IFRS Interpretations Committee issues — IFRS 7 (IASB only)
Servicing assets and liabilities: Clarifying the requirements for continuing involvement in IFRS 7 Financial Instruments: Disclosures
In October 2010, the IASB issued Disclosures—Transfers of Financial Assets (Amendments to IFRS 7). The transfer disclosures include the addition of paragraphs 42A–42H to IFRS 7 and are effective for annual periods beginning on or after 1 July 2011. IFRS 7 paragraph 42C includes the definition of ‘continuing involvement’ for the purpose of the transfer disclosures.
In October 2012, the Committee received a request for clarification through an annual improvement on whether servicing rights and obligations are continuing involvement in a transferred financial asset/liability for the purpose of the transfer disclosures. In analysing this issue, the Committee noted that, based on the current wording in IFRS 7 paragraph 42C, it was not clear to the Committee whether servicing arrangements are continuing involvement for the purposes of applying the transfer disclosure requirements. Among the specific concerns raised by the Committee were what the IASB meant by referring to rights ‘inherent in’ or ‘relating to’ the transferred financial asset in paragraph 42C and whether servicing agreements automatically meet one of the exceptions to continuing involvement in paragraph 42C(c). Consequently, the Committee recommended that the IASB should consider clarifying the requirements for continuing involvement in paragraph 42C of IFRS 7.
At this meeting, the staff presented its technical analysis of the application of paragraph 42C of IFRS 7 which considered the specific concerns raised by Committee members. The staff believed that servicing agreements would generally meet the definition of continuing involvement in IFRS 7. The staff, seeking confirmation from the Board, did not think that further clarification related to continuing involvement was required by the IASB based on the analysis performed.
One Board member, noting the minutia of the staff’s analysis of the issue and the statement that servicing agreements generally met the definition of continuing involvement in IFRS 7, questioned whether there were any cases in which a new or amended servicing agreement would not constitute continuing involvement.
In response, the staff noted that servicing agreements generally would be within the scope of the disclosures (i.e., continuing involvement). However, in the extreme, the staff envisaged circumstances in which a servicing arrangement would not represent continuing involvement. An example outlined by the staff was a guaranteed servicing fee irrespective of any requirement to incur costs in the development, operation or maintenance of the grantor’s infrastructure assets. The staff acknowledged that they had not specifically considered examples where a servicing agreement would not constitute continuing involvement.
Another Board member feared that the current wording of paragraph 42C, if left unchanged, could result in varying interpretations of the applicability of the disclosure requirements to servicing agreements. She focused on the exception in paragraph 42C(c) which provides an exception from the disclosure requirements in paragraph 42E for arrangements that meet the pass-through arrangement criteria in paragraph 19 of IAS 39. She believed paragraph 42C(c) could be interpreted as permitting servicing agreements to meet the pass-through criteria in paragraph 19 of IAS 39.
A couple of Board members believed it was the Board’s original intent to include servicing agreements within the scope of the disclosures. However, they could not ignore the concerns of the Committee that the current wording in paragraph 42C of IFRS 7 was unclear. They believed that additional insight was required regarding what made paragraph 42C indecipherable in order to decide how best to move forward.
The Committee Chair recommended that he take back to the Committee the IASB’s tentative conclusion that servicing agreements generally meet the definition of continuing involvement in IFRS 7. He would then discuss with the Committee how best to advance this issue – specifically considering whether an agenda rejection decision should be issued or whether the Committee could recommend specific actions of the Board. The IASB agreed with this action plan.