Other accounting consequences

Recognition in profit or loss

On derecognition of a financial asset in its entirety, the difference between:

 the carrying amount at the derecognition date, and

 the consideration received

is recognised in profit or loss (IFRS 9.3.2.12).

Transferred asset is part of a larger financial asset

Paragraphs IFRS 9.3.2.13-14; B3.2.11 cover the accounting for a transaction where the
transferred asset is part of a larger financial asset (e.g. when an entity transfers interest cash
flows that are part of a debt instrument) and the part transferred qualifies for derecognition in its
entirety.

Servicing asset/liability

For some transfers that qualify for derecognition, an entity retains the right (or obligation) to
service the asset, e.g. to collect payments. In such cases, servicing asset or servicing liability
could be recognised depending on whether the servicing fee is expected to compensate the entity
adequately for performing the servicing (IFRS 9.3.2.10; B3.2.10).

Offsetting

If a transferred asset continues to be recognised, the asset and the associated liability cannot be
offset. Similarly, the entity cannot offset any income arising from the transferred asset with any
expense incurred on the associated liability (IFRS 9.3.2.22).

Non-cash collateral

Paragraph IFRS 9.3.2.22 covers accounting for non-cash collaterals provided by transferor to the
transferee.
Reassessment of derecognition

If an entity determines that as a result of the transfer, it has transferred substantially all the risks
and rewards of ownership of the transferred asset, it does not recognise the transferred asset
again in a future period, unless it reacquires the transferred asset in a new transaction (IFRS
9.B3.2.6).

Examples illustrating derecognition of financial assets

Paragraph IFRS 9.B3.2.16 provides numerous examples that illustrate the application of the
derecognition principles. Some of them are helpful, other just repeat the requirements.

See also an example on factoring of trade receivables.

More about financial instruments

See other pages relating to financial instruments:

Scope of IFRS 9 and Initial Recognition of Financial Instruments

Scope of IAS 32
Financial Instruments: Definitions
Derivatives and Embedded Derivatives: Definitions and Characteristics
Classification of Financial Assets and Financial Liabilities
Measurement of Financial Instruments
Amortised Cost and Effective Interest Rate
Impairment of Financial Assets
Derecognition of Financial Assets
Derecognition of Financial Liabilities
Factoring
Interest-free loans or loans at below-market interest rate
Offsetting of Financial Instruments
Hedge Accounting
Financial Liabilities vs Equity
IFRS 7 Financial Instruments: Disclosures

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Has the entity transferred its rights to receive the cash flows
from the asset?

Overview of the transfer of rights to cash flows step

The question ‘has the entity transferred its rights to receive the cash flows from the asset?’ is a
next step in the decision tree and is reflected in paragraph IFRS 9.3.2.4(a). There is not much
guidance on this point, as it is self-explanatory in most instances. Transferring an asset is usually
effected by transferring a legal title to it. Additionally, IFRIC November 2005 update notes that
retaining by the transferor the role of an agent to administer collection and distribution of cash
flows does not affect the determination of whether an entity transfers the contractual rights to
receive the cash flows from a financial asset.

It should be also noted that this condition for derecognition is also met when a legal title is not
transferred. In its September 2006 update, the IASB  indicated that a transaction in which an
entity transfers all the contractual rights to receive the cash flows (without necessarily
transferring legal ownership of the financial asset), would not be treated as a pass through
transfer. In other words, such a transaction also falls into the scope of paragraph IFRS 9.3.2.4(a)
and the assessment against the ‘pass through’ criteria (discussed below) is not applicable.

Conditional transfers

Transfers can be conditional and conditions attaching to a transfer can be grouped into two broad
categories:

1. contractual provisions ensuring the existence and quality of transferred cash flows at the
date of transfer or
2. conditions relating to the future performance of the asset.
 IASB expressed its view (IASB September 2006 update) on conditional transfers so that the
conditions set out above do not affect whether the entity has transferred the contractual rights to
receive cash flows under paragraph IFRS 9.3.2.4(a). However, existence of conditions relating to
the future performance of the asset (point 2. above) can affect the conclusion related to transfer
of all risks and rewards discussed below.

Has the entity assumed an obligation to pay the cash flows

from the asset that meets the condition for derecognition?
(‘pass through’ transfers)

Overview of ‘pass through’ transfers

This step from the decision tree is reflected in paragraphs IFRS 9.3.2.4(b) and IFRS 9.3.2.5.

A ‘pass through’ transfer is a transaction where an entity keeps the legal title and rights to cash
flows from a financial asset (hence condition in IFRS 9.3.2.4(a) is not met), but enters into an
arrangement with a third party under which those cash flows will be passed to this party.
Securitisation is a typical example of a ‘pass through’ transfer. Such an arrangement is accounted
for as a transfer of the original asset if, and only if, all the following three conditions are met
(IFRS 9.3.2.5):

a. The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset.
b. The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients for the obligation to pay them cash
flows.
c. The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay.

The entity has no obligation to pay amounts to the eventual recipients unless it
collects equivalent amounts from the original asset

This criterion has the effect that all transactions where cash flows are passed through to a third
party, but that third party has recourse to the transferor, do not qualify as transfers under IFRS 9.

Paragraph IFRS 9.3.2.5(a) clarifies that short-term advances by the entity with the right of full
recovery of the amount lent plus accrued interest at market rates do not violate this condition.
The entity has an obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay

Pass through transfers often concern groups of financial assets and it would be impracticable to
remit cash flows on a daily basis from every individual financial asset. IFRS 9 does not allow a
‘material delay’, therefore an ‘immaterial delay’ is allowed. Exact period is of course not
specified, but payments on a quarterly basis are not considered to be a material delay in practice.

In addition, in order to fulfil the criterion being discussed, the entity cannot be entitled to reinvest
cash flows received from financial assets in question, except for investments in cash or cash
equivalents during the short settlement period from the collection date to the date of required
remittance to the eventual recipients, and interest earned on such investments is passed to the
eventual recipients.

Has the entity transferred or retained substantially all risks

and rewards?

Overview of the risks and rewards step

If, based on criteria in previous steps, an entity has transferred a financial asset, next steps in the
decision tree relate to risks and rewards. These steps are set out in paragraphs IFRS 9.3.2.6(a)-
(b). If the entity transfers substantially all risks and rewards, it derecognises the asset. If entity
retains substantially all risks and rewards, it continues to recognise the asset. If the entity neither
transfers nor retains substantially all risks and rewards, it assesses whether it has retained control
of the asset (the step that follows).

If there are any rights and obligations created or retained in the transfer, they should be
recognised separately as assets or liabilities (IFRS 9.3.2.6(a)).

The transfer of risks and rewards is evaluated by comparing the entity’s exposure, before and
after the transfer, with the variability in the amounts and timing of the net cash flows of the
transferred asset. Often it will be obvious whether the entity has transferred or retained
substantially all risks and rewards of ownership and there will be no need to perform any
computations. In other cases, it will be necessary to compute and compare the entity’s exposure
to the variability in the present value of the future net cash flows before and after the transfer.
Computations and comparison are made using an appropriate current market interest rate as the
discount rate. All reasonably possible variability in net cash flows is considered, with greater
weight being given to those outcomes that are more likely to occur (IFRS 9.3.2.7-8).

IFRS 9 does not set any threshold that would represent ‘substantially’ all risks and rewards.
Examples of when an entity has or has not transferred substantially all the risks and rewards of
ownership are given in paragraphs IFRS 9.B3.2.4-5. Finally, examples of when an entity has
neither retained nor transferred substantially all the risks and rewards are given in paragraphs
IFRS 9.B3.2.16(h)-(i) and IFRS9.B3.2.17.

Retention of substantially all the risks and rewards

When an entity transferred an asset, but has retained substantially all the risks and rewards, the
asset is not derecognised. Instead, any proceeds received are recognised as a financial liability. In
subsequent periods, an entity recognises income on the transferred asset and expense incurred on
the financial liability as if they were separate financial instruments (IFRS 9.3.2.15).

Note that this is not the same as continuing involvement in transferred assets covered below.

Variability in the amounts and timing of the net cash flows of the transferred
asset

An example in the section on factoring presents a simple analysis showing whether an entity has
transferred substantially all risks and rewards of its trade receivables by comparing the entity’s
exposure, before and after the transfer, with the variability in the amounts and timing of the net
cash flows of the transferred assets.

Has the entity retained control of the asset?

This is the last question to be answered in the derecognition decision tree. It should be answered
when an entity transferred an asset, but has neither retained nor transferred substantially all risks
and rewards. If the entity has not retained control, it should derecognise the financial asset and
recognise separately as assets or liabilities any rights and obligations created or retained in the
transfer. If the entity has retained control, it continues to recognise the financial asset to the
extent of its continuing involvement in the financial asset (IFRS 9.3.2.6(c)).

Whether the entity has retained control of the transferred asset depends on the transferee’s (i.e. a
party to whom the asset was transferred) ability to sell the asset. If the transferee has the practical
ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability
unilaterally and without needing to impose additional restrictions on the transfer, the entity has
not retained control. In all other cases, the entity has retained control (IFRS 9.3.2.9).

Paragraphs IFRS 9.B3.2.7-9 elaborate on what is meant by practical ability to sell the asset. It
starts with a sentence saying that ‘transferee has the practical ability to sell the transferred asset if
it is traded in an active market because the transferee could repurchase the transferred asset in the
market if it needs to return the asset to the entity’. Some tend to interpret this as a condition that
 an asset must be traded in an active market irrespective of the circumstances. In my opinion this
is not the case, as the explanation goes on to say that an active market is needed when the
transferee would need to repurchase the transferred asset in the market if it needs to return the
asset to the entity. If the transferee would never be obliged to repurchase a transferred asset,
there need not be an active market in order to conclude that the control has been transferred. In
any case, accounting consequence will often be essentially the same, as retaining control means
accounting for continuing involvement in the asset (see below), which will often be similar to
recognition of any assets or liabilities resulting from rights and obligations created or retained in
the transfer under paragraph IFRS 9.3.2.6(c).

Continuing involvement in transferred assets

Overview of the continuing involvement

Accounting for continuing involvement in transferred assets is covered in paragraphs IFRS

9.3.2.16-21 and applies when an entity:

i. neither transfers nor retains substantially all the risks and rewards of ownership of a
transferred asset and
ii. retains control of the transferred asset.

See also the discussion contained in basis for conclusions paragraphs IFRS 9.BCZ3.27-28.

Transfers with guarantees

If a guarantee provided by an entity to pay for credit losses on a transferred asset prevents the
transferred asset from being derecognised to the extent of the continuing involvement, the
transferred asset at the date of the transfer is measured at the lower of (IFRS 9.3.2.16(a);
B3.2.13(a)):

i. the carrying amount of the asset and

ii. the guarantee amount

Example is given in paragraph IFRS 9.B3.2.17.

Put and call options on assets measured at amortised cost

If a put or call option prevents a transferred asset from being derecognised and the entity
measures the transferred asset at amortised cost, the associated liability is measured at the
consideration received adjusted for the amortisation of any difference between that cost and the
 gross carrying amount of the transferred asset at the expiration date of the option (IFRS
9.B3.2.13(b)).

Put and call options on assets measured at fair value

If a put or call option prevents a transferred asset from being derecognised and the entity
measures the transferred asset at fair value, the asset continues to be measured at its fair value.
The associated liability is measured at (IFRS 9.B3.2.13(c)):

i. the option exercise price less the time value of the option if the option is in or at the
money, or
ii. the fair value of the transferred asset less the time value of the option if the option is out
of the money.

Continuing involvement in a part of a financial asset

Paragraph IFRS 9.B3.2.17 illustrates accounting for continuing involvement in a part of a

financial asset.

Derecognition criteria applied to a part or all of an asset

Derecognition criteria in IFRS 9 should be applied to a part of an asset if, and only if, the part
being considered for derecognition meets one of the following three conditions (IFRS 9.3.2.2):

a. The part comprises only specifically identified cash flows from a financial asset or a
group of similar financial assets.
b. The part comprises only a fully proportionate (pro rata) share of the cash flows from a
financial asset or a group of similar financial assets.
c. The part comprises only a fully proportionate (pro rata) share of specifically identified
cash flows from a financial asset or a group of similar financial assets.

These conditions should be applied strictly as illustrated in examples given in paragraph IFRS
9.3.2.2(b). If none of them is met, derecognition criteria are applied to the financial asset in its
entirety.

The discussion on derecognition on this page refers to ‘a financial asset’ but is important to keep
in mind that ‘a financial asset’ may refer to a part of an asset if the criteria above are met.

‘A group of similar financial assets’

The criteria to decide whether derecognition criteria should be applied to the financial asset in its
entirety or to a part of it refer also to ‘a group of similar financial assets’. It is not further
explained in IFRS 9 what is meant by a group of similar financial assets and IASB
acknowledged that there is a diversity in determining what a group of similar financial assets is.
It is quite common that non-derivative assets (e.g. loans) are transferred together with derivative
financial instruments (e.g. interest rate swaps). The September 2006 IASB update indicated that
derecognition tests in IAS 39 (now in IFRS 9) should be applied to non-derivative financial
assets (or groups of similar non-derivative financial assets) and derivative financial assets (or
groups of similar derivative financial assets) separately, even if they are transferred at the same
time. The IASB also indicated that transferred derivatives that could be assets or liabilities (such
as interest rate swaps) would have to meet both the financial asset and the financial liability
derecognition tests. However, there is no binding interpretation addressing this issue, therefore
entities can develop their own accounting policies in this respect.

Consolidate all subsidiaries

It is worth noting that the derecognition decision tree starts with a reminder that all subsidiaries
should be consolidated. This might seem to be a trivial reminder, but it’s possible that an
arrangement for transferring financial assets to a third party may trigger its consolidation
under IFRS 10 and hence  financial assets will stay in consolidated financial statements.