Decision tree for derecognising an asset

Learning objectives

• Apply, in order, the derecognition decision tree for a financial asset (expiry, transfer, risks and rewards, control) and conclude: derecognition, continued recognition or continuing involvement.L3, L4
• Prepare a workpaper documenting the derecognition decision tree for financial assets.L3, L4
• Support in writing, from the facts of the case, the judgement made on the derecognition decision tree for financial assets.L3, L4

Normative references

• IFRS 9 §3.2.3Derecognition of a financial asset: first question, have the contractual rights to the cash flows from the asset expired (for example, repayment or expiry of an option)? If not, the entity considers whether there is a transfer that qualifies for derecognition.
• IFRS 9 §3.2.6When the rights are transferred, the entity first evaluates the extent to which it retains the risks and rewards of ownership: (a) substantially all transferred: derecognition and separate recognition of any rights and obligations created or retained; (b) substantially all retained: the asset continues to be recognised; (c) neither transferred nor retained: control is considered — control not retained: derecognition; control retained: the asset continues to be recognised to the extent of the continuing involvement. The Standard sets no numerical threshold for 'substantially all'.
• IFRS 9 §3.2.9Whether the entity has retained control of the transferred asset depends on the transferee's ability to sell it: the entity has not retained control if the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally, without needing to impose additional restrictions on the transfer; in all other cases, control is retained.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• In what order does the entity carry out the derecognition analysis of a financial asset?L3
• Pi SA has sold a portfolio of loans to a fund. It has neither transferred nor kept substantially all the risks and rewards, but the fund can sell the whole portfolio to an unrelated third party, on its own initiative and without additional restrictions. What is the conclusion?L3
• Rho SA has sold a portfolio of receivables to a vehicle. Facts of the case: the contractual rights have been transferred; Rho remains exposed to part of the variability of net cash flows, with substantially all the risks and rewards neither transferred nor kept; the vehicle can resell the portfolio to unrelated third parties, but with Rho's consent. Write a short note that concludes on derecognition, distinguishing the facts of the case, the rule and professional judgement.L4