IFRS 9 Transfer right to receive cash flows 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 Transfer right to receive cash flows
Step 4 Has the entity transferred its right to receive the cash flows from the asset? [IFRS 9 3.2.4(a)]
If the contractual rights to the cash flows from the asset still exist, the asset is transferred before derecognition is possible. IFRS 9 identifies two ways in which a transfer can be achieved. An entity ‘transfers’ a financial asset only if it either: IFRS 9 Transfer right to receive cash flows
- transfers the contractual rights to receive the cash flows of the financial asset, or
- retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients, in what is often referred to as a ‘pass-through arrangement’ [IFRS 9 3.2.4].
IFRS 9 does not explain what is meant by the phrase ‘transfers the contractual rights to receive the cash flows of the financial asset’. A literal reading of the words could suggest an asset’s legal sale, or a legal assignment of the rights to the cash flows from the asset. For example, an entity that has sold a financial asset (such as a legal sale of a bond) has transferred its rights to receive the cash flows from the asset. In this situation, the transferee has unconditional, currently exercisable rights to all the future cash flows. The transfer should then be assessed in step 6 to determine whether it qualifies for derecognition.
Some types of financial asset (for example, a receivable or a portfolio of receivables) cannot be ‘sold’ in the same way as other types (for example, a bond), but they can be transferred by means of a novation or an assignment. Both novation and assignment will generally result in the transfer of contractual rights to receive the financial asset’s cash flows. However, any conditions or obligations placed upon the transferor should be considered and may impact this assessment. IFRS 9 Transfer right to receive cash flows
Sometimes transfers of financial assets are made subject to certain conditions. Conditions attached to a transfer could include provisions relating to the existence and value of transferred cash flows at the date of transfer or conditions relating to the future performance of the asset. Such conditions would not affect whether the entity has transferred the contractual rights to receive cash flows (under IFRS 9 3.2.4(a)). However, the existence of conditions relating to the future performance of the asset might affect the conclusion related to the transfer of risks and rewards, as well as the extent of any continuing involvement by the transferor in the transferred asset. IFRS 9 Transfer right to receive cash flows
In some instances, following the transfer of the contractual rights to receive a financial asset’s cash flows, the transferor may continue to administer or provide servicing on the transferred asset. For example, a transferor may transfer all rights to cash flows but continue to collect cash flows on behalf of the transferee in the capacity of an agent rather than for its own benefit. This could occur where the original asset counterparties are notified that their obligation has been legally transferred to the transferee and are requested to pay the cash flows into a bank account for the transferee’s benefit. In this case, the transferor acts purely as an agent in managing the collection of the transferee’s cash flows. Determining whether the contractual rights to cash flows have been transferred is not affected by the transferor retaining the role of an agent to administer collection and distribution of cash flows. Therefore, retention of servicing rights by the entity transferring the financial asset does not in itself cause the transfer to fail the requirements in IFRS 9 3.2.4(a). IFRS 9 Transfer right to receive cash flows IFRS 9 Transfer right to receive cash flows
Continue using this decision tree to evaluate whether and to what extent a financial asset is derecognised…. Document the IFRS questions (including IFRS references) and your answers and your derecognition file is ready for review and authorisation. IFRS 9 Transfer right to receive cash flows IFRS 9 Transfer right to receive cash flows IFRS 9 Transfer right to receive cash flows
Links for more on each IFRS referenced in the decision tree: IFRS 9 3.2.3(a) Rights to cash flows expired, IFRS 9 3.2.4(a) Transferred rights, IFRS 9 3.2.4(b) Assumed an obligation, IFRS 9 3.2.6(a) Transfer risk and rewards test, IFRS 9 3.2.6(b) Retained risks and rewards test, IFRS 9 3.2.6(c) Retained control, IFRS 9 B 3.2.13 Continuing involvement
See also: The IFRS Foundation