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Derecognition

Date recorded:

The Board continued its deliberations on the upcoming ED on derecognition of financial instruments. The staff gave the Board a brief update on where it was at the moment and what issues would be discussed at the January meeting. At this meeting the following issues were presented:

  • Transfers involving derivatives, hybrid instruments and equity instruments
  • Transfer of a component of an asset = different asset after transfer?
  • Similar criterion for transfers of groups involving financial assets
  • Linked presentation (will be discussed at Thursday's session)

Transfers involving derivatives, hybrid instruments and equity instruments (D/HI/EI)

The staff informed Board members that the Board would have to decide whether components as defined in flowchart 2 of the staff proposals should specifically exclude transferred portions of derivatives, hybrid instruments with separable embedded derivatives, and equity instruments. The staff proposed four alternatives (table below taken from the observer notes):

Alternatives

Portions of D/HI/EI* that involve specified and/or proportionate cash flows

Portions of D/HI/EI that involve specified and/or proportionate cash flows (including those instruments that could be assets or liabilities)

Portions of D/HI/EI* that involve specified and/or proportionate cash flows or other future economic benefits (incl those instruments that could be assets or liabilities)

1

NO

NO

NO

2

YES

NO

NO

3

YES

YES

NO

4

YES

YES

YES

*D/HI/EI = Derivatives, hybrid instruments with embedded derivatives that require bifurcation or equity instruments.

The Board discussed, as an example, an interest rate swap. It was highlighted that it could be seen as one net stream or two streams (one inflow, one outflow). Board members seemed to come from different opinions on what the asset was and, hence, had different opinions on which alternative was appropriate.

The staff proposed alternative 4, which was a broad definition. However, the Board agreed on alternative 2, which would keep the component definition in IAS 39.16. The Board also agreed that the derecognition tests in flowchart 1 refer to 'cash flows or other future benefits'.

Transfer of a component of an asset = different asset after transfer?

This issue was a follow-on issue resulting from the discussion at the December Board meeting on non-recourse secured borrowings: Does the transfer of a component lead to the original financial asset ceasing to exist. As a consequence, any gain/loss resulting would have to be recognised when the transaction was entered into. It was highlighted that under a full fair value model this would not render any different outcome.

The staff recommended that the components a transferor retains are accounted for as new assets. After brief discussion, the Board agreed.

Similar criterion for transfers of groups involving financial assets

The staff sought the Board's input on whether a similar criterion is necessary for transfers of components of groups of whole financial assets and for transfers of a group of whole financial assets.

The Board agreed with the staff recommendation that, for transfers of groups of whole financial assets, the similar criterion in IAS 39.16 could be deleted. The staff noted that, as a consequence, the 'continuing involvement' step and the 'practical ability to tansfer' test in flowchart 2 would be applied to the group as a whole.

On the issue of components of groups, the staff noted that any decision must be consistent with the Board decision on transfers involving derivatives, hybrid instruments, and equity instruments. The Board was interested in the consequences for certain scenarios and said that the guidance should not lead to confusion amongst constituents what it was aiming at.

The Board, after a short discussion, agreed to strike out 'similar' from the component definition of IAS 39.16 for components of groups, but that the guidance was to make clear that:

  • None of those assets can be assets that can, during their life, be an asset or a liability
  • None of those assets can be equity instruments that involve future economic benefits other than cash flows (for example, shares)

Finally, the staff gave the Board a brief update on the comment letters received by the FASB on its proposed changes to the US consolidation standards.

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