Derecognise a sale of a financial instrument or not?

Here are some examples regarding sale transactions of financial instruments and whether or not these should be derecognised or not (and why)?

Sale of disproportionate interest

Question

Can the sale of the rights to the first of any cash collections from a group of similar financial assets be considered a part of those assets for derecognition purposes?

Background

Entity A originates a portfolio of similar five-year interest-bearing loans of 10,000. A then enters into an agreement with entity B. A agrees to pay to B the first 9,000 of cash collected from the portfolio plus interest in exchange for an upfront cash payment from B. A retains the rights to the last 1,000 plus interest, representing a subordinated interest in the portfolio.

Conclusion and considerations

No. The derecognition guidance should be applied to the entire portfolio of loans. The transfer of the rights to the first of any cash collections from a group of financial assets cannot be assessed for derecognition separately. The first 9,000 of cash flows plus interest is not a fully proportionate share of the cash flows because any credit losses are borne in the first instance by A and are not shared proportionally between the parties. Also, the first 9,000 of cash flows plus interest cannot be regarded as specifically identified cash flows, as it is not possible to identify which loans in the portfolio the first 9,000 cash flows will arise from.


Sale of asset with a guarantee

Question Derecognise a sale of a financial instrument or not?

Are the derecognition tests applied to the whole or only part of a financial asset that is sold subject to a guarantee?

Background

Entity C enters into an arrangement to transfer the rights to 90% of the cash flows of a group of receivables to Entity D. C also provides a guarantee to compensate D for any credit losses up to 8% of the principal amount of the receivables.

Conclusion and considerations

The derecognition tests should be applied to the asset in its entirety. Although the transferor has transferred 90% of all cash flows from the asset, the existence of the guarantee means that the transferor bears a disproportionate share of any credit losses.


Sale of asset for part of life

Question Derecognise a sale of a financial instrument or not?

Does a transfer of an asset for part of its life qualify as a separate asset for derecognition purposes?

Background

Entity E enters into an arrangement to transfer the rights to 100% of the cash flows arising in the last four years of a 10-year instalment loan. That is, E has transferred the last four equal cash repayments due on this instalment loan.

Conclusion and considerations

Yes. The derecognition requirements can be applied to the specifically identifiable cash flows.


Sale of dividends

Question Derecognise a sale of a financial instrument or not?

Is a right to receive the dividends of certain specified year(s) specifically identified cash flows and hence ‘a part of a financial asset’ (ie, a separate asset under IFRS 9 3.2.2)? For example, entity F that has a holding of shares in Company X (an available-for-sale financial asset) transfers to entity G the right to receive the dividends paid on those shares in the next year. Is that year’s dividend itself a separate asset for the purpose of F’s derecognition test?

Conclusion and considerations

Yes. If the entitlement to dividends of those year(s) is clearly specified, the dividend strip of those year(s) is specifically identified cash flows and therefore a separate asset under IFRS 9 3.2.2.


Sale of shares but retained rights to dividends

Question Derecognise a sale of a financial instrument or not?

Entity H transfers to J its holding of shares but retains the right to receive the dividends paid in the next year.

Is that financial asset, other than the first year’s dividend retained, a separate asset for the purpose of H’s derecognition test?

Conclusion and considerations

Yes. The cash flows arising from this financial asset from the second year to perpetuity are also specially identified cash flows.

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