IASB issues derecognition exposure draft

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31 Mar 2009

The IASB has invited comment an exposure draft of proposals to improve the IAS 39 requirements for derecognition of financial instruments.

Derecognition means removing a financial instrument from an entity's financial statements. This occurs if the entity no longer controls a financial asset or no longer has an obligation to settle a financial liability. The IASB is also proposing to enhance the disclosures currently in IFRS 7, especially in situations where an entity continues to have an ongoing involvement in a financial asset that would be derecognised under the proposals.

The derecognition exposure draft (ED/2009/3 Derecognition) is part of the IASB's comprehensive review of off-balance sheet activities; in December 2008, the IASB published ED 10 on Consolidation to tighten the requirements for identifying which entities a company controls, and therefore consolidates. The IASB will hold public roundtables to seek wider views on its derecognition and consolidation proposals (dates to be announced). Comments on the derecognition exposure draft are due by 31 July 2009. Click for IASB Press Release on Derecognition (PDF 22k).


Brief summary of the proposals

The proposed amendments would replace the approach to derecognition of financial assets in IAS 39 with an approach that is similar in that

  • it uses the same criteria for when a transferred part of a financial asset qualifies to be assessed for derecognition (with some additional guidance to address known application issues)
  • it uses a test of control (although unlike IAS 39 that test has primacy
  • many of the derecognition outcomes will be similar (the notable exceptions being transfers, such as repurchase agreements, involving readily obtainable financial assets).

However, the proposed approach is different from IAS 39 in that it does not combine elements of several derecognition concepts but rather focuses on a single element (control). As a result, unlike IAS 39, the proposed approach does not have:

  • a test to evaluate the extent of risks and rewards retained
  • specific pass-through requirements, or
  • a requirement for a transferor (in a transfer that fails derecognition) to recognise and measure a financial asset to the extent of its continuing involvement.


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