This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9)

Date recorded:

Background

The Committee received a submission about the recognition of cash received via Bacs, a formal automated settlement process that takes a three working-day cycle to settle a cash transfer, as settlement for a financial asset. In the fact pattern described, an entity sells goods to a customer and recognises a trade receivable of CU100 on Day 1. The customer notifies the entity that it has initiated a payment of CU100 via Bacs to settle the trade receivable on Day 2. The entity receives CU100 into its bank account on Day 3. The submitter asked whether it is acceptable for the entity to derecognise the trade receivable and recognise the cash on Day 2, rather than on the date the cash is settled (i.e. Day 3).

Staff analysis

From the outreached performed, it is noted that this kind of settlement process is common in many jurisdictions and it involves international, rather than domestic, cash transfer. In respect to whether the cash transfers initiated before the end of the reporting period is material, the responses were mixed. Moreover, many respondents said they observed diversity in the accounting applied, i.e. some recognise cash on the transfer initiation date while others recognising cash on cash receipt date.

The submitter considered that no IFRS Standards are specifically applicable in determining the timing of recognition of the cash. However, the staff were of the view that IFRS 9 should be applied because both trade receivables settled and cash received are financial assets in the scope of IFRS 9. The entity therefore applies the derecognition requirements in IFRS 9:3.2.3 in determining when to derecognise the trade receivable, and the initial recognition requirements in IFRS 9:3.1.1. in determining when to recognise cash as a financial asset. Furthermore, instead of analysing the recognition of cash received in isolation, the entity needs to consider when to derecognise the trade receivables before recognising cash.

In determining when the trade receivable is derecognised, the entity considers when its contractual right to the cash flows from the trade receivable expires applying IFRS 9:3.2.3. IFRS 9 does not provide specific requirements for assessing when contractual rights to the cash flows from a financial asset expire. It might be helpful to consider the derecognition requirements for a financial liability under IFRS 9:B3.3.1 because an entity's contractual right to cash flows from a financial asset would expire when the counterparty's contractual obligation to deliver cash is extinguished.  Therefore, unless the customer is legally released from primary responsibility for the trade payable before paying the entity, the entity's contractual rights to the cash flows from the trade receivable would expire only by payment. The staff consider the contractual right to payment is a legal matter and it would be helpful to consider the rights of the parties between the transfer initiation and settlement date, such as "does the customer have the right to cancel the transfer after initiating it but before it is settled?" and "does the entity have the right to demand payment from the customer in the event of default by the customer's bank?". Based on the above analysis, the staff would expect an entity to typically derecognise the trade receivable on the settlement date. They did not rule out (but considered it uncommon) that the entity's contractual rights to the cash flows from the trade receivable expire before that date.

The staff concluded that only on the transfer settlement date, and not before, that the entity would recognise cash as a financial asset because the entity would have a right to obtain cash from the bank only when cash is deposited in its bank account. In circumstances where an entity concludes that its contractual rights to the cash flows from the trade receivable expire before the transfer settlement date, the entity would recognise a financial asset it has received (e.g. a right to receive cash from the customer's bank) on that date, before it recognises the cash.

Staff recommendation

Based on the above analysis, the staff concluded that the principles and requirements in IFRS Standards provide an adequate basis to determine the date at which the entity derecognises the trade receivables and recognises cash in the fact pattern described and not to add the matter to the Committee's standard-setting agenda but to publish a tentative agenda decision.

Discussion

All of the Committee members agreed with the staff's analysis related to derecognition of trade receivables and recognition of cash based on IFRS 9 on such settlement process. Also, they considered the logic in this agenda decision as helpful in determining when the original financial asset should be derecognised and when cash should be recognised in other similar circumstances (e.g. credit card settlement in transit, cheque in transit and etc.).

They highlighted that meeting the derecognition criteria for trade receivables does not automatically mean the criteria of recognising cash is met at the same time. Instead, another financial asset (i.e. right to receive cash) may be recgonised when the criteria for recognising cash is not yet met. One Committee member commented that the agenda decision was not clear about how to present the relevant financial assets, for example, it does not explicitly discuss if the right to receive cash meets the definition of C&CE.  The staff explained that it is clear that such assets do not meet the definition of C&CE, however that question was not within the scope of this agenda decision.

The Committee members agreed that it is the entity's right to the assets rather than the automated settlement process itself that is a determining factor for the derecognition of trade receivables and recognition of cash. Different legal environment and circumstances may have different implication on the rights and thus the accounting outcome may be different for entities using the same settlement process.

The Committee decided, by a unanimous vote, not to add the matter to the standard-setting agenda. Also, all Committee members agreed with the suggested edits to the tentative agenda decision.

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.