IAS 39 Financial Instruments: Recognition and Measurement
The Board discussed various issues related to the operation of derecognition principles in IAS 39 paragraphs 15-37 and illustrated in IAS 39 AG36.
Groups of assets
The Board discussed the possible meanings of the phrase 'group of similar assets' contained in IAS 39 paragraph 16. The Board agreed that IAS 39 does requires the derecognition tests to be applied to transfers of groups of financial assets (such as loans, mortgages, etc) that include the following derivative contracts:
- Credit insurance contracts/financial guarantees that are originated with certain loans.
- Interest rate swaps and currency swaps.
- Credit insurance contracts/financial guarantees that are not originated with the loans
In particular, the Board noted that because a bundle of assets (e.g., mortgage loans and mortgage indemnity guarantees) was transferred in a single transaction does not imply that the bundle was 'one asset'. In other words, the transferor had to assess the mortgage loans and the mortgage indemnity guarantees separately for the purposes assessing 'similar' in the derecognition tests.
Board members noted that the IFRIC might be uncomfortable with the consequence of this conclusion: that a derivative that can be either an asset or a liability must pass both derecognition tests before it can be removed from the balance sheet.
The Board which transfers of financial assets are required to satisfy the 'pass through' tests in IAS 39 paragraph 19. The Board noted that IAS 39 paragraph 18(b) states the pass-through tests in paragraph 19 have to be met when an entity transfers a financial asset and 'retains the contractual rights to receive cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients'. Conversely, the pass-through tests are not applicable when the entity 'transfers the contractual rights to receive the cash flows of the financial asset' (paragraph 18 (a)).
The Board agreed that IAS 39 did not require the pass-through test to be applied to transfers of financial assets in which (a) the legal ownership has not changed; and (b) the transfer is conditional.
Report to IFRIC
The Board noted that the topics discussed in this session had been referred to the IFRIC and asked the staff to make a complete report to the IFRIC, together with the Board's basis (essentially the Board papers), so that the IFRIC could make an informed decision as to how to proceed.