• Discussed with SAC: July 2001
• Discussed at December 2007 IASB Meeting
• Discussed at July 2008 IASB Meeting – added to active agenda
• Discussed at October 2008 IASB Meeting
• Discussed at November 2008 IASB Meeting

Timetable

• Click for IASB Project Timetable

Background

Derecognition refers to the removal of an asset or liability (or a portion thereof) from an entity's balance sheet. Derecognition questions can arise with respect to all types of assets and liabilities. This project focuses on financial instruments. Questions regarding derecognition of assets and liabilities often arise in the context of certain special purpose entities and whether those entities should be included in a set of consolidated financial statements.

IASB is considering both a comprehensive project on derecognition or all types of assets and liabilities and also a separate, narrower scope project that would explore the need to revise guidance in IAS 39 in the area of derecognition of financial instruments. This limited scope project would address questions that have arisen with regard to the application of conflicting aspects of IAS 39's guidance on derecognition. The project would result in an amendment to IAS 39 possibly through issuance of a separate standard on derecognition that supersedes that section of IAS 39.

Discussion at the December 2007 IASB Meeting

The objective of this session was to obtain the views of the Board as to when financial assets and financial liabilities should be presented linked in the financial statements (referred to as 'linked presentation'). Any views of the Boards will be included in the staff report on derecognition, which is the next milestone in the research project on derecognition. This is an outcome of the papers presented at the Joint IASB-FASB Board Meeting in October 2007.

Staff presented two possible views on linked presentation – the joint presentation of financial assets and financial liabilities in primary financial statements (but still presenting them separately, that is, no netting).

The Board was presented a paper on two possible views when linked presentation is triggered:

View 1 - an entity shall apply linked presentation in the financial statements when either:

(a) An entity's obligation to a financial liability is satisfied solely by economic benefits generated by a financial asset. In this case the total liability is linked to the asset.

(b) An entity is obliged to pay a financial liability all economic benefits generated by a financial asset. In this case the total asset is linked to the liability.

(c) If a financial liability is satisfied solely by economic benefits generated by a financial asset (thus satisfying condition a.), and the entity is also obliged to pay all economic benefits on a financial asset to settle a financial liability (and also satisfies condition b.), then the financial liability is linked to the financial asset in accordance with condition a.

View 2 - an entity shall apply linked presentation in the financial statements when either:

(a) An entity is obliged at the reporting date to settle a financial liability using economic benefits generated by a financial asset. In this case it is the specific obligation to settle the liability using economic benefits generated by the financial asset that is linked to the financial asset, and other obligations of the entity to the debt holder will not qualify for linked presentation.

(b) An entity has a right at the reporting date to receive economic benefits on a financial asset equal to some or all of the economic resources to be sacrificed if a financial liability is settled. In this case it is the specific right to receive economic benefits equal to some or all of the economic resources to be sacrificed if the financial liability is settled that is linked to the financial liability, and other rights of the entity to receive economic benefits will not qualify for linked presentation.

These views do not only define when linked presentation is required but also if the liability is linked to the asset or vice versa.

The staff presented to the Board a set of scenarios to explain the similarities and especially the differences between both approaches, which can be summarized as follow (the complete case study can be downloaded as Agenda Paper 9B from the IASB's website):

Only the first three scenarios were discussed. The Board had a lengthy discussion on the views and their application to the scenarios.

Some Board members expressed concerns that these scenarios might not be realistic. One Board member questioned whether this issue could better be dealt with in the project on financial statement presentation to avoid proposing principles that are not in line with what has already been agreed on. The staff noted that all discussions are currently at staff paper level.

As the staff talked the Board through the scenarios, some Board members had problems in arriving at the solutions the staff presented when applying the principles set out in views 1 and 2. Those Board members also could not extract the rationale behind the principles. They suggested that if some Board members cannot understand the principle then it is not a good idea to further elaborate on linkage.

On inquiry, the staff stated that the paper is based on the assumption that all financial items concerned are measured at fair value and that even if the cash flows of the linked items are identical in amount and timing there might be a gap due to the different risk premiums.

Also Board members could not see the rationale behind the analysis in scenario 3 that in view 1 the asset is linked to the liability while according to view 2 the liability is linked to the asset.

At one point in the discussion, one Board member raised the question if the staff could come back and make clearer how linked presentation enhances financial reporting, that would be an improvement in the staff paper. Others doubted that it would be desirable to add linkage in any outcome of the research project on derecognition. Another Board member suggested while linked presentation might not be desirable in the primary financial statements, users may find such information useful if it is disclosed in the notes. Board members also noted that linked presentation might mitigate some of the burden resulting from setting a high hurdle for derecognition.

No decisions were made.

Discussion at the July 2008 IASB Meeting

The Board voted to add the project to its active agenda.

Discussion at the October 2008 IASB Meeting

(FASB staff and one Board member joined via video link)

The staff presented the Board with two possible derecognition models and asked the Board for possible improvements to the model and approaches presented to them and an indication on the way forward.

The staff briefly revisited the reasons for adding the project to the IASB's agenda, highlighting the complexity in this area under IAS 39 and the opportunity to converge IFRS and US GAAP. Staff also noted the diversity of views amongst Board members, particularly where an entity has continuing involvement. It was noted that analysts would prefer to keep assets on the books where an entity initially had them and retained a continuing involvement.

The core principle of the staff was that an asset is to be derecognised only when an entity no longer controls the economic benefits (cash flows) of a financial asset or component thereof. This would be consistent with the definition of an asset. Control would cease when the entity had no longer the ability to obtain the underlying economic benefits for its own benefit. In case of no continuing involvement the core principle would be easily applicable, the staff acknowledged, but it would be more challenging once the entity stays involved in some way.

The staff noted that there should be symmetry in accounting. If a transferor derecognised an asset it should be recognised by the transferee - and vice versa.

The Board had a lengthy discussion about the core principle and its practical implications. Some Board members expressed concerns whether this could be operationalised. Some where also confused whether staff was addressing the asset or the right to the asset when the staff paper states 'it'. Others were concerned over the transferee focus when deciding whether to derecognise. The core principle is a transferor focus – the transferor's continuing involvement – but under the staff proposal implementing that prinicple would often involve the rights and obligations of the transferee such as ability to sell the asset.

The staff highlighted that any transfer where the counterparty has the practical ability to sell the asset would trigger derecognition. The issue was when this practical ability is missing. Then the staff suggested two approaches:

• Assess whether the transferee can obtain the underlying cash flows by means other than a transfer (approach one)
• No ability to transfer = no control = no derecognition. Therefore recognise a liability, linked presentation could be considered (approach two)

The staff recommended approach two, although it admitted that approach one is the conceptually right, based on users' and others requests for high derecognition hurdles in the light of current circumstances.

The Board continued its lengthy discussion. One Board member expressed a strong view that the approach preferred by the staff would be inconsistent with the IFRS Framework and asked whether this was not one of the decision criteria presented by the staff. Staff replied that this was not an exhaustive list.

The Chairman took an indicative vote on whether to pursue approach one or approach two. The vote was 5 in favour of approach one and 8 in favour of approach two.

The FASB staff briefly updated the Board on their proposed changes to the consolidation model. It was highlighted that the US proposals would define components of assets and would not allow linked presentation. One Board member asked whether the proposals are in line with the Framework. The staff responded that this was not the case.

The staff presented its timeframe for issuing an ED in March 2009. The Board agreed. One Board member asked the staff to prepare real world examples including disclosures to test whether this information would be useful.

Discussion at the November 2008 IASB Meeting

The Board continued its deliberations of a derecognition model to be included in a future exposure draft. The staff informed the Board that it had further developed its two approaches to implement its derecognition principle. The staff had identified several issues that the Board would need to resolve before issuing an exposure draft. At this meeting the following issues were discussed:

• What is the 'asset' referred to in applying the derecognition principle?
• Definition of 'continuing' involvement
• The Meaning of 'practical ability to transfer'
• Which perspective in the flowcharts: transferor's or transferee's?

What is the 'asset' referred to in applying the derecognition principle?

The staff introduced this issue by noting that it is important to know what the asset is to which the derecognition tests apply. The staff distinguished between transfers of the entire asset and transfers involving parts of financial assets. The Board had a lengthy discussion on this issue.

In the end, the Board agreed to the following by majority vote:

• Transfer of the entire asset: No distinction between the transfer of the asset itself and a transfer of the right to the cash flows from the asset
• Transfer of parts of financial assets:
  • For flowchart 1 (see Agenda Papers to this session): the asset could be any cash flows from a recognised (by the transferor) asset
  • For flowchart 2: the asset would be in line with the component definition in IAS 39.16 along with specific guidance on transfer of groups of similar financial assets and derivatives, embedded derivatives and equity instruments.

Definition of 'continuing' involvement

The notion of continuing involvement is important to both derecognition approaches, as it is the filter to identify 'obvious' cases where no subsequent derecognition tests are required. Staff presented the Board with four possible definitions and recommended the following definition:

Continuing involvement in the Asset represents retention of any contractual rights that resulted in the Asset or the acquisition of any new contractual rights or contractual obligations relating to the Asset (eg, any interest in the future performance of the Asset or a responsibility to make payments in the future in respect of the Asset under any circumstance).

It was noted that this was taken from the draft standard 'Financial Instruments and Similar Items' developed by the Joint Working Group of Standard Setters. The staff said that this definition would require some exceptions to allow for derecognition under flowchart 2:

• standard representations and warranties
• fiduciary servicing
• forwards and options (both with a fair value strike price)

The Board members had a lively debate on the possible definitions of continuing involvement and the consequences of it for the derecognition model. In the end the Board agreed by majority vote to accept the staff recommendation including the proposed exceptions.

The meaning of practical ability to transfer

In response to questions by Board members, the staff elaborated on the meaning of 'practical ability to transfer' an asset acquired from a transferor. Staff asked the Board whether, based on the Agenda Paper, the concept is clear and understandable.

One Board member asked whether the notion 'unique' was used in its usual sense, that is, there is nothing like it elsewhere. The staff clarified that unique was used as meaning 'not readily obtainable' – acknowledging that this notion would also need a definition.

The Board also discussed the whether a put option written by the transferor would in any way impact the assessment – would it impose additional restrictions on the transferee as, if exercised, the transferee would have to deliver the unique asset?

Finally, the Board confirmed that the concept is now clearer but that staff should expand further on the situation involving a put on the transferred asset held by the transferee.

Which perspective in the flowcharts: transferor's or transferee's?

At the Board's request, staff reconsidered whether 'practical ability to transfer' is assessed from the perspective of the transferee, while the continuing involvement test is assessed from the transferor's view. The transferee's view is also considered in assessing whether the transferee presently has other access to all or some of the cash flows of the asset for its own benefit.

After some discussion, the Board concluded that the transferee's view should be applied. Some Board members questioned whether this conclusion must be made for both approaches to implement the derecognition principle. Some believed that for flowchart 1, a transferor's view would be appropriate while a transferee's view would fit better into flowchart 2.

The staff was asked to bring back a short paper with an example that would depict the consequences of the view taken.

Finally, the staff discussed with the Board whether the list of issues provided was complete. One Board member asked the staff to add 'accordance with the framework'.