Sale Of Specifically Identified Cash Flows – FAQ | IFRS

Sale of specifically identified cash flows

This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements for derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity A holds a portfolio of AAA-rated fixed-rate corporate eurobonds classified as at fair value through other comprehensive income, because they are considered available for sale. All bonds mature in approximately five years time.

The bonds are traded in a highly liquid market. Interest rates have fallen since entity A bought the bonds; as a result, the value of the bonds, originally bought for €100 million, has increased to €111 million. Entity A assigns to Entity B rights to 90% of the principal payments on the bonds for a cash payment of €70 million. A will continue to receive all interest payments on the whole portfolio and 10% of the principal payments. When the bonds mature in five years’ time, A will pass on to B 90% of the principal amount that is repaid. B bears the credit risk on any defaults of its newly acquired 90% of the principal amount.

Additional information:

  • Fair value of portfolio at date of transfer – €111 million
  • Fair value of interest only strip at date of transfer – €33 million
  • Amount of gain previously recognised in equity – €11 million

Analysis using the flowchart [IFRS 9 B3.2.1]

Step 1 Consolidate all subsidiaries

This step is not applicable in this example.

Step 2 Determine whether the derecognition model should be applied to part of a financial asset (or a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety.

  • The financial instruments included in entity A’s debt securities portfolio have similar characteristics. They are of the same type and currency (corporate eurobonds), have the same credit rating (AAA), mature at approximately the same date (five years after the transaction) and all carry a fixed rate coupon. They should be assessed as a group of similar financial assets.
  • The transaction relates to a fully proportionate share (90%) of specifically identified cash flows (the principal repayments) from the portfolio. The derecognition model should therefore be applied to that part of the portfolio.

Step 3 Have the rights to the cash flows expired?

The bonds have not yet matured so the rights to the cash flows still exist.

Step 4 Is there a transfer?

Entity A has assigned 90% of the principal cash flows of these debt securities to entity B. This qualifies as a transfer under IFRS 9 3.2.4 (a), even though A continues to act as collection agent.

While A would be able to sell the remaining 10% principal strip and the complete interest strip to a third party, it has no further rights in respect of the 90% principal.

Step 5 Risks and rewards analysis

Entity A has transferred the credit and late payment risks associated with the transferred asset (90% of the principal cash flows). No variability in the cash flows from movements in interest rates is expected, as the transferred asset is a fixed amount that does not vary with interest rate movements. The variability in the fair value of the asset from movements in interest rates has been transferred to entity B. Entity A has therefore transferred substantially all the risks and rewards in relation to the transferred asset (90% of the principal cash flows from the portfolio) and should derecognise that portion.


Transferor’s accounting

On the date of the transfer

Where only part of the asset is sold, the previous carrying amount of the larger financial asset is allocated between the part that continues to be recognised and the part that is derecognised, based on the relative fair values of those parts on the date of transfer.

Fair value of entire portfolio = 111, less fair value of interest only strip = 33 results is a fair value of principal only of 78. So fair value of entire principal is 78, of which 90% is transferred, resulting in a fair value of 90% of transferred principal only of 70.

The gain or loss on sale is calculated as the difference between:

  • the carrying amount allocated to the part derecognised (70), and
  • the sum of the consideration received for the part derecognised (70) and any cumulative gain or loss allocated to it (on the basis of relative fair values) that had been recognised directly in equity (11 x (70/111).

€ millions

Carrying amount allocated to part derecognised

90% of principal payments (90% of 78)

-70

Consideration received for part derecognised

70

70

Cumulative gain or loss allocated to part derecognised previously recognised in equity

11 x (70 / 111)

7

Gain recycled on derecognition

7

Accounting entries on the date of the transfer

(in € millions) Sale of specifically identified cash flows

DR

CR

Cash Sale of specifically identified cash flows

70

\ Debt securities Sale of specifically identified cash flows

70

OCI – Items that may be reclassified to profit or loss – Realised result on securities

7

\ Gain on derecognition (in profit or loss)

7

To recognise the cash received for 90% of the principal of the debt securities and to recycle the gain of 7 on the sale of that proportion.

Subsequently, entity A’s 10% principal strip and its entire interest strip will continue to be measured at fair value through profit or loss with re-measurement of the fair value at each balance sheet date.


Transferee’s accounting

On the date of the transfer

As entity A derecognised 90% of the principal of the bonds, entity B will recognise the 90% of the principal of the bonds and derecognise the cash consideration it paid in return.

(in € millions) Sale of specifically identified cash flows

DR

CR

Debt securities Sale of specifically identified cash flows

70

\ Cash Sale of specifically identified cash flows

70

To recognise the purchase of a 90% principal strip in this portfolio of eurobonds.

Subsequently, the accounting will depend on how B classifies its asset under IFRS 9 (at amortised costs or fair value through profit or loss).

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