Derecognition of Financial Assets
The staff continued its discussions with the Board on open issues arising from the deliberations of the two different approaches to implement the agreed derecognition principle. At this session the Board discussed:
- Practical ability to transfer: impact of puts;
- Change to transferor's perspective: impact on forward examples in flowchart 1; and
- Derecognition of financial liabilities
Practical ability to transfer: impact of puts
The staff reported back on an issue that arose during the October 2008 discussions where it indicated that a transferee who purchased a non-readily obtainable financial asset together with a put option might not have the practical ability to transfer the asset to a third party without attaching a similar option. It thought the transferee was economically constrained transferring the asset without a similar option as the transferring entity would forfeit the benefit of the option.
Some Board members questioned whether this was relevant for flowchart 1 (as presented in the publicly available agenda papers). One Board member noted that he got the impression that people might not like the resulting derecognition while the transferor still retained risks via the written put without this concept of 'economic constraints'. It was also unclear for many at the table what the unit of account was, that is, was the 'asset' the transferred item alone or including the option. Another Board member noted that the concept of economic constraints could lead to recognition of assets that an entity did not control.
Staff confirmed that under flowchart 1 including or excluding the economic constraint test would lead to the same results. It was agreed to remove the references to economic constraints from flowchart 1.
Change to transferor's perspective: impact on forward examples in flowchart 1
Staff reminded the Board about the background to the agenda paper. In November 2008 the staff noted that the derecognition tests in flowchart 1 would return different results if the perspective was changed from that of the transferee to that of the transferor.
Two transactions were analysed by the staff:
- transfer of a non-readily obtainable financial asset with a physically-settled fixed-price forward purchase; and
- transfer of a non-readily obtainable financial asset with a physically-settled total return swap.
While staff admitted that the outcome in the first scenario would not change (as originally concluded), the outcome for the second scenario could change depending on how the asset is defined. The staff presented the Board with three alternative approaches to flowchart 1 as originally proposed (called 1R, 1R2 and 1R3). Depending on whether the asset was contractually viewed (that is, what was contracted as the asset) or economically viewed (that is, what was economically transferred) the outcomes could be different for example 2.
The staff noted that it preferred the economic view of the asset, which was equivalent with a component approach. It also recommended adopting flowchart alternative 1R3 (as documented in the agenda paper).
It was noted by Board members that under flowchart 1R3 the first two steps were not required. Staff replied that this was done to keep the same number of steps in the flowcharts. The Board felt uncomfortable with this approach and asked the staff to condense flowchart 1 as appropriate even if this resulted in different-looking flowcharts.
The Board agreed to both the economic view and approach 1R3 subject to changes in the flowchart.
The staff continued with the derecognition of financial liabilities. It was noted that the current model for derecognition of financial liabilities in IAS 39 caused less difficulties in practice. However, a new derecognition approach might establish a principle that could be used for non-financial liabilities and would create increased symmetry between recognition and derecognition of assets and liabilities.
Staff noted that the current model focussed on the entity having a present obligation and that the definition of a liability in the Framework not only encompasses this present obligation, but also an expected outflow of resources embodying economic benefits from the entity. The staff proposed the following economic derecognition principle for financial liabilities:
An entity should derecognise a financial liability or a component thereof when it no longer qualifies as a liability of the entity (that is, when the present obligation is eliminated or the entity is no longer required to transfer economic resources to a third party in respect of the obligation).
Board members noted that the notion of a third party was not necessary and proposed to remove it. Staff and remaining Board members agreed.
The Board had a brief discussion of this definition. Board members were particularly interested in possible different outcomes based on the proposed principle. Staff confirmed that it considered the impact as low.
The Board agreed to pursue the proposed derecognition model for financial liabilities.
At the end of the session, the staff sought confirmation by the Board whether all issues had been properly captured in the list of open issues and all tentative agenda decisions had been appropriately reflected in the agenda papers. While the Board agreed, some Board members were concerned over the way forward, particularly, whether the exposure draft would be, in effect, two exposure drafts proposing both models for financial assets. Furthermore, Board members highlighted that the recent FASB proposals were not aligned to the current proposals of the staff. In the light of constituents urging the boards for converged solutions this might not be a desirable outcome. Staff noted that the vast majority of comment letters received by the FASB on its proposals indicated that constituents indeed asked the FASB to work towards guidance converged with IFRS literature. It also noted that the FASB monitors progress on the IASB's project and decisions.
Finally, staff informed the Board that discussion of this matter will be continued the next day.