Date recorded:

The Board continued its deliberations of a derecognition model to be included in a future exposure draft. The staff informed the Board that it had further developed its two approaches to implement its derecognition principle. The staff had identified several issues that the Board would need to resolve before issuing an exposure draft. At this meeting the following issues were discussed:

  • What is the 'asset' referred to in applying the derecognition principle?
  • Definition of 'continuing' involvement
  • The Meaning of 'practical ability to transfer'
  • Which perspective in the flowcharts: transferor's or transferee's?

What is the 'asset' referred to in applying the derecognition principle?

The staff introduced this issue by noting that it is important to know what the asset is to which the derecognition tests apply. The staff distinguished between transfers of the entire asset and transfers involving parts of financial assets. The Board had a lengthy discussion on this issue.

In the end, the Board agreed to the following by majority vote:

  • Transfer of the entire asset: No distinction between the transfer of the asset itself and a transfer of the right to the cash flows from the asset
  • Transfer of parts of financial assets:
    • For flowchart 1 (see Agenda Papers to this session): the asset could be any cash flows from a recognised (by the transferor) asset
    • For flowchart 2: the asset would be in line with the component definition in IAS 39.16 along with specific guidance on transfer of groups of similar financial assets and derivatives, embedded derivatives and equity instruments.

Definition of 'continuing' involvement

The notion of continuing involvement is important to both derecognition approaches, as it is the filter to identify 'obvious' cases where no subsequent derecognition tests are required. Staff presented the Board with four possible definitions and recommended the following definition:

Continuing involvement in the Asset represents retention of any contractual rights that resulted in the Asset or the acquisition of any new contractual rights or contractual obligations relating to the Asset (eg, any interest in the future performance of the Asset or a responsibility to make payments in the future in respect of the Asset under any circumstance).

It was noted that this was taken from the draft standard 'Financial Instruments and Similar Items' developed by the Joint Working Group of Standard Setters. The staff said that this definition would require some exceptions to allow for derecognition under flowchart 2:

  • standard representations and warranties
  • fiduciary servicing
  • forwards and options (both with a fair value strike price)

The Board members had a lively debate on the possible definitions of continuing involvement and the consequences of it for the derecognition model. In the end the Board agreed by majority vote to accept the staff recommendation including the proposed exceptions.

The meaning of practical ability to transfer

In response to questions by Board members, the staff elaborated on the meaning of 'practical ability to transfer' an asset acquired from a transferor. Staff asked the Board whether, based on the Agenda Paper, the concept is clear and understandable.

One Board member asked whether the notion 'unique' was used in its usual sense, that is, there is nothing like it elsewhere. The staff clarified that unique was used as meaning 'not readily obtainable' - acknowledging that this notion would also need a definition.

The Board also discussed the whether a put option written by the transferor would in any way impact the assessment - would it impose additional restrictions on the transferee as, if exercised, the transferee would have to deliver the unique asset?

Finally, the Board confirmed that the concept is now clearer but that staff should expand further on the situation involving a put on the transferred asset held by the transferee.

Which perspective in the flowcharts: transferor's or transferee's?

At the Board's request, staff reconsidered whether 'practical ability to transfer' is assessed from the perspective of the transferee, while the continuing involvement test is assessed from the transferor's view. The transferee's view is also considered in assessing whether the transferee presently has other access to all or some of the cash flows of the asset for its own benefit.

After some discussion, the Board concluded that the transferee's view should be applied. Some Board members questioned whether this conclusion must be made for both approaches to implement the derecognition principle. Some believed that for flowchart 1, a transferor's view would be appropriate while a transferee's view would fit better into flowchart 2.

The staff was asked to bring back a short paper with an example that would depict the consequences of the view taken.

Finally, the staff discussed with the Board whether the list of issues provided was complete. One Board member asked the staff to add 'accordance with the framework'.

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