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Chapter
25 /
Financial In struments: Recognition and Mea surement
(l A S
39)
245
5.1.8 If an entity transfers a financial asse t but retains substantially all risks and rewards of own–
ership of the financial asset-situation ( 1) above-lAS 39 requires the entity to continue to recog–
nize the financial asset in its entirety. No gain or loss is recognized as a result of the transfer. Thi s
situatio n is sometimes referred to as a failed sale.
Example
Examples of transactions where an entity retains substantially all risks and rewards of ownership–
situation
(
1
)-include
• A
sale of a fina ncial asset where the asset will be returned to the transf eror for a fixed price
at a f uture date (e.g., a sale and repurchase [repo
1
transaction )
• A
securities lending transaction
• A
sale of a group of short-term accounts receivables where the transf eror issues a guarantee
to compensate the buyer fo r any credit losses incurred in the group and there are no other
substantive risks transferred
• A
sale of a fi nancial asset where the transferor retains a call option to repurchase the trans–
ferred asset, at the transf eror' S option, where the option
is
deep-in-the-money (i.e., it
is
highly probable that the option will be exercised)
• A
sale ofa fi nancial asset where the transfero r issues (writes) a put option that obligates it to
repurchase the transf erred asset, at the transferee
'.I'
option, where the option is deep -in-the
money
• A
sale of a fi nancial asset where the transf eror enters into a total return swap with the trans–
feree that returns all increases in fa ir value of the transf erred asset to the transferor and pro–
vides the transf eree with compensation fo r all decreases in f air value
Example
An entity sells an asset for a fixed price but simultaneously enters into a f orward contract to repur–
chase the transf erred fi nancial asset in one year at the same price plus interest. In this case, even
though the entity has transf erred the fi nancia l asset, there has been no significant change in the en–
tity 's exposure to risk and rewards of the asset. Due to the agreement to repurchase the asset for a
fixed price on a future date, irrespective of what the market price of the asset may be on that date,
the entity continues to be exposed to any increases or decreases in the value of the asset in the pe–
riod between the sale and the repurchase. In substance, therefore, a repurchase transaction is
similar to a borrowing of an amount equal to the fi xed price plus interest with the transferred asset
serving as collateral to the transf eree.
For example, if an entity sells a fi nancial asset fo r $14,300 in cash and at the same time enters into
an agreement with the buyer to repurchase the asset in three months fo r $14,500, the sale would not
qualify f or derecognition. The asset would continue to be recognized, and the seller would instead
recognize a borrowin g from the buyer, as fo llows:
Dr Cash
14,300
Cr Borrowing
14,300
In the period between the sale and repurchase ofthe fina ncial asset, the entity would acc rue interes t
expense on the borrowing for the difference between the sale price ($ 14,300) and repurchase price
($14,500):
Dr Interest expense
Cr Borrowing
200
200
On the date ofthe repurchase, the entity would record the repurchase as f ollows:
Dr Borrowing
14,500
Cr Cash
14,500
5.1.9 The evaluation of the extent to which derecognition of a financi al asset is appropriate be–
comes more complex when the entity has retained some risks and rewards of ownership of a finan–
cial asset and transferred others. To do this evaluation, it may be necessary to perform a quantita–
tive comparison of the entity's exposure before and after the transfer to the risks and rewards of the
transferred asset. If the evaluation results in the conclusion that the entity has neither retain ed nor
transferred substantially all risks and rewards of ownership-situation (3) above-derecognition
depends on whether the entity has retained
control
of the transferred financial asse t. An entity has
lost control if the other party (the transferee) has the practical ability to sell the asset in its entirety
to a third party without attaching any restrictions to the transfer.