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Derecognition

Date recorded:

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.

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