IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 25 / Financial Instruments: Recognition and Measurement (lAS 39)

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(2) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows . (3) The entity has an obligation to remit any cash flows it collects on behalf of the eventual re– cipients without material delay. In addition , the entity is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments is passed to the eventual recipients. 5.1.13.3 For arrangements that meet these conditions, the requirements regard ing evaluating transfer of risks and rewards just described are applied to the assets subject to that arrangement to determine the extent to which derecognition is appropriate. If the three conditions are not met, the asset continues to be recognized. 5.1.14 Consolidation In consolidated financial statements, the derecognition requirements are applied from the perspective of the consolidated group . Before apply ing the derecognition princip les in lAS 39, therefore , an entity applies lAS 27 and SIC 12, ConsoLidation-SpeciaL-Purpose Entities. to deter– mine which entities should be consolidated. Specia l-purpose entities (SPEs) are entities that are created to accomp lish a narrow and well-defined objective and often have legal arrangements that impose strict and sometimes permanent limits on the decision-making powers of the governing board, trustee, or management of the SPEs . For instance, SPEs often are crea ted by transferors of financial assets to effect a securitization of those financia l assets . Under SIC 12, the eva luation of whether an SPE shou ld be consolidated is based on an evaluation of whether the substance of the relationship indicates that the SPE is controlled. Four indicators are: ( I) the activities are conducted according to specific busine ss needs, so that the entity obtains benefits; (2) decision-making pow– ers including by autopilot to obtain the majority of the benefits; (3) rights to obtain the majority of the benefit s; and (4) majorit y of the residual or ownership risks. Where an SPE is required to be consolidated , a transfer of a financial asset to that SPE from the parent or another entity within the group does not qualify for derecognition in the consolidated financial statements. The assets are derecognized only to the extent the SPE in turn sells the transferred assets to a third party or enters into a pass-through arrangement and that sale or arrangement meets the condition for derecogni– tion. 5.1.15 Summary The eight steps that are involved in the evaluation of whether to derecognize a financial asset under lAS 39 are ( I) Consolidate all subsidiaries (including any SPE). (2) Determine whether the derecognition principles are applied to a part or all of an asset (or group of similar assets). (3) Have the rights to the cash fl ows fr om the asset expired? If yes, derecognize the asset. If no. go to step 4. (4) Has the entity transferred its rights to receive the cash flo ws from the asset ? If yes, go to 6. If no, go to step 5. (5) Has the entity assumed an obligation to pay the cash flows from the asset that meets three conditions? As discussed in the previous section, the three conditions are that (I) the transferor has no obligation to pay cash flows unless it collec ts equivalent amounts from the origi nal asset, (2) the transferor is prohibi ted from selling or pledging the original asset, and (3) the transferor has an obligation to remit the cash flows without material delay. If yes, go to step 6. If no, continue to recognize the asset. (6) Has the entity transferred substantially all risks and rewards? If yes, derecognize the asset. If no, go to step 7. (7) Has the entity retained substantially all risks and rewards? If yes, continue to recognize the asset. If no, go to step 8. (8) Has the entity retained control of the asset ? If yes, continue to recognize the asset to the extent of the entity ' s continuing involvement. If no, derecognize the asset.