Proposed derecognition model

The Boards discussed the IASB derecognition model for financial assets and liabilities, focusing in particular on the issues identified by the FASB during the previous educational session as issues requiring clarification. The purpose of this session was to provide the FASB with information that would allow it to decide on the future steps in the project. No decisions were taken during this session.

From the start of the discussion it was obvious that the FASB had serious objections to the model being developed by the IASB. The FASB members did not seem to support the underlying principle of the model and they were more in favour of a model based on stickiness.

In particular, the Boards considered the proposed treatment of sale of an asset with an option to repurchase the asset in the future. On balance, the FASB seemed to be unconvinced that such transactions led to surrendering of control and thus should lead to derecognition of the financial asset. As such, the threshold for derecognition for the FASB would be much higher than proposed in the IASB model.

The Boards discussed the consistency of the application of the control model in derecognition and consolidation projects and application for the consolidation of entities and derecognition of assets. No clear consensus emerged.

One FASB member raised a particular issue that the IASB proposed an exception for repurchase agreements (that would be treated as financing) but no similar exception was to be granted for transactions with derivatives that achieve the same economic substance. The staff responded that the repurchase agreements exception was a limited exception that was tightly defined and limited to certain circumstances. They argued that otherwise the derivatives transactions would lead to grossing-up of the balance sheet (and ultimately based on this logic all derivatives would have to be grossed-up on the balance sheet).

One IASB member also challenged the staff on the role of stickiness in accounting for financial instruments. He noted that there is informational asymmetry in derecognition transactions and the real issue is that the entities did not recognise all the risks related to the derecognised asset (especially items like implicit guarantees). He urged the Board not to ignore the lessons from the recent financial crisis in the derecognition model. The FASB members agreed. They challenged the IASB and the staff how well it was possible to identify and recognise such components. The staff responded that the financial instruments accounting is based on current contractual rights and obligations. As one IASB member put it, this issue is rather a recognition issue accompanied with providing of proper disclosures.

The Boards continued with a discussion on the consistency of the model with the conceptual framework, difference in assessing of stickiness in financial and non-financial assets as well as possibilities for window-dressing. No conclusion was reached The Boards agreed to re-discuss the remaining issues jointly at the following joint meeting. There seems to be a tension point between the two Boards as the FASB would like to re-discuss all the features of the model, rationales for all the decisions taken and conclusions reached, whereas the IASB was prepared to proceed to drafting and balloting process. The Boards agreed that the technical directors should consider the way forward.