COMMENTS ON THE EXPOSURE DRAFT ED/2009/03: DERECOGNITION. PROPOSED AMENDMENTS TO IAS 39 AND IFRS 7 The ED sets on Paragraph 17A the circumstances under which an entity shall derecognise the Asset: (a) the contractual rights to the cash flows from the Asset expire; (b) the entity transfers the Asset and has no continuing involvement in it; or (c) the entity transfers the Asset and retains a continuing involvement in it but the transferee has the practical ability to transfer the Asset for the transferee’s own benefit. In case the transference includes the contractual right to sell the asset, paragraph AG 52L of the implementation guide provides some examples to determine if the transferee has the practical ability to transfer the asset; in this situation the transferor should derecognize the asset and the transferee should recognize it. Specifically, the implementation guide includes two illustrative examples for repurchase agreements and securities lending: The asset is readily obtainable in the market (e.g. instruments publicly traded in an active market), in this case the transferee is considered to have the practical ability set out in IAS 39, paragraph 17A c), and therefore the transferor should derecognize the asset, and the transferee should recognize it. The asset is not readily obtainable in the market (e.g. loans or ordinary shares not publicly traded in an active market). In such situation, when the repo contract is to be physically settled, the transferee is not considered to have the practical ability set out in IAS 39, paragraph 17A c), and therefore the transferor should not derecognize the asset and the transferee should not recognize it. As almost all repo contracts allow the transferee to sell the asset and the collateral are traded in active markets, the approval of the amendments on IAS 39 would imply a substantial change in accounting these contracts. In the actual situation the transferor does not derecognize the asset, nor the transferee recognize it. Under the proposed amendment, the transferor will have to book a real sell combined with a forward obligation to buy back the collateral, and therefore the transferee will recognize the financial asset on its books and account a forward obligation to sell it at maturity date. The impact of this accounting review would be the following: TRANSFERS OF FINANCIAL ASSETS OF THE TRADING BOOK Impact for the Transferor When the derivative is valued at its fair value, the transferor has to book the agreed interests to pay in advance, instead of accruing them until maturity. Impact for the Transferee When the derivative is valued at its fair value, the transferee has to book the agreed interests to receive in advance, instead of accruing them until maturity. TRANSFERS OF FINANCIAL ASSETS OF THE AVAILABLE FOR SALE PORTFOLIO Impact for the transferor Recycle to P&L the AFS reserve accounted for the transferred asset. When the derivative is valued at its fair value, the transferor has to book the agreed interests to pay in advance, instead of accruing them until maturity. Impact for the transferee Book in the AFS reserve the difference between the amount paid for the asset and its fair value until maturity. When the derivative is valued at its fair value, the transferee has to book the agreed interests to receive in advance, instead of accruing them until maturity. TRANSFERS OF FINANCIAL ASSETS OF THE HOLD TO MATURITY PORTFOLIO According to the current financial rules, derecognition of a financial asset, which is in the hold to maturity portfolio, implies derecognition of the whole portfolio. This makes unfeasible the transferences of these assets. THE EFFECT ON CAPITAL REQUIREMENTS The ED modifies the current capital requirements. The application of this amendment would free capital requirements for the transferor (entity that gives the financial asset) and would penalize the transferee (entity that receives the financial asset). THE GOAL OF REPURCHASE AND SECURITIES LENDING AGREEMENTS The repurchase and securities lending transactions should be excluded from the proposed amendments to IAS 39 due to the following reasons: - The goal of these transactions is to provide liquidity to the transferor and not to benefit from the possible sale of the asset. These transactions are time deposits with a significant credit risk reduction by means of assets that are used as collateral. - As a deposit, in this type of transaction the refund of the initial amount includes the interest agreed, which means that both transactions have similar characteristics. - In general, in these transactions the price settlement process is not as accurate as it is on a firm sale, since their aim is to facilitate liquidity through a deposit. - The transferor keeps the benefit of the assets because it has been previously dealt that the transferee will pay him the interests or dividends obtained from the assets in the period in which the transferor has the assets as collateral. - Nowadays it is common to join a transfer agreement to other type of contracts (GMRA or GMSLA) by which the transferor is obliged to make a deposit (usually cash and remunerated) in favour of the transferee, in case the given financial assets diminish in its market value in relation to the money given in the initial transaction and vice versa. It means that it is conceptually a guaranteed deposit transaction. - Therefore, the consequences on the profit and loss account, on the capital requirements and the difficulties associated to the hold to maturity portfolio could be so important that it could make impossible or costly putting into practise these transactions which, in fact, are of great value for the exchanging of liquidity between entities.
Pages to are hidden for
"comments"Please download to view full document