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Derecognition of Financial Assets

Date recorded:

 

The staff continued its discussions on derecognition of financial assets and financial liabilities. At this session staff presented the Board with certain fact patterns to analyse the interaction of the derecognition principles for financial assets and financial liabilities. These issues were:

 

  • Collateral arrangements which are not transfers;
  • Secured liabilities with recourse; and
  • Secured liabilities without recourse.

Collateral arrangements which are not transfers

The first issue was a collateral arrangement, in which the creditor had custody of and permission to sell or lend the securing assets. In this fact pattern, the staff recommended that these transactions must be assessed for derecognition with the exception of brokerage agreements where the transferee acts in an agency capacity. After some clarifications of the transaction, the Board agreed.

Secured liabilities without recourse

The second issue addressed secured liabilities where the lender had recourse, that is, the debtor accepts restrictions on the asset. Staff proposed three possible alternatives for an accounting treatment:

  • The debtor could offset the two; that is, report the securing asset net of the obligation;
  • The securing asset could be derecognised by the debtor and recognised by the creditor. The secured liability could be derecognised by the debtor, and the receivable derecognised by the creditor; and
  • The secured liabilities and securing assets could be accounted for without special treatment, in the same way as unsecured liabilities and unpledged assets.

The staff recommended the third alternative. The Board agreed.

Secured liabilities without recourse

The third issue was split in two. In a general non-recourse situation, a lender can only look at the specified asset(s) in case the debtor defaults, but has no 'control' over what the debtor does with these assets. As the specific second alteration, the repayment of a liability depends on the specific assets the lender has recourse to.

The staff proposed three possible accounting responses:

  • Nonrecourse liabilities could be offset against the securing assets. The debtor could offset the two and report the securing asset net of the liability;
  • Liabilities secured under nonrecourse agreements and the securing assets could be accounted for in the same way as other secured liabilities and securing assets; and
  • Nonrecourse provisions could be considered effectively to be call options, and thus the liability need not be recognised and related securing asset should be derecognised by the debtor.

Staff recommended the third alternative for both subsets of scenarios. The Board asked for further clarifications on the fact patterns and the way the transactions worked. Finally, it agreed with the staff proposal.

To further test the principles, the staff presented, in an Appendix (available in Agenda Paper 10F), further three cases that, while economically considered to be equivalent, could give different accounting answers under the proposed models. While the Board agreed with the first to cases, the third caused more confusion. It was based on a self-liquidating non-recourse fact pattern. The Board discussed further alterations to this fact pattern (including a situation where an entity promises to pay back a loan from future revenues) and had a lengthy debate on the appropriate treatment. This discussion unveiled broader issues of accounting, not part of the project. It was agreed that the issues identified during this discussion that relate to the scope of the project will be brought back.

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