Recognition and derecognition

Question 1

When are Financial assets/liabilities recognized?

Answer 1

IFRS9_3_1

• when entity becomes party to contractual provisions of instrument
• Application guidance #9_B_3_1

Question 2

When are Financial Assets derecognized?

Answer 2

IFRS9_3_2_1
- Group perspective first IFRS10

1. Component Approach #IFRS9_3_2_2
   
   • extent to which principle applies -> partial derecognition?
     
     • Criteria: identified CF
     • proportionate pro rat share of CF if transfer of rights >90%
     • proportional pro rata share of specifically identified cashflows if transfer of rights <90%
2. Risk and reward approach #IFRS9_3_2_3
   
   • Derecognition of a financial asset if the substantial risks and rewards are transferred
     
     • two cases #IFRS9_3_2_4:
       
       • contract exists: transfer of contractual rights to receive CF
       • no contract: no transfer of contractual rights but contractual obligation to pay all CF –> pass-through-arrangement #IFRS9_3_2_5
         
         • sale or cession
         • eligibility: No additional obligation to pay amounts to recipient (e.g. credit enhancements or guarantees); No possibility of control by seller; Payment is made in full and without any significant delay
3. Control approach #IFRS9_3_2_6
   
   • Derecognition in the event of loss of control
     
     • substantially transferred wisk/Rewards of ownership
       
       • based on exposure to variability of present Value of future net cashflows
     • only assessed if risk/reward approach no clear solution
   • examples continued regnition
     
     • transferor gives guarantee, transferee keeps var. purchase price reduction
4. Continuing involvement approach #IFRS9_3_2_16
   
   • No derecognition to the extent of continuing involvement

Question 3

When are genuine pension transactions derecognized?

Answer 3

340bIIHGB

• Rückkaufverpflichtung des Anbieters
• pension provider keeps risk/reward of transferred securities
• consequences: securities still recognised at pension provider, pension provider keeps current profit as well, accounting linke secured borrowing, transferred securities are collateral –> no special accounting rules

Question 4

When are non-genuine pension transactions derecognized?

Answer 4

340bIIIHGB

• RückübertragungsOPTION
• risk position of pension provider depends exercising probability of put option of recipient
  
  • Put option of recipient of pension is deep in the money than the related substantial risks and rewards are transferred – derecognition
  • Put option of recipient of pension is deep out of the money, than the related substantial risks and rewards are retained – no derecognition
  • Put option of recipient of pension is neither deep in the money nor deep out of the money – control approach to be assessed
    
    • Financial asset available at market at any time – derecognition because entity has not retained control
    • Financial asset not available at market at any time – Continuing involvement – derecognition not (completely) possible because entity has retained control

Question 5

When are securities lending agreement derecognized?

Answer 5

• Securities repurchase agreements (Repo)
  
  • return for payments -> securities transferred to another party
    
    • retransfer obligation #340bIIHGB
    • retransfer rights #340IIIHGB
• Securities lending agreements
  
  • obligation of retransfer in same constitution, quality and quantity
  • economically equivalent to retransfer obligation
  • treatment like retransfer obligation
  • Treatment:
    
    • assessment of transfer of substantial risk/reward
    • analogue to genuine pension transaction -> no derecognition
    • SLA that provides cash deposit from borrower to be accounted as secured loan contract

Question 6

What are examples for partial derecognition?

Answer 6

Sale of interest-strip of capital claim (debt/bond)

Question 7

What is example for full derecognition?

Answer 7

Option not exercised at maturity date

Question 8

What should be done if Chance and Risk approach is unclear?

Answer 8

mathematical comparison of NPV before and after transaction
- if >90% risk transferred –> derecognition
- if <10% risk transferred –> no derecognition
- if 10,x-89,9x% –> see control approach

Question 9

When are financial liabilities derecognized?

Answer 9

IFRS9_3_3_1

• when obligations are extinguished, discharged, cancelled, expires