IASB Meeting 2006
Derecognition of financial instruments
The Board discussed a request from the IFRIC for input and advice regarding possible interpretations of two issues relating to the derecognition requirements of IAS 39 Financial Instruments: Recognition and Measurement.
The first issue was the meaning of ‘similar’ for groups of financial assets (in paragraph 16) and the possible implications for the subsequent derecognition tests required by IAS 39.
The Board indicated that derivative assets (which are often transferred together with non-derivative financial assets) are not ‘similar’ to non-derivative financial assets for the purposes of IAS 39 paragraph 16. Therefore, an entity would apply the derecognition tests in IAS 39 to non-derivative financial assets (or groups of similar non-derivative financial assets) and derivative financial assets (or groups of similar derivative financial assets) separately, even if they are transferred at the same time. The Board also indicated that transferred derivatives that could be assets or liabilities (such as interest rate swaps) and are transferred would have to meet both the financial asset and the financial liability derecognition tests.
The second issue related to the types of transactions that are required to be treated as pass-through transfers in IAS 39.
The Board discussed whether the pass-through test is applicable to all transfers in which legal ownership of the financial asset is not transferred. The Board indicated that a transaction in which an entity transfers all the contractual rights to receive the cash flows (without necessarily transferring legal ownership of the financial asset), would not be treated as a pass through. An example might be a situation in which an entity transfers all the legal rights to specifically identified cash flows of a financial asset (for example, a transfer of the interest or principal of a debt instrument). Conversely, the pass through test would be applicable when the entity does not transfer all the contractual rights to cash flows of the financial asset, such as disproportionate transfers (see IAS 39 paragraph 16(b)).
The Board also discussed whether conditional transfers should be treated as pass-through transactions. Conditions attached to a transfer could include provisions ensuring the existence and value of transferred cash flows at the date of transfer or conditions relating to the future performance of the asset.
The Board indicated that such conditions would not affect whether the entity has transferred the contractual rights to receive cash flows (under paragraph 18(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.
The Board asked the staff to report its discussions to the IFRIC.