Our Recommendations :-
Follow FB Page Facebook

IFRS Practical applications for banks and other financial institutions

IFRS Practical applications for banks and other financial institutions: Many derecognition structures use entities (for example, trusts and partnerships) that have been specifically set up for the acquisition of the transferred assets. The transfer of assets to such an entity might qualify as a legal sale.

However, if the relationship between the transferor and the transferee suggests that the transferor controls the transferee, the transferor needs to consolidate the transferee.

The derecognition principles therefore have to be applied on a consolidated level.

An entity first consolidates all subsidiaries and special purpose entities in accordance with IAS 27, ‘Consolidated and separate financial statements’, and SIC 12, ‘Service concession arrangements’, and then applies the derecognition principles to the resulting group.

Important Note – Preparing for IFRS?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from CAKART.in. Quality is much better than local tuition, so results are much better.
Watch Sample Video Now by clicking on the link(s) below – 
For any questions Request A Call Back  

The next is to identify the assets (or part of assets) that should be tested for  derecognition.

IFRS Practical applications for banks and other financial institutions

The tests may be applied to any of the  following:

  • An entire asset (for example, an unconditional sale of a financial asset)
  • A fully proportionate share of the cash flows from an asset (for example, a sale of 10 per cent of all principal and interest cash flows)
  • Specifically identified cash flows from an asset (for example, a sale of an interest-only strip)
  • A fully proportionate share of specifically identified cash flows from an asset (for example, a sale of a 10 per cent interest-only strip).

If the contractual rights to the cash flows from a financial asset (or part of the asset) have expired or are forfeited, the entity derecognises the financial asset.

This is the case when a debtor discharges its obligation by paying the holder of the financial asset or when the debtor’s obligations to the holder have ceased (for example, when the rights under an option expire).

A transaction qualifies as a transfer if the entity transfers the contractual rights to receive the cash flows to a third party or where it retains the contractual rights but assumes a contractual obligation to pass on these cash flows to  another.

IFRS Practical applications for banks and other financial institutions: Derecognition

Important Note – Preparing for IFRS?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from CAKART.in. Quality is much better than local tuition, so results are much better.
Watch Sample Video Now by clicking on the link(s) below – 
For any questions Request A Call Back  

Some transactions clearly involve the transfer of rights to another party. For example, an entity that has sold a financial asset (for example., a legal sale of a bond) has transferred its rights to receive the cash flows from the asset. The transfer then has to be assessed to determine whether it meets the derecognition criteria.

An entity that retains its contractual rights to receive cash flows from a financial asset may still assume a contractual obligation to pass on the cash flows to one or more entities (pass-through arrangements)

This situation may arise, for example, if the transferor is a special purpose entity or trust, and issues beneficial interests in the underlying financial assets that it owns to investors while continuing to service those financial assets (that is, custody of the underlying asset remains with the transferor).

Additional requirements have to be fulfilled to conclude that a pass-through arrangement meets the criteria for a transfer.

If the following conditions are met, the entity performs the derecognition tests in 5 in order to determine whether it meets the derecognition criteria:

  • The entity has no obligation to pay cash flows to the transferee unless it collects equivalent cash flows from the transferred
  • The entity is prohibited from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pass-through cash
  • The entity is obliged to remit any cash flows without material delay and subject to certain investment restrictions.

IFRS Practical applications for banks and other financial institutions

If the conditions are not met, the financial assets remain on the balance sheet.

If the entity transfers substantially all the risks and rewards of ownership of the asset (for example, an unconditional sale of a financial asset), it derecognises the asset.
IFRS Practical applications for banks and other financial institutions

The transfer of risks and rewards is evaluated on the entity’s exposure before and after the transfer to the variability in amount and timing of the cash flows that are likely to occur in practice. It will be clear in most cases whether the entity has transferred substantially all the risks and rewards without the need for a calculation. If substantially all the risks and rewards have been transferred, the asset is derecognised.

If the entity has not transferred substantially all risks and rewards, it carries out Test 2.

IFRS Practical applications for banks and other financial institutions: Derecognition

If the entity retains substantially all the risks and rewards of ownership of the asset, it continues to recognise the  asset.

If the transferor’s exposure has not changed substantially as a result of the transfer, it has retained substantially all risks and rewards of ownership and does not derecognise the asset.

For example, this would be the case in a sale and repurchase transaction where the repurchase price is set at the sales price plus a lender’s return, or where a sale of a financial asset is accompanied by a total return swap that transfers the full exposure back to the transferor.

If the entity has not retained substantially all the risks and rewards, it carries out Test 3.

If the entity neither transfers nor retains substantially all the risks and rewards of ownership of the asset, it determines whether it has retained control of the asset.

Control is based on the transferee’s practical ability to sell the asset. The transferee has this ability if it can sell the asset in its entirety unilaterally to an unrelated third party without needing to impose further restrictions on the transfer.

The key issue is what the transferee is able to do in practice and not what contractual rights the transferee has. A transferee has the practical ability to sell the asset if it is traded in an active market because the transferee could purchase the asset in the market if it needs to return the asset to the transferor.

IFRS Practical applications for banks and other financial institutions

If an asset subject to a call option can be readily obtained by the transferee in the market, the transferor has lost control, although he has retained some of the risks and rewards in relation to the asset.

However, the contractual right to dispose of an asset is of little practical use if there is no market for the asset.

If the entity has lost control, it derecognises the  asset.

If the entity has retained control, it continues to recognise the asset to the extent of its continuing  involvement.

IFRS Practical applications for banks and other financial institutions

Cakart.in provides India’s top IFRS faculty video classes – online & in Pen Drive/ DVD – at very cost effective rates. Get IFRS Video classes from www.cakart.in  to do a great preparation for primary Student.

Watch IFRS sample video lectures Here
Watch  IFRS  sample lecture books  Here
Watch IFRS free downloads  Here

About Author: cakart

Leave a Reply

Your email address will not be published. Required fields are marked *

Chat with a counsellor
SIGN UP