Full derecognition with new assets liabilities

Full derecognition with new assets liabilities retained is part of a decision model for the derecognition of financial assets. The derecognition can be a full derecognition, a full continued recognition, a full derecognition with recognition of new assets or liabilities retained or a continued involvement. The model is starting here Derecognition of financial assets.

Derecognition

Derecognition is the removal of a previously recognised financial asset (or financial liability) from an entity’s statement of financial position. In general, IFRS 9 criteria for derecognition of a financial asset aim to answer the question whether an asset has been sold and should be derecognised or whether an entity obtained a kind of financing against this asset and simply a financial liability should be recognised.

No transfer or retainment of risks and rewards but transfer of control

When an entity has neither transferred nor retained substantially all the risks and rewards but has transferred control, it derecognises the financial asset and recognises separately as assets or liabilities any rights and Full derecognition with new assets liabilitiesobligations created or retained in the transfer. For example, if an entity sells an asset that is traded in an active market but retains a call option to buy back that asset at a fixed price, the transferor derecognises the asset and recognises the call option.

Derecognition?

An entity that derecognises a financial asset in its entirety includes the difference between the carrying amount of the asset and the consideration received (including any cumulative gain or loss that had been recognised directly in equity) in the income statement.

Part derecognition

An entity that derecognises only a part of a larger financial asset allocates the previous carrying amount of the financial asset between the part that continues to be recognised and the part that is derecognised based on relative fair values at the date of transfer. The difference between the carrying amount allocated to the part derecognised (including any cumulative gain or loss relating to the part derecognised that had previously been recognised in equity) and the consideration received is included in the gain or loss on derecognition.

The contract (or agreement or habit) on which the derecognition is based may also result in new assets acquired and/or new liabilities assumed. Read the contract!

Full derecognition with recognition of new assets or liabilities retained – Example Securitisation

Source: Annual report 2018 Deutsche Bank (page 242)

Securitisation

The Group securitizes various consumer and commercial financial assets, which is achieved via the transfer of these assets to a structured entity, which issues securities to investors to finance the acquisition of the assets. Financial assets awaiting securitisation are classified and measured as appropriate under the policies in the “Financial Assets and Liabilities” section.

Unconsolidated structured entity

If the structured entity is not consolidated then the transferred assets may qualify for derecognition in full or in part, under the policy on derecognition of financial assets. Synthetic securitisation structures typically involve derivative financial instruments for which the policies in the “Derivatives and Hedge Accounting” section would apply. Those transfers that do not qualify for derecognition may be reported as secured financing or result in the recognition of continuing involvement liabilities. The investors and the securitisation vehicles generally have no recourse to the Group’s other assets in cases where the issuers of the financial assets fail to perform under the original terms of those assets.

Retained interests

Interests in the securitized financial assets may be retained in the form of senior or subordinated tranches, interest only strips or other residual interests (collectively referred to as “retained interests”). Provided the Group’s retained interests do not result in consolidation of a structured entity, nor in continued recognition of the transferred assets, these interests are typically recorded in financial assets at fair value through profit or loss and carried at fair value.

Fair value

Consistent with the valuation of similar financial instruments, the fair value of retained tranches or the financial assets is initially and subsequently determined using market price quotations where available or internal pricing models that utilize variables such as yield curves, prepayment speeds, default rates, loss severity, interest rate volatilities and spreads. The assumptions used for pricing are based on observable transactions in similar securities and are verified by external pricing sources, where available. Where observable transactions in similar securities and other external pricing sources are not available, management judgment must be used to determine fair value. The Group may also periodically hold interests in securitized financial assets and record them at amortized cost. Full derecognition with new assets liabilities

Present obligation

In situations where the Group has a present obligation (either legal or constructive) to provide financial support to an unconsolidated securitisation entity a provision will be created if the obligation can be reliably measured and it is probable that there will be an outflow of economic resources required to settle it. Full derecognition with new assets liabilities

Derecognition

When an asset is derecognized a gain or loss equal to the difference between the consideration received and the carrying amount of the transferred asset is recorded. When a part of an asset is derecognized, gains or losses on securitisation depend in part on the carrying amount of the transferred financial assets, allocated between the financial assets derecognized and the retained interests based on their relative fair values at the date of the transfer. Full derecognition with new assets liabilities

See also: The IFRS Foundation

Full derecognition with new assets liabilities

Full derecognition with new assets liabilities Full derecognition with new assets liabilities Full derecognition with new assets liabilities

Full derecognition with new assets liabilities Full derecognition with new assets liabilities Full derecognition with new assets liabilities

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