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Derecognition of Financial Instruments

Date recorded:

Transfer definition

The Board discussed the set of concerns raised by respondents to the Derecognition ED with respect to the definition of transfer. The Board agreed with the staff analysis that in the alternative approach, the link between the financial asset and the transaction transferring the economic benefits is of crucial importance. Therefore, the Board decided not to provide a transfer definition in the final Standard, but to deal with the individual issues raised by providing additional application guidance on application of the derecognition principle underlying the alternative approach.

Some Board members expressed their concerns how consistent would be this decision with the conclusions reached in other projects, especially with respect to the importance of legal form of the transaction in some cases (e.g. leases).

The Board continued to discuss the question whether 'economic' benefits were to be assessed in derecognition principle include voting or subscription rights. Most Board members agreed that inclusion of these rights in the definition of economic benefits is consistent with the general principle of the model, to the extent they were not recognised separately. Nonetheless, they expressed concerns relating to valuation, in particular, of the non-financial economic benefits and they suggested additional application guidance in this area.

Some Board members stated that in their opinion the impact of the recognition of differences between values of these rights in profit or loss would be limited, as in practice these rights being transferred would not have much value, unless connected with control premium.

Some Board members were concerned by the implication of such decision, especially for temporary transfer of non-financial benefits. The staff responded that such distinction between temporary and permanent transfer would contradict the principle of the model and they analogised it to passing of all interest for loans to a third party.

One Board member expressed his concerns that the alternative derecognition approach would lead to a free choice of classification of financial assets and suggested to be limited. Another Board members responded that these concerns do not relate to the derecognition principles but rather to classification criteria of IFRS 9.

Finally, by a large majority, the Board agreed that economic benefit concept shall include both financial and non-financial economic benefits.

Derecognition Principle - Access to economic benefits

The Board discussed other issues related to the derecognition principle raised by constituents. The Board briefly discussed and agreed with the proposed clarifications of terms of the alternative approach (definition of the derecognition principle, definition of present access and benefit).

The Board discussed in particular the issue of unit linked insurance i.e. whether does the sale of units in insurance fund in which the insurer has agreed to pass onto the policyholder the economic benefits of the underlying linked investment constitute a transfer. The Board acknowledged the links with the insurance projects and asked the staff to analyse the matter further beyond the simple answer that if such asset is outside of scope of IAS 39 it would not be subject to derecognition rules.

In a further discussion that referred to the 'empty SPEs' issue, some Board members emphasised the need for consistency between the consolidation and derecognition guidance and asked the staff to consider this in further analysis. One Board member pointed out that the issue of empty SPEs would be more pressing for the FASB as it would mean that even such empty shell would have to be consolidated under FASB consolidation rules.

The Board discussed the need for specific guidance for pass-through arrangements. Most of the Board members disagreed with the staff recommendation that the new Standard would not include guidance related to the pass-through test in IAS 39. Even though they acknowledged that the recognition principle might address all the issues intended to be addressed by the pass-through test it would represent useful application guidance, given that it is part of the guidance now.

Accounting for repurchase agreements

The Board discussed the accounting for repurchase agreements. Although most of the Board members expressed their conceptual preference for the sale approach, they acknowledged that such approach was not tenable given the level of disagreement from constituents.

Most Board members agreed that the guidance for repurchase agreement should be formulated as an exception from the general derecognition principle. Given this decision, most Board members agreed that this guidance should be as converged with the FASB as possible even though such solution might be prone to structuring.

Most of the Board members agreed that a transaction would be treated as secured financing, if the agreement both entitles and obligates the transferor to repurchase or redeem transferred financial assets from the transferee and all of the following conditions are met:

  • (a) The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred.
  • (b) The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price.
  • (c) The agreement is entered into contemporaneously with, or in contemplation of, the transfer.

The Board decided not to include the requirements for collateral maintenance that are currently part of the U.S. GAAP to the proposed approach, due to the concerns about application of such guidance in the IFRS context.

The Board decided also to discuss these conditions with the FASB in order explore any potential differences.

Finally, following a brief discussion, when the Board discussed the possibility of the same asset being portrayed in financial statements of multiple companies the Board agreed that the resulting asset should be presented as the right to get the asset rather than the asset itself. The Board also did not agree with any 'linked' presentation of assets and liabilities in the Financial Statements.

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