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Derecognition

Date recorded:

The IASB staff provided a brief overview of its proposed derecognition principle and how that principle links back to the definition of an asset: A transferor should derecognise a financial asset when the financial asset ceases to qualify as an asset of the entity. A financial asset ceases to be an asset of the entity if (1) the economic benefits of the asset no longer exist (that is, the asset matures) or (2) the entity no longer controls the underlying economic benefits of the asset (that is, the contractual rights to the asset are transferred to a third party). An entity no longer controls the economic benefits underlying a financial asset if the entity no longer has the ability to (a) obtain the future economic benefits inherent in the asset and (b) restrict others' access to those benefits.

In determining whether a transferor no longer controls the economic benefits underlying a financial asset, the IASB staff suggested that it is easiest to consider whether the transferee of the financial asset obtains control over the economic benefits underlying the asset as a result of a transfer. If the transferee obtains control of the economic benefits underlying the asset, the transferor would no longer control the asset, and derecognition would be appropriate. The IASB staff proposed that determining whether the transferee obtains control of the economic benefits underlying an asset can be achieved in either of the following two ways: (1) the transferor has no continuing involvement in the transferred assets or (2) the transferee has the practical ability to transfer the asset in its entirety to a third party and is able to exercise that right unilaterally and without needing to impose additional restrictions on the asset.

The IASB staff then presented two different approaches that it is considering when dealing with a scenario where the transferee does not have the practical ability to transfer the financial asset.

  • Approach 1 would require further consideration of whether the transferee presently has other abilities to obtain all of the cash flows of the asset for its own benefit. If the transferee can obtain all the cash flows of an asset for its own benefit through other rights, than derecognition would be appropriate. Otherwise, a sale would not occur.
  • Approach 2 would not allow for derecognition of the asset if the transferee does not have the practical ability to transfer the asset regardless if the transferee can obtain all the cash flows of the asset for its own benefit through other rights. However, if certain conditions not yet discussed are met, the transferor would be allowed to present the asset and associated liability as linked on the left hand side of the statement of financial position (a linked presentation).

 

The staff stated that it recommends that the Boards accept Approach 2.

In response to questions from Board members, the IASB staff provided its views on how its proposal would apply to various common types of financial asset transfers. Several Board members also questioned whether Approach 2 is consistent with the definition of an asset in the conceptual framework. The IASB staff acknowledged that Approach 2 is not consistent with the conceptual definition of an asset but that it is the more workable of the two approaches and clearly distinguishes between transfers that qualify for derecognition and transfers that are 'failed sales'.

After discussion of Approach 2, the staff then asked the Boards to vote on which approach they support for further development. By votes of 7-6 (IASB) and 4-1 (FASB), the Boards supported the staff's recommendation to further develop Approach 2. The staff acknowledged that it will likely include both approaches in the pending ED.

Finally, the IASB staff discussed the project timeline and asked whether the Boards will allot additional resources to further develop the IASB staff's derecognition principle and other considerations (including measurement and presentation). The Boards agreed that the project is urgent but stated that they would discuss resource allotment at a future date.

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