Derecognition
The project encompasses the requirements in IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) for when a financial asset or financial liability must be removed from an entity’s statement of financial position and the related derecognition disclosure requirements in IFRS 7 Financial Instruments: Disclosures.
The IASB is undertaking this project for three reasons:
- To improve the derecognition requirements for financial assets in IAS 39, which have been perceived to be complex to understand and apply in practice
- To facilitate convergence between the derecognition requirements in IAS 39 and those in US GAAP
- To provide users with more information about an entity’s exposure to the risks of transferred financial assets.
Where are we in the project?
In March 2009, the Board published an exposure draft Derecognition ED/2009/3 (proposed amendments to IAS 39 and IFRS 7). Read the ED and related press release.
In June 2009, the Board held public round-tables to discuss the proposals in the ED in North America, Asia and Europe. Click here for further information. In addition to the round-tables, the IASB staff also undertook an extensive outreach programme with users, preparers, regulators, auditors, trade associations, and others. The comment deadline for the ED closed in July 2009.
In September 2009, the IASB discussed the feedback received from respondents on the ED as well as from the outreach programme undertaken by the staff.
In October 2009 the Board tentatively decided the following:
a. to pursue the derecognition approach for financial assets that was described as the alternative approach in the ED. The Board directed the staff to further develop that approach to consider some of the concerns that respondents to the ED raised with the alternative approach.
b. that a bankruptcy remoteness test should not form part of the derecognition model.
c. if an entity retains a disproportionate interest in an asset, the transferor should treat the part retained as a new asset, measure it initially at fair value, and recognise any gain or loss resulting from the transfer in profit or loss. If an entity retains a proportionate interest in an asset previously recognised, the transferor should treat it as part of that asset and recognise a gain or loss only on the part transferred. The transferor would continue to measure the retained interest using the measurement basis that it applied to the asset recognised before the transfer.
In December 2009 the Board discussed feedback from respondents to the ED on the proposed changes to the derecognition requirements for financial liabilities. The Board made tentative decisions on the following issues:
a. the criteria for determining when a change in contractual terms results in a new contract (and hence extinguishment of the associated liability). A contract is substantially modified if the contract is altered in such a manner that either the timing, amounts or uncertainty of the cash flows under the new or modified contract are substantially different from those under the original contract, or it changes the nature of the debtor’s obligation or the nature of the investment that the contract represents.
b. the accounting for contractual amendments that result in extinguishment of a financial liability (including debt for equity swaps) should be in accordance with current IAS 39 guidance. Any transaction costs or fees incurred related to the extinguishment of the original liability should be included in the gain or loss recognised on extinguishment, unless any part of that cost can be directly attributed to the new liability.
c. the accounting for contractual amendments that do not result in extinguishment of a financial liability should be in accordance with the current guidance under IAS 39.
d. derecognition accounting by the borrower and lender, if an amendment to a contract meets the substantial modification criteria, should be symmetrical.
What happens next?
The Board will continue deliberations on the comments received from respondents to the ED on the alternative approach to derecognition of financial assets and the proposed disclosure requirements at the February and March 2010 meetings.
As agreed at the joint meeting in July 2009, the FASB will join the IASB’s deliberations following the implementation of the FASB’s recent amendments to derecognition and related disclosure requirements in US GAAP. This is to ensure that the IASB and FASB will consider the lessons and experiences from the application of those amendments in practice in the development of a converged derecognition standard.
Estimated project completion
The Board plans to publish a final amendment of the derecognition guidance in IAS 39 in the second half of 2010.
Related projects
Financial Statement Presentation
Conceptual Framework
Consolidated Financial Statements
Recognition and Measurement of Financial Instruments