Accounting for Financial Instruments Set 4

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Flip-Modus

Evaluation scheme for derecognition of financial assets - Derecogntion concept under IFRS (mixed model)

Component approach - Decision about complete or partial derecognition of a financial asset to be taken
Risks and rewards approach - Derecogntion of a financial asset if the substantial risks and rewards are transferred
Control approach - Derecognition in the event of loss of control
Continuing involvement approach - Ne derecogntion to the extent of continuing involvement

Evaluation scheme for derecognition of financial assets - Step 1

Group perspective in consolidated financial statements to be taken into consideration for assessing derecogntion
All subsidiaries incl. all special purpose entities (SPE's) to be consolidated before question of derecognition arises
Scope of consolidated financial statements determine who is considered as transferee
- derecogntion not possible if SPE has to be consolidated on group level
- derecognition is possible for separate financial statements

Evaluation scheme for derecognition of financial assets - Step 2 (intuitiv)

Subject of assessment to be defined (component approach)
- extent to which derecognition principles apply
  - derecognition of part of a financial asset or
  - derecognition of the entire asset or a group of similar financial assets
Criteria for partial recognition
- specifically identified cash flows (e.g. interest rate strip)
- fully proportionate (pro-rata) share of the cash flows (e.g. transfer of the rights to a 90% share) or
- fully proportionate (pro-rata) share of specifically identified cash flows (e.g. transfer of rights to a 90% share of interest cash flows)

Evaluation scheme for derecognition of financial assets - Step 3

Derecognition of a financial asset when contractual rights of cash flows from the financial asset expireExamples
Examples
- receivables have been repaid
- options have not been exercised

Evaluation scheme for derecognition of financial assets - Step 4

Derecogntion also if contractual rights are not expired, but all risks and rewards of ownership are transferred
- transfer of contractual rights to receive all of the cash flows
- no tranfer of contracutal rights to receive the cash flos, but contractual obligation to pay all of the cash flows of the financial asset (pass through)
Transfer of contractual rights of a financial asset
- Sale or cession
  - Legal continuity of transfer in case of an insolvency of the transferring party
  - (remaining) servicing itself is harmless
  - silent cession is harmless, if the transferee is able to convert it in an open cession or rather the preconditions for a conversion are on the behalf of the transferee
If contractual rights to receive cash flows retained, a financial asset can only be derecognised in conjunction with a pass through arrangement
Conditions applicable for pass through arrangements
- no additional obligation to pay amounts to recipient (e.g. credit enhancements or guarantess)
- no possibility of control by the seller
- payment is made
  - in full and
  - without any significant delay (forwaring within 3 months)
Assessmnet of whether risks and rewards of ownership of a financial asset have been substantially transferred based on the entity's exposure to the variability in the present value of the future net cash flows from the financial asset before and after the transfer
- an entity has retained substantially all risks and rewards of ownership if its risk position has not significantly changes
- an entity has transferred substabtially all risks and rewards of ownership if its exposure to such variability is not significant in relation to the total variability in present value of future net cash flows

Evaluation scheme for derecognition of financial assets - Step 5

Assets also derecognised if the entity has not retained or transferred risks and rewards but has transferred control (control apporach)
Control is transferred if transferee has practical ability to sell or pledge the asset in its entirely to an unrelated third party without any restritction
Indications against a transfer of control
- no active market for the transferred asset (even if no active market is required)
- collection activity taken by the trnsferring party (passing through)
- variable purchase price discounts to hich the transferring party is entitled if the asset can only be sold with this discount
Recoverable guarantees or other risk assumptions of the transferring party, which expire in case of resale, always lead to a control fo the transferring party
-> disposition is not probable

Evaluation scheme for derecognition of financial assets - Step 6 (intuitiv)

Transferred asset continues to be recognised to the extent of continuing involvement
Extent of the entity's continuting involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset
Example of recognition
- transferor gives guarantee
- transferee keeps variable purchase price reduction
- sale of 90% of receivables and subordination of the remaining part of the transferor in favour of the transferee

Specific cases of derecognition of financial assets - Defintion - Asset Backed Securities

Securities that result from the measurement and securitisation of one or more portfolios of financial assets (receivables)
Objective of securitising entity is reducing the strain on the balance sheet by transferring securities to a special purpose entity (SPE)
Further objectives
- improving liquidity situation
- improving financing conditions
- developing new financial markets