CFM21900 - IFRS 9: recognition and derecognition

For those entities applying IFRS or FRS 101 with a period of account beginning before 1 January 2018 refer to IAS 39 for the recognition and measurement of financial instruments at CFM21520+

Recognition

‘Recognition’ refers to the requirement to recognise all financial assets and liabilities, including derivatives, on a company’s balance sheet.

A company must recognise a financial asset or financial liability on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument.

The Application Guidance in IFRS 9 provides examples of this principle. For example, if a company receives a firm order for goods from a customer, it should delay recognition of the trade debtor until at least one of the parties has performed under the agreement - which will normally be when the goods are shipped or delivered.

In contrast, however, a forward contract or option is recognised on the commitment date if it falls within the scope of IFRS 9.

Derecognition

‘Derecognition’ means the removal of a previously recognised financial asset or financial liability from the balance sheet.

Derecognition - financial assets

A company shall derecognise a financial asset when, and only when:

  • the contractual rights to the cash flows from the financial asset expire (for example, a bond matures), or
  • it transfers the financial asset.

A transfer of a financial asset occurs if the company either:

  • transfers the contractual rights to receive the cash flows of the financial asset, or
  • retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients.

If the company assumes a contractual obligation to pay the cash flows to one or more recipients the financial asset should be derecognised if the company:

  • has no obligation to pay the amounts to the eventual recipient unless it collects equivalent amounts from the original asset.
  • is prohibited from selling or pledging the original asset other than as security to the eventual recipient of the cash flows.
  • has an obligation to remit any cash flows it collects to the eventual recipients without material delay.

When a company transfers a financial asset it shall evaluate the extent to which it retains the risk and rewards of ownership of that financial asset. If the company retains substantially all the risk and rewards of the financial asset the company shall continue to recognise the financial asset in its financial statements.

Derecognition - financial liabilities

A company shall remove a financial liability from its statement of financial position when, and only when, it is extinguished (i.e. when the obligation is discharged, cancelled or expires).

An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as extinguishing the original financial liability and recognition of a new financial liability. Similarly, a substantial modification of the terms of the existing financial liability shall be accounted for as extinguishing the original financial liability and recognition of a new financial liability.

The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.