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Pass through testing

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Pass through testingPass through testing provides some examples to learn which types of financial instruments/transactions qualify for accounting for a pass-through arrangement. All the following conditions have to be met to conclude that such pass-through arrangements meet the criteria for a transfer: [IFRS 9 3.2.5]

  • The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition. Pass-through arrangements
  • The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as
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Derecognition of financial assets

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Derecognition of financial assets has drawn a lot of attention in the Enron scandal. Enron used special purpose entities—limited partnerships or companies created to fulfil a temporary or specific purpose to fund or manage risks associated with specific (financial and/or non-financial) assets. Derecognition of financial assets

On October 16, 2001, Enron announced that restatements to its financial statements for years 1997 to 2000 were necessary to correct accounting violations. The restatements for the period reduced earnings by $613 million (or 23% of reported profits during the period), increased liabilities at the end of 2000 by $628 million (6% of reported liabilities and 5.5% of reported equity), and reduced equity at the end of 2000 by $1.2 Read more

The Risk and Rewards Test and the Control Test

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The Risk and Rewards Test and the Control Test are used to validate the accounting for a transfer of a financial asset under IFRS 9 Financial instruments.

Based on criteria in previous steps it has been concluded that an entity has transferred a financial asset (see IFRS 9 B3.2.1).

The central questions here are:

1) has the entity transferred or retained substantially all risks and rewards?

and The Risk and Rewards Test and the Control Test

2) has the entity retained control of the asset(s)? 

Which leads to 3 possible outcomes, or in a diagram:

The Risk and Rewards Test and the Control Test

The risk and rewards test and the Control Test

These steps are set out in paragraphs IFRS 9 3.2.6(a)-(b)Read more

Derecognise a transfer of a financial instrument or not?

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Derecognise a transfer of a financial instrument or not – to quickly grow comfortable and get a gut feeling for derecognising a financial instrument read this page. Small cases with different inputs with a analysing comment on the case provide a fruitful learning ground. Here are some examples regarding transfers of financial instruments and the question of whether or not these should be derecognised (and why)? Derecognise a transfer of a financial instrument or not

Transfer versus agency relationshipDerecognise a transfer of a financial instrument or not

Question Derecognise a transfer of a financial instrument or not

Is the transfer of securities to a custodian a transfer of the contractual rights under IFRS 9 3.2.4(a)?

Background Derecognise a transfer of a financial instrument or Read more

Derecognise a sale of a financial instrument or not?

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Derecognise a sale of a financial instrument or not – to quickly grow comfortable and get a gut feeling for derecognising a financial instrument read this page. Small cases with different inputs with a analysing comment on the case provide a fruitful learning ground. 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 … Read more

Control and continuing involvement

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Control and continuing involvement – Under IFRS 9, control is different from the notion of control in IAS 27 – the power to govern so as to obtain benefits. The notion in IAS 27 focuses on the powers of the entity (transferor) and implies an ability to manage the asset actively. Control and continuing involvement

In contrast, in the context of derecognition under IFRS 9, control is based on whether the transferee has the practical ability to sell the asset. This IFRS 9 notion addresses the extent that the transferor continues to be exposed to the cash flows of the particular asset that was the subject of the transfer as opposed to be exposed to risks Read more

Pass through arrangements

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Pass through arrangements – If there is no transfer of contractual rights under IFRS 9 3.2.4 (a), an entity should determine if there is an obligation to pass on the cash flows of the financial asset under a pass-through arrangement. For example, a transferor that is a trust or SPE may issue beneficial interests in the underlying financial assets to investors but continue to own those financial assets. Pass through arrangements

All the following conditions have to be met to conclude that such pass-through arrangements meet the criteria for a transfer: [IFRS 9 3.2.5]

  • The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the
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Securitisation all in interest rate swap retained

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Securitisation all in interest rate swap retained – 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

Bank Q assigns 10-year 10% fixed rate pre-payable mortgages with a notional principal of €10 million to an SPE for €10 million of cash on 1 January 20X1.

The SPE issues 10-year floating-rate (Libor based) notes to investors (with quarterly interest payment dates) in various credit-rated tranches Read more

Sale of loans guarantee retained

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Sale of loans guarantee retained – 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 P has originated a group of similar five-year fixed rate corporate loans for €9,980,000 with the intention of selling them to a bank in the near future. It is, therefore, accounting for these loans at fair value through profit or loss before the sale.

Subsequently, P assigns the Read more

Securitisation revolving structure

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Securitisation revolving structure – 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

Bank N assigns €100 million of its credit card receivables to a Special Purpose Vehicle (SPV) on a revolving basis for five years. The SPV is formed for the purpose of this securitisation; its activities are limited to holding the credit card receivables, issuing notes to investors and Read more