition does
not occur as a result of continuing involvement in an asset of which substantially all the risks
and rewards of ownership are neither retained nor transferred (Figure 48.1, Box 8, Yes). Such
transactions are dealt with by the separate provisions discussed in 5.3 and 5.4 below.
Example 48.8: Asset not qualifying for derecognition (risks and rewards retained)
An entity holds a loan of £1,000 made on 1 January 2015, paying interest of £65 annually in arrears and
redeemable at par on 31 December 2019, which it accounts for at amortised cost (see Chapter 46 at 3).
On 1 January 2019 it enters into a transaction whereby the loan is sold to a bank for its then fair value of
€985, but with full recourse to the entity for any default on the loan. The guarantee provided by the entity has
the effect that it retains substantially all the risks and rewards of the loan, which is therefore not derecognised
(Figure 48.1, Box 7, Yes – see 3.8.2 above). [IFRS 9.B3.2.12].
The entity therefore continues to recognise the loan, and interest on it, as if it still held the loan. It accounts
for the £985 proceeds as a liability which must be accreted up using the effective interest method (see
Chapter 46 at 3) so that it will be equal to the carrying amount of the asset on the date on which it is expected
that the asset will be derecognised.
In this case, the asset will be derecognised at maturity on 31 December 2019 when a payment of £1,065 (the
final instalment of interest of £65 and return of principal of £1,000) is due. Accordingly, the liability must be
accreted from £985 to £1,065 during t
he year ended 31 December 2019. The following accounting entries are
made by the entity:
£
£
1 January 2019
Cash 985
Liability
985
Consideration received from bank
1 January-31 December 2019
Loan (£1,065 at 31.12.18 – £1,000 at 1.1.19)
65
Interest on loan (income statement)
65
Interest on liability (income statement)
80
Liability (£1,065 at 31.12.19 – £985 at 1.1.19)
80
Accretion of interest income loan and liability
31 December 2019
Liability
1,065
Loan receivable
1,065
‘Redemption’ of loan and ‘discharge’ of liability
This accounting treatment recognises an overall loss of £15 in 2019, which would be expected, as representing
the difference between the carrying value of the asset at the date of transfer (£1,000) and the consideration
Financial
instruments:
Derecognition
3929
received (£985). However, IFRS 9 requires the various elements of the transaction to be shown separately –
it would not have been acceptable for the income statement simply to show a net loss of £15.
If the transferred asset had been accounted for at fair value through profit or loss, it would already have been
carried at £985 at the date of transfer – i.e. the loss of £15 would already have been reflected in the financial
statements. The accounting entries at 1 January and 31 December 2019 would be the same as above.
However, the following accounting entries would then have been made during the year ended 31 December:
£
£
1 January-31 December 2019
Interest on liability (income statement)
80
Liability (£1,065 at 31.12.19 – £985 at 1.1.19)
80
Loan (£1,065 at 31.12.19 – £985 at 1.1.19)
80
Interest on loan (income statement)
65
Change in fair value of loan (income statement)
15
Recognition of interest on, and change in fair value of, loan
and accretion of interest on liability
Whilst the total amounts recorded in the income statement net to nil, they are arrived at by different
methodologies – the £80 increase in the carrying value of the loan receivable is recognised as it occurs
whereas the £80 interest on the liability is accrued at a constant effective rate. This means that, if the entity
were to prepare financial statements at an interim date, it might well show a net gain or loss on the transaction
at that date, notwithstanding that ultimately no gain or loss will be reflected.
It would presumably be possible for the entity to avoid this result by designating the liability as at fair value
through profit or loss (see Chapter 44 at 7), such that changes in the fair value of the liability would be
matched in line with those in the fair value of the asset.
Example 48.9: Asset not qualifying for derecognition (‘repo’ transaction)
An entity holds a government bond of £2,000 issued on 1 January 2015, paying interest of £50 semi-annually
in arrears and redeemable at par on 31 December 2020, which it accounts for as a financial asset subsequently
measured at amortised cost (see Chapter 46 at 3).
A Gross-settled
transaction
On 1 January 2019 the entity enters into a transaction whereby the bond is sold to a bank for its then fair value
of £1,800, and the entity agrees to repurchase it on 1 January 2020 for £1,844. As the legal owner of the loan
at 30 June 2019 and 31 December 2019, the bank will receive the £100 interest payable on the bond for the
calendar year 2019. This £100, together with the £44 difference between the sale and repurchase price gives
the bank £144, representing a lender’s return of 8% on the £1,800 sale proceeds. Accordingly, the effect of
the transaction is that the entity has retained substantially all the risks and rewards of ownership of the bond
(Figure 48.1, Box 7, Yes – see 4.1 above).
The entity therefore continues to recognise the bond, and interest on it, as if it still held the bond. It accounts
for the £1,800 proceeds as a liability which must be accreted up to £1,844 (the repurchase price due on
31 December 2019) over the period to 31 December 2019 using the effective interest method (see Chapter 46
at 3). The following accounting entries are made by the entity:
£
£
1 January 2019
Cash 1,800
Liability
1,800
Consideration received from bank
3930 Chapter 48
£
£
1 January-31 December 2019
Interest on liability (income statement)
144
Liability (£1,944 at 31.12.19 – £1,800 at 1.1.19)
144
Bond (£2,100 at 31.12.19 – £2,000 at 1.1.19)
100
Interest on bond (income statement)
100
Accretion of income on bond and finance cost of liability
1 January-31 December 2019
Liability
100
Bond 100
Notional receipt of interest on bond at 30 June and 31 December and notional
transfer thereof to bank
1 January 2020
Liability
1,844
Cash 1,844
Execution of repurchase contract
The above is arguably the strict translation into accounting entries of the accounting analysis under IFRS 9
for a situation where the entity still retains ownership of the bond throughout 2019. As a matter of practicality,
however, the same overall result could have been obtained by the following ‘short-cut’ approach, which
avoids recording the notional receipt and transfer to the bank of bond interest received on 30 June and
31 December:
£
£
1 January 2019
Cash 1,800
Liability
1,800
Consideration received from bank
1 January-31 December 2019
Interest on liability (income statement)
144
Interest on bond (income statement)
100
Liability (statement of financial position)
44
Accretion of income on bond and finance cost of liability
1 January 2020
Liability
1,844
Cash 1,844
Execution of repurchase contract
If (as would be likely, given the nature of the transferred asset) the bank has the right to sell or pledge the
bond during the period of its legal ownership, it would be necessary to reclassify the bond as a repurchase
receivable during the period of the bank’s ownership (see 4.1.1.A above). In other words, the following
additional accounting entries would be required.
£
£
1 January 2019
Repurchase receivable
2,000
Bond 2,000
1 January 2020
Bond 2,000
Repurchase receivable
2,000
Financial
instruments:
Derecognition
3931
B Net-settled
transaction
The e
ntity might enter into the transaction above, but on terms that the repurchase contract was to be net-
settled. In other words, on 1 January 2020, a payment would be made to or by the bank for the difference
between £1,844 (the notional repurchase price) and the fair value of the bond at that date. Assuming that
the fair value of the bond at 1 January 2020 is £1,860, the bank would be required to pay the entity £16
(£1,860 – £1,844).
In this case, matters are further complicated by the fact that the economic effect of the net-settled forward is
the same as if the entity sold the bond on 1 January 2020. The following accounting entries would be made:
£
£
1 January 2019
Cash 1,800
Liability
1,800
Consideration received from bank
1 January-31 December 2019
Interest on liability (income statement)
144
Interest on bond (income statement)
100
Liability (statement of financial position)
44
Accretion of income on bond and finance cost of liability
1 January 2020
Cash 16
Liability
1,844
Loss on derecognition of bond
140
Bond
2,000
Net settlement of repurchase contract and recognition of loss on derecognition of
the bond
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 777
