To
understand how to recognize and de-recognize financial assets on your
balance sheet, imagine you have a cow
Recognition
of financial assets
When is
the cow yours? Under IFRS, it is yours, when you have the right to
keep the milk it produces.
Turning
back to financial assets, you recognize a financial asset on your
balance sheet when you are entitled to receive its cash flows. IFRS
accountants talk about “becoming party to the contractual
provisions of the instrument”.
De-recognition
of financial assets
When is
the cow no more yours? Two scenarios are possible here – either the
cow dies or your neighbor takes care of it.
1.
The cow dies.
Under
IFRS, you de-recognize a financial asset if “the contractual
rights to the cash flows from the financial asset expire”.
2.
Your neighbor takes care of the cow.
When you
talk to your neighbor about your cow, you can take two approaches:
You can
suggest selling the cow so that your neighbor takes care of it in his
own hutch. Under IFRS, accountants talk about a “transfer of
contractual rights to receive cash flows”.
Another
possibility is to let the cow in your hutch and to continue feeding
it. Your neighbor will nevertheless pay the price for the cow and, in
return, receive the milk it produces, if any. Simply, you have to
promise that you will not give your cow to someone else. After all,
you cannot get paid twice for the same cow!
Substituting
the cow for a financial asset, you will de-recognize a financial
asset under five cumulative conditions:
- You “retain the contractual rights to receive cash flows but assume a contractual obligation to pay those cash flows to one or more entities.” (You will milk the cow in the first place and then pass the milk to your neighbor.)
- You are obliged to transfer cash flows only after their collection. (If there is no milk, your neighbor gets nothing.)
- You commit not to “sell or pledge the original asset (other than a pledge for security purposes to the eventual recipient of the cash flows).” (Your neighbor can come and see his cow, nobody else.)
- You engage to “remit received cash flows without material delay” and to “reinvest cash flows in cash or cash equivalents only.” (You have to give you neighbor the milk on the same day.)
- You “transfer substantially all the risks and rewards of ownership of the financial asset” (In other words, you’re are no more exposed to a variability of the present value of future cash flows of the financial asset. You don’t care whether the cow produces milk or not. You were paid for it anyway.) or you transfer the control over the financial asset (In other words, you cannot sell the financial asset any more. As I wrote above, you cannot get paid twice for the same cow.).
Resource:
- IFRS 9, Chapter 3
