Derecognition

The derecognition provisions of IAS 39 will clarified by establishing as the guiding principle a 'continuing involvement' approach that disallows derecognition to the extent to which the transferor has continuing involvement in an asset or a portion of an asset it has transferred.

A transferor has a continuing involvement when:

• It could, or could be required to, reacquire control of the transferred asset (for example, if the financial asset can be called back by the transferor, the transfer does not qualify for derecognition to the extent of the asset that is subject to the call option); or
• Compensation based on the performance of the transferred asset will be paid (for example, if the transferor provides a guarantee, derecognition is precluded up to the amount of the guarantee).

• The notion that the transferor must not retain substantially all of the risk and returns of certain assets in order for any portion of those assets to qualify for derecognition; and
• The transferee 'right to sell or repledge' condition for derecognition.

Guidance will be provided dealing with pass-through arrangements. When the transferor continues to collect cash flows from the transferred asset, additional conditions must be met for a transfer to qualify for derecognition, including:

• The transferor has no obligation to pay cash flows to the transferee unless it collects equivalent cash flows from the transferred asset;
• The transferor cannot use the transferred asset for its benefit; and
• The transferor is obligated to remit on a timely basis any cash flows it collects on behalf of the transferee.

Valuation Techniques

The Board discussed valuation techniques, which is a major issue following the collapse of Enron. The Board agreed that more guidance is needed on fair value but was unsure of what else to include as the objective was felt to be very clear. Additional disclosure regarding the valuation technique was decided to be the best solution.

Impairment of Investments and Equity Carried at Fair Value

All impairments are permanent by definition. Impaired investments and equity instruments should be written down to the impaired amount with the write down going through the income statement. No reversal of the impairment is allowed, as it is permanent. This treatment is in line with the current US treatment. All temporary changes must go through the equity statement. It was also agreed that debt and equity must be treated in the same way.

Hedging of Firm Commitments

The US treatment was considered but the board concluded to make no change to the current IAS 39 treatment.

Transition

The old paragraph 39.172(h) will be replaced. It was agreed that if the financial instrument qualified for derecognition under the old rules but did not qualify for derecognition under the new rules, the financial instrument must be re-recognised on the balance sheet.

Grandfathering

A question will be included in the exposure draft as to whether there should be any grandfathering.

SIC 5

SIC 5, Classification of Financial Instruments - Contingent Settlement Provisions, will be incorporated into IAS 32.