IFRS 9 Continue To Recognise The Financial Asset - FAQIFRS

IFRS 9 Continue to recognise the financial asset

IFRS 9 Continue to recognise the financial asset 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. IFRS 9 Continue to recognise the financial asset

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. IFRS 9 Continue to recognise the financial asset

No derecognition (on balance sheet)

If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity must assess whether it has relinquished control of the asset or not. If the entity does not control the asset IFRS 9 Continue to recognise the financial assetthen derecognition is appropriate; however if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to which it has a continuing involvement in the asset. [IFRS 9 3.2.16]

Collateralised borrowing

A transaction is accounted for as a collateralised borrowing if the transfer does not satisfy the conditions for derecognition. The entity recognises a financial liability for the consideration received for the transferred asset. If the transferee has the right to sell or repledge the asset, it is presented separately in the balance sheet (for example, as a loaned asset, pledged security or repurchased receivable). In subsequent periods, the entity recognises income relating to the transferred assets and any expense incurred on the financial liability. Where a derivative forms part of the transaction and precludes the asset from being derecognised, the derivative is not accounted for separately, as this would result in the derivative being accounted for twice. IFRS 9 Continue to recognise the financial asset

Retained control

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). IFRS 9 Continue to recognise the financial asset

The practical ability to sell an asset

IFRS 9 B3.2.7-9 elaborates 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.

IFRS 9 Continue to recognise the financial asset

If the transferee would not be obliged to repurchase a transferred asset under no circumstances, 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 IFRS 9 3.2.6(c). IFRS 9 Continue to recognise the financial asset

Determination of Fair value

It may be difficult to determine the fair values of the parts of a larger asset that are derecognised and continue to be recognised. Where there are no available market prices, the best estimate of the fair value of the part that continues to be recognised is the difference between the fair value of the larger financial asset as a whole and the consideration received from the transferee for the part of the asset that is derecognised. IFRS 9 Continue to recognise the financial asset

See also: The IFRS Foundation

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