Monday 15 June 2009 – Derecognition
Participants expressed a preference for the approach put forward in the Alternative View to the Exposure Draft rather than the preferred approach that was described by the ED, with most participants raising concerns about the consequences of adopting the preferred approach. In particular, several participants proposed a more explicit risk and rewards filter in the process of derecognition as they felt that underlying risk and rewards exposures may be otherwise lost.
Alternative approach supported by five IASB Board Members, as described in the exposure draft
Under the alternative approach, when the rights to identified cash flows are transferred, the transferor derecognises the previously recognised asset and recognises all the rights and obligations either retained or obtained in the transfer transaction. For example, forward contracts, puts, calls, guarantees or disproportionate involvement with respect to transferred cash flows would not result in failed sales or result in the recognition of a liability for the proceeds received. Any involvement would be recognised and measured at the date of transfer at fair value. The objective would be to recognise any rights and obligations associated with a transferred asset as if those rights and obligations related to an asset that had not previously been owned.
Under the alternative approach, a transferor could be required to apply the same disclosure guidance as proposed by the amendment to IFRS 7. The proposed amendment to IFRS 7 would provide adequate information to enable users to evaluate the nature of and risks associated with the transferor's continuing involvement in derecognised financial assets. The full exposure (including the nature, timing, ranking, amount and uncertainty of any obligations or cash outflows relating to the entity's continuing involvement in a transferred asset and the details about those assets) would be provided in one note (disclosure). Hence, the proposed disclosures would provide clear information both on the allocation of risks and on their potential impact on the financial condition of the transferor.
One participant expressed his concern that in the current period of economic crisis the Board had opted for an approach that could lead to more derecognition of financial instruments when the market is expected the opposite development. Some participants suggested that recognition criteria that incorporated the overall risk exposure on the balance sheet rather than disclosing it in the notes would be preferable for users of the financial statements. Concern was also expressed about the different criteria for transferors and transferees in the ED and how those could be reconciled.
The discussion continued regarding the continuing involvement filter in the derecognition criteria. Several ideas were floated; one participant seemed to object to the introduction of a model that has inherent exceptions built in itself (that is, call options). Participants also notified that a kind of de minimis threshold for continuing involvement would be needed in order to avoid practical issues on application.
The panel continued with the discussion on the practical ability test for derecognition of financial instruments. Most participants agreed with the thrust of the proposal, nonetheless, most raised the practical issues. In particular concerns were raised that different parties can interpret the criteria in a different way depending to whom the transfer is being made and that how would be derecognition applied in case further transfer is regulatory restricted. Moreover, as one participant pointed out, there is a potential inconsistency with ED 10 as you may have come to a conclusion that no consolidation is required but in the same time to fail the derecognition test.
Much attention in the discussion was paid to the alternative model which was included in the ED. Many participants thought that it would provide a better reflections of economic reality, but on the other hand felt that the alternative approach had not been developed sufficiently in the ED to enable them to endorse it. One participant expressed his concerns that the alternative model, albeit being more conceptually pure, will be even less understandable to the users of financial statements. Particular concerns were raised in relation to recording a gain on derecognition when only a part of and instrument is being derecognised without changing the nature of it.
Overall, many participants raised concerns about the speed of the project as well as perceived lack of coordination with FASB, that could lead to further lack of convergence with US GAAP. The staff noted that the speed of the project is determined by the current economic environment and in particular demands from governments and regulators. The staff noted the risk that unless quick solution is found regulators may impose their own rules.
Many participants expressed concerns about the proposed disclosures. There was general agreement that a new framework for disclosures was needed: one that would make them more principle-based as opposed to the current practices, under which they are treated as a mandatory checklist containing both minimum and maximum disclosure requirements. In particular, the potential usefulness of the disclosures to some entities was questioned. Participants thought that in some instances disclosures of financial instruments derecognised (or not recognised on the balance sheet in the first place) could be more useful than detailed disclosures of derecognitions that failed the proposed criteria.