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Wiley lFRS: Practical Implementation Guide and Workbook
5.1.5
(I)
2,400
26,300
2,600
to the entity or an option held by the entity has expired worthless. In these cases, derecognition is
appropriate because the rights associated
w~th
the financial asset no longer exist.
5.1.3 The application of the second criterion for derecognition of financial assets is often more
complex. It relies on an assessment of the extent to which the entity has transferred the risks and
reward s of owners hip of the asset and, if that assessme nt is not conclusive, an assessmen t of
whether the entity has retained control of the transferred financial asset.
5.1.4 More specifically , when an entity sells or otherwise transfers a financial asset to another
party , the entity (transferor) must evaluate the extent to which it has transferred the
risks and re–
wa rds of ownership
of the transferred financial asset to the other party (transferee). This evaluation
is based on a comparison of the exposure to the variability in the amounts and timing of the net
cash flows of the asset before and after the transfer of the asset.
lAS 39 distinguishes among three types of transfers:
The entity has
retained
substantially all risks and rewards of ownership of the transferred
asset.
(2) The entity has
transf erred
substantially all risks and rewards of ownership of the trans–
ferred asset.
(3) The entity has neither retained nor transferred substantially all risks and rewards of owner–
ship of the transferred asset (i.e., cases that fall between situations
(I )
and (2) above).
5.1.6 If an entity transfers substantially all risks and rewards of ownership of a transferred finan–
cial asset-situation (2) above-the entity derecognizes the financial asset in its entirety.
Example
Examples of transactions where an entity has transferred substantially all risks and rewards of
ownership- situation
(1)
above-include
• A
sale of a financial asset where the seller (transferor ) does not retain any rights or obliga–
tions (e.g., an option or guarantee) associated with the sold asset
• A
sale of a finan cial asset where the transferor retains a right to repurchase the fi nancial
asset, but the repurchase price is set as the current fair value of the asset On the repurchase
date
• A
sale of a fi nancial asset where the transferor retains a call option to repurchase the trans–
ferr ed asset, at the transf eror 's option, but that option is deep-aut-of the-money (i.e., it is not
probable that the option will be exercised)
• A
sale of a finan cial asset where the transferor writes a put option that obligates it
to
repur–
chase the transferred asset, at the transferee' s option, but that option is deep-out-of-the–
money
5.1.7 On derecognition, if there is a difference between the consideration received and the carry–
ing amount of the financial asset, the entity recognizes a gain or loss in profit or loss on the sale.
For a derecognized financial asset classified as available for sale, the gain or loss is adjusted for
any unrealized holding gains or losses that previously have been included in equity for that finan–
cia l asset.
Example
If the carrying amount of a finan cial asset is $26,300 and the entity sells it for cash of $26,500 in a
transfer that qualifies for derecognition, an entity makes these entries:
Dr Cash
26.500
Cr Asset
26,300
Cr Gain
all
sale
200
If
the asset sold was an AFS fi nancial asset, the entries would look differently. Changes in fa ir value
of available-far-sale (AFS) finan cial assets are not recognized in profit or loss, but as a separate
component of equity until realized.
If
changes in fair value of $2,400 had previously been recog–
nized as a separate component of equity, the entity would make these entries On derecognition, as–
suming the carrying amount was $26,300 and the sales price was $26,500.-
Dr Cash
26,500
Dr Available-fo r-sale gains
recognized in equity
CrAsset
Cr Gain on sale