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BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION: Derecognition of a financial asset
The original IAS 396  Under the original IAS 39, several concepts governed when a financial asset should be derecognised. It was not always clear when and in what order to apply those concepts. As a result, the derecognition requirements in the original IAS 39 were not applied consistently in practice. As an example, the original IAS 39 was unclear about the extent to which risks and rewards of a transferred asset should be considered for the purpose of determining whether derecognition is appropriate and how risks and rewards should be assessed. In some cases (eg transfers with total returns swaps or unconditional written put options), the Standard specifically indicated whether derecognition was appropriate, whereas in others (eg credit guarantees) it was unclear. Also, some questioned whether the assessment should focus on risks and rewards or only risks and how different risks and rewards should be aggregated and weighed.

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION: To illustrate, assume an entity sells a portfolio of short-term receivables of CU1007 and provides a guarantee to the buyer for credit losses up to a specified amount (say CU20) that is less than the total amount of the receivables, but higher than the amount of expected losses (say CU5). In this case, should (a) the entire portfolio continue to be recognised, (b) the portion that is guaranteed continue to be recognised or (c) the portfolio be derecognised in full and a guarantee be recognised as a financial liability? The original IAS 39 did not give a clear answer and the IAS 39 Implementation Guidance Committee—a group set up by the IASB’s predecessor body to resolve interpretative issues raised in
practice—was unable to reach an agreement on how IAS 39 should be applied in this case. In developing proposals for improvements to IAS 39, the IASB concluded that it was important that IAS 39 should provide clear and consistent guidance on how to account for such a transaction.

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION

The International Financial Reporting Standards, usually called the IFRS Standards,are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm.

IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC (the predecessor of IASB) are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards “International Financial Reporting Standards”.

Financial statements are a structured representation of the financial positions and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it.[4]

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION

To meet this objective, financial statements provide information about an entity’s:

  1. Assets;
  2. Liabilities;
  3. Equity;
  4. Income and expenses, including gains and losses;
  5. Contributions by and distributions to owners in their capacity as owners; and
  6. Cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

BASIS FOR CONCLUSIONS ON IFRS 9 RECOGNITION AND DERECOGNITION

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